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SSA administers three major federal programs. The Old Age and Survivors Insurance (OASI) and the Disability Insurance (DI) programs, together commonly known as “Social Security,” provide benefits to retired and disabled workers and their dependents and survivors. Monthly cash benefits are financed through payroll taxes paid by workers and their employers and self-employed people. The third program, SSI, provides means-tested assistance to needy aged, blind, or disabled people. SSI payments are financed from general tax revenues. In 1997, 50 million beneficiaries—about one of every five individuals in this country— received benefits from SSA each month. SSA serves the public through a nationwide network that includes 1,300 field offices, 132 hearings offices, and a national toll-free telephone system. To administer these programs, SSA must perform certain essential tasks: issue Social Security numbers to individuals; maintain earnings records for individual workers by collecting wage reports from employers, using these records to determine the amount of benefits an applicant may receive; and process benefit claims for all three programs. In addition, SSA must determine beneficiaries’ continuing eligibility, provide hearings and appeals for denied applicants, and disseminate information about its programs. The OASI and DI programs are facing significant financial problems as a result of profound demographic changes. As a share of the total U.S. population, the elderly population grew from 7 percent in 1940 to 13 percent in 1996; this share is expected to increase to 20 percent by 2050. As it ages, the baby boom generation will increase the size of the elderly population. However, other demographic trends are at least as important. Life expectancy has increased continually since the 1930s, and further increases are expected. Moreover, the fertility rate has declined from 3.6 children per woman in 1960 to around 2 children per woman today and is expected to level off at about 1.9 by 2020. Combined, increasing life expectancy and falling fertility rates mean that fewer workers will be contributing to Social Security for each aged, disabled, dependent, or surviving beneficiary. While 3.3 workers support each Social Security beneficiary today, only 2 workers are expected to be supporting each beneficiary by 2030. In addition, as the population ages, the number of disabled individuals is expected to rise. Beginning in 2012—14 years from now—Social Security’s expenditures are expected to exceed its tax income. By 2029, without corrective legislation, the trust funds are expected to be depleted, leaving insufficient funds to pay the current level of OASI and DI benefits. These demographic changes will also affect SSA’s workload and approach to customer service. When the baby boom generation begins to retire shortly after the turn of the century, the agency must look for ways to cope efficiently with its increasing workloads without adding substantial numbers of employees. In addition, SSA knows that this new set of beneficiaries will likely prefer to be served differently from those whom SSA has served in the past. While SSA has traditionally delivered face-to-face service through its network of field offices, the public has begun to conduct more and more business by telephone. In the future, even more individuals may prefer to do business by telephone or other electronic means, such as the Internet. As a result, SSA must increasingly rely on the use of new technology to meet its workload challenges and provide service in the ways its new customers will expect. In addition, SSA currently relies heavily on information technology to support its administrative processes, and it has acknowledged that its goals for improved operations outlined in its strategic plan are not achievable unless the agency invests wisely in information technology. how the agency intends to achieve its goals and the measures it will use to hold itself accountable over the next year. The two documents together chart SSA’s future course. SSA’s strategic plan and its performance plan demonstrate that the agency recognizes its most pressing problems. In addition, they highlight the importance of leadership and recognize the need to ensure that the agency changes at the pace necessary to meet the goals it has set. The national debate on Social Security solvency has begun. The Advisory Council on Social Security and others have advanced a range of proposals to address the system’s solvency. Some proposals represent a significant departure from the current program. The President has made Social Security reform a top priority, and the Congress is beginning to discuss options. Given the magnitude of the financial problems facing the system, the nature of the proposals for change, and the growing interest in these topics across the country, we can expect the debate over Social Security’s financing and structure to continue and intensify in the coming years. To understand and debate the proposals, policymakers and the general public need thoughtful and detailed analyses of their likely effect on workers, beneficiaries, and the economy—as well as the impact of their implementation on SSA and other government agencies. SSA is in a unique position to inform policymakers and the public about the long-term financing issues, yet we have reported that the agency has not undertaken the range of research, evaluation, and policy analysis needed to fully contribute to the debate. In addition to the solvency debate, other issues call for enhanced research, evaluation, and policy analysis. For example, from 1988 to 1996, SSA’s disability programs grew significantly. The number of beneficiaries receiving SSI increased by about 70 percent, while the number of DI beneficiaries grew by about 49 percent. In addition, beneficiaries are staying on the disability rolls longer. To better manage these programs, policymakers need more information on the causes of these changes, whether the programs are meeting their objectives, and the impact of possible changes. By improving its research and evaluation capacity, SSA also would be in a better position to propose legislative changes. In its current strategic plan, SSA committed itself to a new goal: “to . . . conduct effective policy development, research, and program evaluation.” The agency is taking steps to strengthen its capacity in these areas. It has increased its funding for external research; plans to expand its ability to use modeling techniques to predict the effects of proposed program changes; and, by the end of this fiscal year, plans to have established a research consortium to advise it on relevant research and policy activities. However, these efforts have a long lead time before useful products will become available. In the meantime, SSA will not be fully contributing to the current debate on Social Security reform. In addition, a recent report by a private consultant recommended that SSA substantially increase the number of its research and evaluation staff and combine the research and evaluation office with the policy analysis office. To date, the agency has added only a fraction of the recommended staff and does not have a long-range plan to add many more. SSA’s need to strengthen its research, evaluation, and policy analysis capacity is not new; we and others have highlighted this weakness for a number of years. We are concerned that the agency has not seized the opportunity to build its capacity. Without an adequate number of skilled staff and a vital, responsive research, evaluation, and policy analysis agenda, the agency cannot fulfill its current and future role as the nation’s expert on Social Security issues. living arrangements to determine initial and continuing eligibility for the program. Our previous and ongoing reviews have highlighted long-standing problem areas. SSA does not pay enough attention to verifying eligibility information in a timely way, has failed to recover millions of dollars in SSI overpayments, has not installed adequate internal controls, and has failed to curb SSI program fraud and abuse. The program’s complex policies and SSA’s insufficient management attention exacerbate these problems. We have also criticized SSA for not initiating legislative proposals to improve program operations. Together, these deficiencies have eroded program integrity and contributed to significant annual increases in SSI overpayments to recipients. During 1997, current and former recipients owed SSA more than $2.6 billion, including $1 billion in newly detected overpayments for the year. On the basis of the agency’s prior experience, SSA is likely to collect less than 15 percent of the outstanding debt in a given year. SSA has acknowledged the need to attack this problem aggressively, and the agency is taking steps to address some of the weaknesses in the SSI program. For example, it is developing a new automated system to track and recover SSI overpayments and is expanding its use of on-line access to state data to obtain real-time applicant and recipient financial information. To address the overpayment problem, the fiscal year 1999 budget requests $50 million to complete redeterminations for recipients who have been designated by SSA as having a high probability of having been overpaid.Finally, SSA has recently taken a stronger role in addressing fraud and abuse. For example, it has initiated several pilot programs aimed at detecting fraud and abuse earlier in the SSI application process. plan, SSA has made a commitment to complete a comprehensive action plan to improve the management of the SSI program in fiscal year 1998. This step links to SSA’s strategic goal of making “SSA programs the best in the business, with zero tolerance for fraud and abuse.” To be effective, the SSI action plan must include a carefully designed set of measures to evaluate progress and hold the agency accountable. The 1996 welfare reform legislation changed the definition of childhood disability for the SSI program, and in February 1997, SSA issued regulations to implement the legislative changes. Under the new regulations, SSA reviewed the cases of 263,000 children and conducted an extensive review of the outcome of this process. The regulations represent a stricter standard of severity than existed in previous law. Under this standard, a child’s impairment generally must result in marked limitations in two areas of functioning or an extreme limitation in one area, such as social functioning, cognition and communication, personal functioning, and motor functioning. Previously, a child was eligible if his or her impairment resulted in one marked and one moderate limitation or three moderate limitations. In supporting the “two marked or one extreme” severity standard in its regulatory analysis, SSA concluded that the Congress meant to establish a stricter standard of severity than had previously existed. Nevertheless, some children whose impairments are at the prior, less severe threshold have been awarded benefits because SSA has not updated some of its medical listings, which are set below the two marked or one extreme functional limitation level. SSA has not quantified how many children are in this situation and may have difficulty doing so because its listing codes are not always reliable. Some of these less severe listings, however, are for prevalent impairments, including mental retardation, cerebral palsy, epilepsy, and asthma. SSA is aware that these listings are below the two marked or one extreme level, but has not established a schedule for updating its listings. This update is necessary to ensure that all children are awarded benefits on the basis of a uniform standard of severity. standard. SSA is taking steps to improve decisional accuracy by training its adjudicators and quality assurance staff in areas SSA has found to be problematic. Moreover, it will be reviewing a larger sample of new childhood claims to identify problems unique to these cases so that it can issue policy clarifications and additional guidance as necessary. Under our mandate to report on the implementation of the legislation, we will continue to monitor the accuracy and consistency of decisions on childhood cases. SSA’s disability programs face several challenges. The agency’s disability claims process is time-consuming and expensive, but the agency’s efforts to redesign the process are disappointing. Moreover, SSA’s disability caseloads for its DI and SSI programs have grown by nearly 65 percent in the past decade; SSA has not developed a plan that sufficiently addresses actions needed to help beneficiaries fully develop their productive capacities, and few people have left the rolls to return to work. Despite these systemic problems, however, SSA recently has been making progress in reducing its continuing disability review (CDR) backlogs. Making disability decisions is one of SSA’s most demanding and administratively complex tasks, and SSA has struggled to keep pace with applications for disability benefits and appeals of disability decisions. Disability claimants often wait more than a year for a final decision. To manage the disability caseload growth, increase efficiency, and improve service to its customers, SSA began a major effort in 1993 to redesign the way it makes disability decisions. The agency developed an ambitious plan for change that included testing and implementing 26 key initiatives over a period of 6 years. In December 1996, we reported that SSA was already one-third of the way through the 6-year period but had made little progress with testing and implementing the initiative. We identified a number of problems: SSA had delayed testing and project development, expanded the scope and complexity of certain initiatives, changed executive leadership, and risked losing stakeholder support. In that report, we recommended that SSA (1) focus on the initiatives most likely to reduce claims-processing time and administrative costs and (2) combine those initiatives in an integrated process and test them at a few sites before full-scale implementation. Responding to these concerns and those of other stakeholders, SSA revised its redesign plan in February 1997. It developed a scaled-down plan that focused on testing and implementing eight key initiatives. However, the new strategy retained plans to first test certain initiatives individually at a large number of sites nationwide. On the basis of our ongoing work, we have determined that the success of SSA’s scaled-down plan may also be threatened. SSA continues to experience delays in testing or implementing initiatives—anywhere from 2 months to 3 years. More importantly though, test results for the first two initiatives are disappointing. As tested, they will not result in dramatic improvements in efficiency and quality of claims processing. In addition, SSA has encountered performance problems with the software it considers vital to support the redesign effort, and the pilot tests have been delayed. On a more positive note, SSA is also conducting a test that combines a number of the initiatives into an integrated process, and the early results are more promising, according to SSA officials. It is too early to tell whether these positive results will continue and be significant enough to lead to the needed improvement in the claims process. If the results of these efforts do not demonstrate significant improvements, SSA will have some hard choices to make about whether and how to proceed with its current redesign plan. Even before receiving the disappointing test results, SSA had reduced or deferred its projected 5-year savings from disability redesign by more than 25 percent, or more than 4,500 work-years. Finally, as we have reported, one redesign initiative—process unification—is the linchpin of SSA’s efforts to improve the integrity and efficiency of the disability claims process. This initiative focuses on reducing the inconsistency of decisions made by examiners at the state disability determination services (DDS), who make initial decisions, and by administrative law judges (ALJ), who decide appeals. We have supported SSA’s efforts to improve consistency and have also recommended that SSA develop a performance goal to measure and report its progress in doing so. While SSA does not believe such a goal is appropriate and has not included one in its new performance plan, the agency has taken some steps toward reducing the inconsistency between decisions. The agency has (1) provided initial common training to decisionmakers at all levels and developed plans for follow-up training, (2) issued several rulings to clarify and reinforce current policy, and (3) initiated a pilot effort in 10 states to study the effects of providing more detailed explanations of the reasons for decisions at the initial level. By improving these explanations, SSA hopes to give ALJs a better understanding of the basis for the initial decision and to lay the foundation for greater consistency. Following the training and the new rulings, SSA officials told us they have seen some decline in the allowance rates at the appellate level. Today, more than ever, people with disabilities have new opportunities to return to work, yet very few DI and SSI beneficiaries do so. New technologies and medical advances have provided people with disabilities with greater independence and ability to function. Also, the Americans With Disabilities Act supports the premise that people with disabilities can work and have the right to work, and the Social Security Act calls for rehabilitating benefit applicants to the maximum extent possible. Yet not more than 1 in 500 DI beneficiaries, and few SSI beneficiaries, have left the rolls to return to work. Over the past few years, we have issued a series of reports recommending that SSA place a higher priority on helping DI and SSI beneficiaries maximize their work potential. The lengthy disability determination process encourages applicants to emphasize their inabilities, not their abilities. Beneficiaries receive little encouragement to use rehabilitation services. Also, work incentives may not make it financially advantageous for people to work to their full capacity. intervention and provision of return-to-work assistance as well as changes in the structure of cash and health benefits. CDRs are required by law for all DI and some SSI beneficiaries to help ensure that only those eligible continue receiving benefits. In the past, however, SSA has not conducted the number of reviews required by law. We have reported on several occasions that SSA’s failure to consistently complete these CDRs has led to hundreds of millions of dollars in unnecessary costs each year and has undermined program integrity. For almost a decade, budget and staff reductions and large increases in initial claims have hampered SSA’s efforts to conduct these reviews. Consequently, more than 4 million beneficiaries were due or overdue for CDRs by 1996. As a result of congressional attention to this problem, SSA developed a plan to conduct 8.2 million CDRs between 1996 and 2002, and the Congress authorized funding of about $4.1 billion over 7 years for this purpose. SSA is currently revising this plan to incorporate new CDR requirements included in the August 1996 welfare reform legislation. In 1997, we found that SSA’s experience in conducting CDRs was encouraging. In that year, SSA conducted 690,000 CDRs, exceeding its goal of 603,000. In addition, the agency increased its goal to 1,245,000 for 1998 and 1,637,000 for 1999. The more quickly SSA can remove those who are no longer eligible from the rolls, the more it can save in program costs. However, key issues, such as deciding which beneficiaries should undergo a full medical review—a lengthy and costly process—are still unresolved but will determine how expeditiously and at what cost SSA can become current on its CDR caseload. Finally, we have noted that many beneficiaries whose health will not improve could nevertheless have or regain work capacity. Therefore, we believe SSA should consider how the CDR point of contact with beneficiaries could be integrated with return-to-work initiatives. In the near future, SSA will be challenged to serve increasing numbers of customers with fewer staff. The agency is counting on its effective use of technology to cope with these changes, although it is currently facing challenges with the installation of its crucial new computer network. In addition, SSA must accommodate the increases in workload and changing customer preferences with a flexible service delivery structure. Difficult choices about the future service delivery structure lie ahead. The agency is, however, taking positive steps to better prepare for the retirement of large numbers of its management staff and is taking advantage of new technologies to provide more accessible training to its staff around the country. To handle increasing workloads and improve public service, SSA is in the midst of a multiyear, multibillion-dollar systems modernization effort. The cornerstone of this modernization effort is the intelligent workstation/local area network (IWS/LAN) initiative. SSA plans to install up to 56,500 workstations and 1,742 local area networks in SSA field offices and state DDS offices throughout the country. The initiative is expected to improve productivity and customer service in field offices and teleservice centers and lay the needed foundation for further technology enhancements. SSA is depending on the success of this initiative and has stated that it cannot achieve its strategic goals unless it invests wisely in this infrastructure. However, the size and complexity of the IWS/LAN initiative pose significant challenges for SSA. We are monitoring SSA’s progress as it installs its IWS/LAN and have some concerns, which we will present in a separate testimony today. and teleservice centers. Over time, SSA will likely need to restructure how it does business to take advantage of new technologies, cope with staff reductions, and cost-effectively meet changing customer preferences. One of the major challenges facing SSA in the future is its aging workforce. More than 57 percent of SSA employees are over the age of 45 and, therefore, approaching retirement. In addition, many of those retiring will be managers; over the next 5 years, 40 percent of SSA’s staff at the middle management level and above will be eligible for retirement. In the past, we have criticized SSA for not adequately preparing for the loss of its experienced workforce. However, SSA has recently begun to better prepare for this retirement attrition. Officials told us the agency is in the process of conducting a detailed analysis of retirement patterns in order to predict when staff will retire and which offices or geographic areas will be most affected. The study is showing that SSA can expect a dramatic wave of retirements over the next 10 years. To help train staff to replace its retiring management corps, SSA plans to conduct a series of management development programs. It has formally announced plans for a Senior Executive Service Career Development Program and expects to complete selections in early spring of this year. SSA also plans to conduct a mid-level management development program and a management intern program. SSA has also begun to revitalize its training programs to enhance the skills of current staff and to prepare them for future challenges and changes in their job expectations. For its current managers, SSA is developing a series of seminars designed to deliver a common message concerning leadership and change management related to the goals and objectives described in its strategic plan. SSA expects to have trained 100 percent of its DDS and SSA managers by the end of fiscal year 1999. SSA is also taking advantage of technology advances to provide training. Employees will be able to access a variety of training tools via the new intelligent workstations provided in SSA’s technology roll-out. In addition, SSA is greatly enhancing its capacity to provide interactive video training/interactive distance learning throughout its entire service delivery structure. By the end of the summer of this year, SSA hopes to have deployed enough video training sites that 89 percent of its staff will be within 20 minutes of a site. This offers SSA the advantage of providing training to a wide audience at once, ensuring that most of its staff throughout the country receive the same message. retirements and the certain future technological changes, it is especially important that SSA complete its retirement study, disseminate the detailed results, and sustain its momentum in ongoing employee training and career development. A recent audit by an independent accounting firm found that SSA’s fiscal year 1997 financial statements were fairly presented, in all material respects. However, the audit did identify significant deficiencies in the design and operation of information systems’ internal controls that raise some concern for the future. The audit identified vulnerabilities that expose SSA and its systems to both internal and external intrusion; subject sensitive information such as Social Security numbers and benefit-related data to unauthorized access, modification, and disclosure; and increase the risk of fraud. For example, the audit found that SSA’s agencywide security program does not provide the comprehensive protection needed to safeguard the sensitive information its systems maintain. The audit also found that, because of deficiencies in the agency’s contingency plans, SSA’s systems are vulnerable to disruptions in the event of a long-term emergency. These deficiencies could significantly affect SSA’s ability to continue critical operations without interruption in the event of a long-term emergency. The audit also reported that SSA’s controls do not adequately protect the integrity of its systems’ applications. These weaknesses expose SSA’s application systems to unauthorized or undetected changes that could affect the integrity of processed information. Finally, the audit noted that SSA continues to have insufficient separation of duties or compensating controls to reduce, to an acceptable level, the risk of undetected errors, irregularities, or both. When SSA streamlined its business processes, the agency gave workers increasing control over information processing without imposing effective mitigating controls over their activities. As a result, SSA has limited its ability to prevent errors, fraud, waste, and abuse in a timely manner. take to enhance its systems controls and security, and we support these recommendations. The Commissioner of SSA has stated that agency officials are working with the auditors to resolve any differences. He further stated that the agency will make every effort to take the steps necessary to ensure that information in its systems is protected and that SSA is able to continue operations in a time of emergency. Overall, our work suggests that SSA recognizes each of the challenges we have identified and, in almost every case, has taken some action to address them. However, in some cases the steps have been too fragmented, and the results have often been slow in coming and disappointing. Yet, we recognize the issues are complex, and solutions are not easy. To effect meaningful change, SSA must address the root causes of its problems and ensure sustained management oversight. The new Commissioner will need to effectively lead the agency to move with a sense of urgency to address its long-standing problems. Messrs. Chairmen, this concludes my prepared statement. I would be pleased to answer any questions you or Members of the Subcommittees may have. Social Security: Restoring Long-Term Solvency Will Require Difficult Choices (GAO/T-HEHS-98-95, Feb. 10, 1998). Social Security Disability: SSA Is Making Progress Toward Eliminating Continuing Disability Review Backlogs (GAO/T-HEHS-97-222, Sept. 25, 1997). Social Security Disability: SSA Must Hold Itself Accountable for Continued Improvement in Decision-making (GAO/HEHS-97-102, Aug. 12, 1997). 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). High Risk Series: An Overview (GAO/HR-97-2, Feb. 1997). Social Security Administration: Significant Challenges Await New Commissioner (GAO/HEHS-97-53, Feb. 20, 1997). SSA Disability Redesign: Focus Needed on Initiatives Most Crucial to Reducing Costs and Time (GAO/HEHS-97-20, Dec. 20, 1996). Social Security Disability: Alternatives Would Boost Cost-Effectiveness of Continuing Disability Reviews (GAO/HEHS-97-2, Oct. 16, 1996). Supplemental Security Income: SSA Efforts Fall Short in Correcting Erroneous Payments to Prisoners (GAO/HEHS-96-152, Aug. 30, 1996). SSA Disability: Program Redesign Necessary to Encourage Return to Work (GAO/HEHS-96-62, Apr. 24, 1996). Supplemental Security Income: Disability Program Vulnerable to Applicant Fraud When Middlemen Are Used (GAO/HEHS-95-116, Aug. 31, 1995). Social Security Administration: Leadership Challenges Accompany Transition to an Independent Agency (GAO/HEHS-95-59, Feb. 15, 1995). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO discussed the Social Security Administration's (SSA) progress in addressing its management challenges, focusing on: (1) SSA's need to strengthen its research and policy capacity in order to address the future solvency of the Social Security Trust Funds; (2) SSA's management and oversight problems with its Supplemental Security Income (SSI) program; (3) its disability programs; and (4) its future workload demands. GAO noted that: (1) SSA recognizes the challenges GAO has identified and has taken or plans to take steps to address many of these problems; (2) in 1997, for example, SSA conducted even more eligibility reviews of disabled beneficiaries than it had planned; (3) also, after changes in the childhood disability program were enacted, SSA rapidly reviewed the cases of over 260,000 children receiving SSI benefits; (4) nevertheless, the pace at which the agency is moving does not seem adequate to resolve most of its challenges within a meaningful timeframe; (5) for example, SSA's efforts to bolster its research, evaluation, and policy analysis capabilities have a long lead time before useful products will be available; (6) in the meantime, SSA will not be able to fully contribute to the current debate on social security reform; (7) in addition, in some areas, SSA's efforts have also been too limited; (8) its steps to date, for example, to address deep-seated problems in its SSI program have been piecemeal and have not addressed the root causes of the SSI problems; and (9) given the long-standing nature of challenges SSA faces and their far-reaching implications for current and future beneficiaries, the new Commissioner will need to assert strong leadership to spell out the expected changes and marshal the agency's resources to translate SSA's plans into timely action. |
In managing federal lands, the Forest Service and BLM often contract for services such as road maintenance, forest thinning, and other activities. They also frequently contract to sell forest resources such as timber or firewood. Traditionally, these contracts have been executed separately— service contracts have generally been funded with appropriated funds from the agencies’ budgets, while timber has been sold through contracts with private purchasers. The Omnibus Consolidated and Emergency Supplemental Appropriations Act of 1999 authorized the Forest Service to combine these contracting mechanisms by entering into “stewardship end result contracts,” under which the agency could use the value of forest products sold to offset the cost of contracted services. Under such goods- for-services contracts, the Forest Service could, for example, pay for thinning operations by using the proceeds from any commercial timber removed as part of the project. Additional contracting authorities were also included in the legislation; the full list of authorities follows. (Stewardship contracting authority was initially granted only to the Forest Service; in 2003 it was extended to BLM.) Goods for services allows the agency to use the value of commercial products, such as timber, to offset the cost of services received, such as thinning, stream improvement, and other activities. Designation by description or prescription allows the agency to conduct a timber harvest by providing the contractor with a description of the desired end result of the harvest. For example, the Forest Service might require that all ponderosa pine less than 10 inches in diameter be harvested. Ordinarily, cutting any standing tree before a Forest Service employee has marked or otherwise designated it for cutting is prohibited. Multiyear contracting allows the agency to enter into stewardship contracts of up to 10 years in length. (Standard service contracts are limited to 5 years, although timber sale contracts of up to 10 years were already authorized.) Retention of receipts allows the agency to retain receipts generated from the sale of commercial products removed through stewardship contracts, rather than returning the funds to the Treasury. Receipts are to be applied only to stewardship contracting projects. Less than full and open competition exempts the agency from the requirement under the National Forest Management Act that all sales of timber having an appraised value of $10,000 or more be advertised. This allows the Forest Service to favor local contractors when soliciting contract bids. Supervision of marking and harvesting of timber sales exempts the agency from the requirement that USDA employees supervise the harvesting of trees on Forest Service lands. This has allowed the Forest Service to use one state agency to assist in stewardship contracting. Best-value contracting requires the agency to consider other factors— such as past performance or work quality—in addition to price when making stewardship contract award decisions. The law authorized 28 stewardship contracts by the Forest Service, of which 9 were to be in the Forest Service’s Northern Region. The authority of the Forest Service to enter into these contracts was to end on September 30, 2002. Contracts were to “achieve land management goals for the national forests that meet local and rural community needs.” The goals listed in the legislation included, but were not limited to, maintaining or obliterating roads and trails to restore or maintain water maintaining soil productivity, habitat for wildlife and fisheries, or other setting prescribed fires to improve the composition, structure, condition, and health of stands or to improve wildlife habitat; noncommercially cutting or removing trees or other activities to promote healthy forest stands, reduce fire hazards, or achieve other noncommercial objectives; restoring and maintaining watersheds; restoring and maintaining wildlife and fish habitat; and controlling noxious and exotic weeds and reestablishing native plant species. The law also required that the Forest Service establish a multiparty monitoring and evaluation process to assess each stewardship contract. Several subsequent laws modified the requirements of the initial stewardship contracting authority. The Consolidated Appropriations Act of 2000 changed the requirement from 28 stewardship contracts to 28 stewardship projects, allowing for the possibility that individual projects may involve more than one contract. The following year, the Department of the Interior and Related Agencies Appropriations Act of 2001 doubled the number of authorized projects for a total of 56, requiring that at least 9 of the newly authorized projects be in the Forest Service’s Northern Region and at least 3 in the agency’s Pacific Northwest Region. Similarly, a year later, the Department of the Interior and Related Agencies Appropriations Act of 2002 authorized an additional 28 projects (for a total of 84), again requiring that at least 9 of the newly authorized projects be in the Northern Region and at least 3 in the Pacific Northwest Region. This law also changed the end date of the demonstration project from 2002 to 2004. Most recently, the Consolidated Appropriations Resolution of 2003 extended the authority to enter into stewardship contracts to 2013, extended stewardship contracting authority to BLM, removed the restriction on the number of projects that could be implemented under this authority, removed the emphasis on noncommercial activities among the land management goals listed, and replaced the requirement for multiparty monitoring and evaluation of each project with a requirement to monitor and evaluate the overall use of stewardship contracting. Stewardship contracting projects are subject to environmental and resource management laws—such as the National Environmental Policy Act (NEPA), the Endangered Species Act, and others—that also apply to nonstewardship projects. Responsibility for administering stewardship contracting authority at the Forest Service lies within two agency offices: the Forest and Rangeland Management Group and the Acquisition Management Group. Each of the nine Forest Service regions has established a stewardship contracting coordinator to facilitate stewardship contracting activities within each region. Within BLM, authority for administering stewardship contracting authority resides with its Forest and Woodland Management Group. Each of BLM’s 12 state offices also has a stewardship contracting coordinator. As of September 30, 2003, the Forest Service had completed 9 pilot projects, and another 68 were ongoing, with project completion dates scheduled through 2014. Most projects included the removal of timber and other vegetation to reduce fuels or promote forest health, while other activities included trail construction, wildlife pond restoration, and public toilet installation. The projects had treated about 13,800 acres and were expected to treat about 158,000 additional acres. Expected project costs and forest product values varied widely: Projects were expected to cost from $1,000 to $5.7 million, and the estimated value of forest products to be removed as part of the projects varied from $124 to $6.3 million. Forest Service staff reported that as of September 30, 2003, 9 pilot projects had been completed—i.e., all contracts associated with these projects were completed and closed—and an additional 68 projects were ongoing. Pilot projects were distributed throughout the Forest Service regions, except for the Alaska Region, which had none. As expected, given the requirements of the initial legislation, the Northern Region had the most pilot projects. Figure 1 shows the distribution of pilot projects by Forest Service region. (Appendix III provides a list of all 77 projects and related project details, including project acres and expected completion date.) The earliest reported completion date for a pilot project was May 2001, while the latest reported completion date is expected to be 2014. Figure 2 shows the number of pilot projects expected to be completed each year from 2004 until 2014. The pilot projects encompassed a variety of activities. For example, one project we visited—the Baker City Watershed Rehabilitation project— involved thinning trees on Forest Service land that served as the watershed for an Oregon town. The water provided by the watershed was so pure that the town did not need a filtration facility, according to project and town officials. However, the watershed was at high risk for fire, which officials told us would degrade the watershed to the extent that a multimillion- dollar treatment facility would be required. The watershed was thinned to reduce the density of fuels and thus the risk of fire, with the cost of logging partially offset by the value of timber removed. Logging was done by helicopter to avoid degrading the watershed by building roads. Figure 3 shows a helicopter using a cable to lift and transport trees that were cut by workers on the ground. Another project we visited—the Burns Creek project in southwestern Virginia—involved cutting timber on Forest Service land and using an elevated cable harvesting system to transport the cut logs across a steep ravine to a sorting area, where they were stacked and sold. Forest Service officials decided against using a traditional logging approach because of the risk of environmental damage to the stream and drainage system in the ravine. After the timber was removed, the cable system was used to transport limestone to the creek at the bottom of the ravine to reduce the creek’s acidity. Project officials told us that without the cable system, the Forest Service would have had to spend considerably more money to transport the limestone to the creek by helicopter. Figure 4 shows the cable system used to transport timber and limestone on this project. Across all stewardship contracting pilot projects, the most common activities were removing timber to improve forest health or reduce fuels and cutting slash, while other frequently cited activities included road maintenance and prescribed burning. Less commonly cited activities varied considerably and included culvert removal or installation; trail construction, maintenance, or obliteration; tree planting; wildlife pond restoration; and public toilet installation on national forest lands to protect water quality. Figures 5, 6, and 7 show additional examples of the types of activities undertaken as part of stewardship contracting projects. In addition to these activities, several projects cited road construction, maintenance, or obliteration among their activities. In all, about 19 miles of permanent road are expected to be constructed as part of the pilot projects and another 292 miles reconstructed; conversely, 320 miles of permanent road are expected to be decommissioned (that is, closed and stabilized) and another 89 obliterated. The stewardship contracting legislation enumerated seven land management goals. The goal most commonly cited by Forest Service project managers was removing vegetation or other activities to promote healthy forest stands, reduce fire hazards, or achieve other land management objectives; 59 projects reported addressing this goal to a great or very great extent. Figure 8 shows the number of respondents reporting that their projects addressed the land management goals to a great or very great extent. The stewardship contracting authority most commonly used to address these land management goals was goods for services, reported by 54 projects. Least commonly used was supervision of marking and harvesting of timber sales, reported by only one project in Colorado, where the Colorado State Forest Service is administering the project contract. Figure 9 shows the number of projects reporting the use of each authority. The sizes of the pilot projects (measured by the number of acres expected to be treated as part of each project) varied considerably, with the smallest project reported at 3.6 acres and the largest at 20,000 acres. The total reported acreage was about 172,000, with a mean project size of about 2,600 acres. As figure 10 shows, slightly more than half of the projects involved less than 1,000 acres, while about 10 percent of the projects exceeded 10,000 acres. But not all pilot projects had begun activities on the ground. Of the 77 ongoing and completed pilot projects, 31 reported that some treatments had taken place. Only about 13,800 of the 172,000 acres expected to be treated under the pilot projects had been treated by the time of our survey. Among projects reporting some activity, the number of acres treated ranged from 8 to 3,224, with a mean of about 445 acres treated per project. The expected costs of the projects differed markedly. The lowest reported total project cost was estimated at $1,000, while the highest was about $5.7 million. The mean reported pilot project cost estimate was about $850,000. The portion of these costs attributed to contracts (that is, the amount paid to a contractor to perform services) also varied—from about $1,000 to $4 million. Similar variation was evident in the expected value of products removed as part of the projects—primarily timber, but also firewood, wood chips, Christmas trees, and other products. The lowest estimate was $124, while the highest was about $6.3 million. These figures reflect the estimated value of material to be removed, without considering the contract costs required for its removal. The mean estimate of product value was about $480,000 per pilot project. Slightly more than half of the projects reporting both value and costs expected that contract costs would exceed product value—in other words, that the cost to pay a contractor to perform services would exceed the value of the materials to be removed. Of the 45 projects reporting both expected product values and expected contract costs, 24 (about 53 percent) reported that expected contract costs would exceed expected product values. (The Forest Service may use appropriated dollars to pay contract costs not covered by product values.) The remaining 21 projects reported that expected revenues would equal or exceed expected contract costs. Overall, net revenue estimates (estimated product values minus estimated contract costs) ranged from a negative $3.27 million to $2.47 million. Similarly, the amount of products to be removed varied among projects. The Forest Service’s standard unit of measure for wood products is 100 cubic feet, or ccf. Thus, 100 cubic feet of wood would be measured as 1 ccf. Estimates of the volume of sawlogs (timber large enough to be milled into lumber) to be removed as part of stewardship contracting projects ranged from 0.7 ccf to 49,000 ccf. About 70 percent of the reporting projects are expected to remove less than 5,000 ccf, and about one fourth are expected to remove less than 500 ccf. Estimates of other products (such as firewood and wood for posts and poles) varied from 4.2 ccf to about 67,000 ccf. Many projects also anticipated removing material of no commercial value, such as brush or small-diameter trees. Estimates of such noncommercial material ranged from 50 ccf to 144,000 ccf. Figures 11, 12, and 13 show examples of the material removed as part of stewardship projects. The Forest Service limited the amount of initial contracting and financial guidance it provided to stewardship contracting pilot project officials to allow them to experiment with different approaches to managing the projects. Despite the limited guidance, the eight projects we visited had contracting and financial controls in place, including both preaward and postaward activities and controls to provide accountability in managing the projects (see fig. 14 for the projects’ names and locations). Since the enactment of the 2003 legislation expanding stewardship contracting authority, the Forest Service and BLM have developed more specific guidance on designing and implementing future projects and on accounting for project costs and revenues. The Forest Service provided limited initial contracting and financial guidance on stewardship contracting to allow project managers to experiment with different implementation approaches, according to an official with the Forest Service’s Forest and Rangeland Management Group. The Forest Service provided a “Desk Guide for Contracting under Existing Authorities for Service Contracts with Product Removal,” intended to provide guidance to field staff on conducting pilot projects, although the desk guide focused primarily on contracting authorities other than those in the stewardship legislation. Other guidance was provided by the Pinchot Institute for Conservation—with which the Forest Service had contracted to review stewardship contracting implementation, including the design and management of monitoring, evaluation, and reporting processes. For example, the Pinchot Institute facilitated stewardship contracting workshops at Forest Service headquarters and several field locations to explain the nature of the stewardship contracting authority. The Pinchot Institute also provided technical assistance and general program guidance through its three subcontracted partners. Because of the limited guidance available to them, some project managers also sought project design assistance from staff in the Forest Service’s Northern Region, which had the greatest number of pilot projects and which had experience in and knowledge of stewardship contracting techniques. Because of the lack of specific centrally issued guidance, some projects were slow to begin. Project managers attributed this delay to the need to independently determine how to design and implement their projects using their understanding of stewardship contracting and the need to coordinate the efforts of timber sale and acquisition contracting officers in developing a single contract. Under traditional contracts, timber sales are handled by timber sale contracting officers, while service acquisitions are handled by acquisition contracting officers. With the exchange of goods for services under stewardship contracting, only one contracting officer is needed for both activities; but close cooperation and coordination between the timber sale and acquisition offices are needed, which can be difficult and time consuming. For example, one contracting officer at the Antelope stewardship project said developing a contract combining a timber sale with various services took approximately 6 months, in contrast to the approximately 2 to 3 months that this official said were required for a standard timber sale or service contract. This official told us the delay occurred primarily because of the lack of direction on how to achieve the necessary coordination between the timber sale and acquisition contracting offices. The eight projects we visited generally included the preaward and postaward contracting activities and safeguards we believe are necessary for effectively awarding and administering stewardship contracts. Preaward controls we looked for included widely distributed contract solicitations, the use of pre-established criteria for evaluating bids, and meetings with potential contractors to clarify project activities and Forest Service expectations. Postaward controls we looked for included the use of payment or performance bonds, appropriate techniques for valuing forest products, and provisions for on-the-ground inspections of contractor work. See appendix II for more information about our selection of these criteria. The project managers for the projects we reviewed undertook preaward solicitation and advertisement activities to seek contract bids and proposals. These efforts included solicitations in the form of mailings to potential contractors, advertisements in local newspapers, and national announcements in the Commerce Business Daily and on the Federal Business Opportunities Web site. Such solicitations are intended to maximize the number of potential contractors aware of the project, and thus the pool of potential bidders. When solicitations did not result in any bidders, the solicitations were sometimes expanded to include a broader geographic area. The project managers also held conferences with potential contractors before they submitted bids or proposals, and sometimes potential contractors made trips to the proposed project sites. These “scoping” sessions served to clarify project objectives and contract terms and schedules, as well as to solicit ideas from contractors and to increase local awareness of projects. Project managers and other agency staff also conducted bid reviews using predefined criteria to ensure thoroughness and objectivity in evaluating each bid and awarding the contracts. The evaluation criteria included such factors as bidders’ past performance and experience, proposed work schedules and technical approaches, and cost or price factors. The Forest Service evaluation teams generally were composed of experienced contracting officers, project managers, and other key Forest Service staff. Contracts for the eight projects we visited generally incorporated safeguards such as bond, valuation, inspection, and default requirements. The contracts we reviewed contained clear definitions of contract requirements, including work-site locations, access points, and the size of work units. The contracts also generally defined the roles of the various Forest Service staff, including those responsible for oversight activities, such as the contracting officers and the contracting officers’ representatives. Before commencing work under the contract, Forest Service project managers generally held orientations with the contractors to clarify contract terms, work performance requirements, and work progress schedules. These meetings sometimes resulted in amendments to the solicitations and clearer contract language. Nearly all of the stewardship contracts we reviewed included payment and performance bond clauses to ensure the satisfactory performance of contract requirements. These bonds are written instruments executed by the contractor to ensure fulfillment of its obligations. If the obligations are not met, the bonds ensure payment, to the extent stipulated, of any loss sustained. In particular, payment bonds, also known as advance deposits or cash deposits, ensure that the government receives payment for timber harvested. In the event that a contractor harvests timber but then defaults on the contract or goes out of business before paying for it, the agency can keep the cash value of the bond as payment for the timber. Similarly, performance bonds ensure that, in the event the government is required to conduct work to remediate damage done by the contractor, the agency can use the value of the performance bond to finance remediation activities. Although most contracts included bonds, some did not. The Winiger Ridge Restoration project, for example, did not include payment or performance bonds. The project manager told us that she believed such bonds were too onerous for small contractors, and agency officials wanted to make the project as attractive as possible to small local contractors. Additionally, according to the project manager, there was little incentive for the contractor to cut commercially valuable timber and then default on the remainder of the services because there was very little valuable timber included in the project. This manager characterized the contract as “$190,000 worth of services and $500 worth of timber.” Another project— Antelope—did not require a performance bond because of the expense and burden it would place on the contractor, according to the project manager. The stewardship contracts also included valuation clauses to establish the volume and value of the forest materials to be removed and the services to be provided. Volume is determined by a “cruise” of the project area, which involves staff examining the area in different locations to estimate the timber that is to be removed. Forest Service managers at the projects we examined established the value of timber through government cost estimates or appraisals. Government cost estimates are simply indications of what the timber will bring on the market based on previous sales, according to Forest Service staff. Appraisals, on the other hand, involve calculations of not only what the timber will bring on the market but also the cost of cutting and hauling the timber, constructing or improving roads, and so forth, and are thus more detailed, time consuming, and expensive. According to staff, government cost estimates are appropriate when the value of the material is known to be low, because in such cases the cost of a full appraisal can exceed the value of the material. Of the eight projects we reviewed, five conducted full appraisals while three used government cost estimates. The stewardship contracts we examined also included provisions for on- the-ground inspections of contracted work to ensure that the work was conducted in accordance with contract requirements and Forest Service expectations. At the projects we reviewed, the contracting officers and the designated contracting officers’ representatives who served as on-the- ground administrators documented their observations on inspection forms and contract daily logs, which we examined. These logs included information on whether the work was performed in an acceptable manner, and the measures necessary to correct any deficiencies. Additional effort was sometimes required to ensure that contractors performed according to Forest Service expectations. For example, the Winiger Ridge Restoration stewardship project contracting officer told us that the project’s initial contract had to be revised to make the designation by description specifications clearer to the contractor, after it became evident that the specifications as written did not lead to the expected results. (Designation by description allows the agency to conduct a timber harvest by providing the contractor with a description of the trees to be cut or the desired end result of the harvest, rather than by marking individual trees.) At this project, the initial description directed the contractor to, among other things, cut all trees with a certain level of dwarf mistletoe infestation. However, project officials realized that it was impossible to verify that the contractor had cut only infected trees, and contract provisions regarding mistletoe infestation were eliminated. Similarly, contracting officers and contractors at other locations also told us that the contractors sometimes had difficulty interpreting the language in designation by description contracts, or that the language was not specific enough to ensure that Forest Service expectations were met. This unclear language sometimes required additional project oversight to ensure that contractors were meeting contract requirements. At the Clearwater stewardship project, for example, the project manager told us that although they had planned periodic project inspections, the use of designation by description authority required them to have inspectors on site virtually every day for several weeks. Finally, the stewardship contracts we reviewed also included breach or default and dispute resolution clauses. These mechanisms allow the Forest Service to address any issues or problems by issuing default notices and stop work orders. However, aside from work delays, which generally resulted from uncontrollable events such as excessive snow or fire seasons, there were no significant problems with the contracts we examined. In fact, several Forest Service contracting officers we interviewed praised the relative ease of administering the contracts once they were developed and awarded. Similarly, the contractors conducting the work told us that, although the stewardship contracts and the contracting process were somewhat new and time consuming to them, implementation of the contracts themselves was relatively straightforward. During our project site visits, we observed evidence of established procedures in place for accounting for project funds, including procedures for receiving and tracking timber payments and tracking retained receipts and expenditures, as well as other steps taken to provide financial accountability. Our review of selected items included an examination of payment vouchers, receipts, and other expenditure-related documentation to assess whether retained receipts and other project funds had been spent on stewardship-related activities. We did not review all financial controls for stewardship contracting. The Forest Service uses two data collection systems—the Timber Sale Accounting (TSA) system and the Foundation Financial Information System (FFIS)—to track project financial activities. The TSA tracks data such as the name of the purchaser and the quantity and species of timber to be harvested, and is the principal system for recording revenues related to timber sales. However, the TSA reflects only a portion of stewardship contracting activity. While the TSA includes timber-specific information such as species, it does not reflect the services contracted for as part of stewardship contracting projects; instead, these services are recorded and tracked at the local forest or regional office. The FFIS, which incorporates some TSA data, is the system of record supporting Forest Service billing and collection functions. As with traditional timber sale contracts, actual payments are received and processed through an independent “lockbox” system in San Francisco. The payment receipts are recorded by job code in a specified distribution account within the FFIS. At each location, we observed adequate separation of duties and supervisory review responsibilities being handled by officials in the timber and financial groups. For example, a project official at each location was responsible for verifying the accuracy of all the charges to the project account, and the financial group manager was responsible for monitoring the project account balances. At the end of each month, timber and accounting clerks completed reconciliations between the timber and financial system data and their detailed local records. When discrepancies were identified, the problems were researched and corrected in a timely manner. For those projects we looked at, several monthly reports were generated by the TSA and FFIS systems, which managers in each group used to track project activities and to review and verify the accuracy of the charges against project funds. Two projects we visited, the Clearwater and Fernow Experimental Forest projects, had expended retained receipts on additional stewardship contracting activities. At these projects, we examined payment vouchers, receipts, and other expenditure-related documentation to ensure that retained funds had been spent on stewardship-related activities, as required, and the funds appeared to have been spent appropriately. Another project we visited, the Burns Creek project, passed all retained receipts on to another stewardship project, the Wayah Contract Logging project, in the same region; however, the Wayah Contract Logging project (which we also visited) did not need to use the funds because receipts and appropriated funds associated with that project were sufficient to cover project expenditures. As a result, the retained receipts were being passed on yet again to a third stewardship project, the Sand Mountain project, also in the same region. At the time of our review, a portion of these funds had been obligated to cover the cost of a contract for work on this project, but had not yet been expended. Forest Service staff at the locations we visited took additional steps to provide financial accountability. For example, we noted procedures in place to prevent timber harvesting activities from significantly exceeding service activities under goods for services contracts. To this end, two projects (the Clearwater and Warm Ridge/Glide projects) established “land management credits” to record service activities completed. Once the contractor earned such credits, they were then applied to the value of the timber being harvested. At these projects, contractors were not permitted to harvest timber until they had earned the required credits through service work—thus preventing contractors from harvesting commercially valuable timber and then failing to perform needed restoration activities. The Forest Service and BLM issued jointly developed guidance in January 2004 to provide direction in implementing stewardship contracts. The Forest Service’s new handbook and BLM’s new guidance address the use of contracting controls, such as appraisals, and the use of two authorities— designation by description and less than full and open competition; include contract templates for field staff; provide guidance on financial accountability; and outline the responsibilities of agency staff. According to an official with the Forest Service’s Forest and Rangeland Management Group, their handbook is intended to be a working document that will change as necessary. For example, if the results of ongoing monitoring of stewardship contracting show a need for changes, the handbook will be revised accordingly. The agencies’ guidance includes some of the same elements we examined during our site visits to provide project accountability. For example, both agencies’ guidance includes provisions requiring appropriate valuation of service work to be performed and timber to be harvested. To this end, the Forest Service handbook states, “The appraisal for timber and other forest products shall be conducted using appraisal methods as specified in the Timber Sale Preparation Handbook . . . and Regional guidelines.” Both agencies also provide guidance on required bonding. For example, the BLM guidance states that “payment protection in the form of payment bonds should be used to protect the value of the byproduct to be removed when the product will be removed prior to cash payment or the contractor’s earning of conservation credits.” BLM’s guidance further states that “contracting officers are encouraged to strive toward the concept of a single bond to cover ‘performance,’ which would include the product value (payment) and the service work rolled into one bond.” The agencies’ guidance also provides expanded discussions on the use of two additional authorities—designation by description and less than full and open competition. Regarding designation by description, the guidance specifies that the amount of material removed from the forest must be verifiable and accountable. For example, the Forest Service handbook generally requires that for commercial material (such as sawtimber), trees to be removed must be identified based on characteristics that can be verified after removal—for example, the contractor might be required to remove all lodgepole pine less than a specified stump diameter. Agency personnel could subsequently measure remaining stumps to verify that contract provisions were met. For noncommercial material, the handbook allows less specific designations setting forth the desired end result of treatment (sometimes referred to as designation by prescription)—for example, the contractor might simply be required to leave a certain number of trees on each acre, with an average spacing between them. Regarding less than full and open competition, which exempts the agency from the requirement that all sales of timber having an appraised value of $10,000 or more be advertised, the Forest Service handbook specifies that forest supervisors must document and submit to regional foresters the reasons for the selection process used. Documentation must include the level of competition to be used in the contracting process. As part of their guidance, the agencies also are developing contract templates that field staff can use as examples when developing their own contracts—potentially improving the efficiency and applicability of stewardship contracts. These are standard contract formats that incorporate timber sale and service components. The Forest Service has also conducted additional training sessions, and staff from both agencies told us they plan to expand their intranet sites to provide more ongoing stewardship contracting project information, including details about successful stewardship contracting projects that can serve as models for staff who are developing projects. The agencies’ guidance also contains direction on financial accountability. According to the Forest Service handbook, the proper use and management of stewardship contracting receipts must be assessed as a normal part of regional- and forest-level renewable resource program and activity reviews. Through the guidance, both agencies have assigned responsibility for various financial activities, including providing technical advice, reviewing and approving retention of project receipts, and ensuring that associated financial data are accurate and reconciled to the financial statements. In addition to specifying responsibility for various activities, the agencies’ guidance notes the approved funding source for project- related activities. For example, stewardship contracting preparation, overhead, and project-level monitoring costs normally are to be funded through appropriated funds. According to the guidance, stewardship contracting retained receipts shall not be used for overhead, administrative, or indirect costs or for the completion of environmental studies. The guidance indicates these retained receipts can be used for another stewardship project or to fund national programmatic multiparty monitoring. Although both agencies’ guidance states that multiparty monitoring of individual projects is encouraged, the Forest Service handbook states that it is inappropriate to conduct project monitoring with revenues received from a stewardship contract. Finally, both agencies’ guidance outlines the responsibilities of the various headquarters, regional, and state office officials in the implementation, monitoring, and evaluation of stewardship contracting projects. The agencies also have appointed stewardship contracting coordinators at each Forest Service regional office and at each BLM state office. These staff serve as resources for all projects under the respective Forest Service regional offices and BLM state offices and are expected to enhance communication between the agencies’ headquarters and the field. Their specific responsibilities include clarifying stewardship contracting guidance, monitoring project status and soliciting feedback, and making recommendations on how to improve the effectiveness of stewardship contracting. Despite the stewardship contracting legislation’s emphasis on meeting community needs, the Forest Service initially provided little guidance on incorporating community involvement in stewardship contracting pilot projects; as a result, the type and extent of field staffs’ efforts to involve communities in projects varied considerably among the projects we reviewed. Some project managers actively sought community involvement in planning or implementing their projects, while other managers took a less active approach—potentially leading to missed opportunities for meeting local community needs. Although the majority of the project managers we spoke with touted the potential benefits of community involvement in stewardship contracting projects and expressed their desire for additional guidance in this area, neither the Forest Service nor BLM included such guidance in their January 2004 stewardship contracting guidance documents. Although the stewardship contracting legislation explicitly stated that stewardship projects are “to achieve land management goals for the national forests that meet local and rural community needs,” the Forest Service initially provided only minimal guidance on soliciting and incorporating community involvement in stewardship contracting projects, and most managers we spoke with articulated their frustration with the overall lack of guidance on community involvement. Managers told us that little or no formal training on involving the community had been provided, and in some cases reported that the only guidance they had received was in the form of a brief discussion of the topic during a meeting. The most frequently identified source of community involvement guidance was in the form of advice from the Pinchot Institute for Conservation’s regional subcontractors, which reportedly provided some consultation on community involvement efforts. The managers’ desire for guidance or training resulted primarily from two concerns: first, that they were wasting time “reinventing the wheel” because they were unaware of effective or innovative community involvement strategies developed by managers of other projects, and second, that they were potentially violating the Federal Advisory Committee Act (FACA) by incorporating community involvement into their projects. Because of the lack of guidance, the steps taken by Forest Service managers to involve communities varied widely. Most of the community involvement we learned about was incorporated through multiparty monitoring teams, which were required by the stewardship contracting legislation. However, the legislation did not specify, and the Forest Service provided little guidance on, the teams’ roles and responsibilities, leading to uncertainty among field staff about what was expected and how to proceed. Some projects simply did not have monitoring teams, and some managers told us they did not realize such teams were required. The project managers who assembled monitoring teams did so using very different approaches. For example, some managers formed teams of primarily Forest Service employees, while others sought to involve a cross section of the community. The Yaak project manager in Montana even transferred the responsibility for assembling the project monitoring team and completing an annual report on the project to the contractor, by making these efforts a requirement in the contract. Some managers formed small teams composed of a few interested local individuals, while the manager at the Priest-Pend Orielle project in Idaho formed a large monitoring team consisting of about 30 members organized into several specialized subcommittees focusing on specific issues such as roads, watershed, wildlife, and noxious weeds. This project manager also coordinated with the team to ensure that a Forest Service specialist was available to consult with each of the subcommittees as needed. The project monitoring teams also played varying roles and undertook varying activities. Team members included university professors, local government officials, environmental advocates, industry representatives, and other interested citizens, and the composition of the team often helped to determine the level and type of work the team undertook. For example, several project managers noted that their teams focused on assessing the effectiveness of specific ecological work or evaluating the project’s impact on the local economy, while other teams focused on assessing the stewardship contracting process, believing that their assessment of the tool would help the Congress evaluate the pilot program. The monitoring teams conducted such activities as inspecting project sites, testing soils and water, establishing photo points, and gathering and analyzing economic information. Figure 15 shows a multiparty monitoring team meeting at a project site. In a few instances we noted other forms of community involvement. Some managers took steps such as meeting with local contractors and environmentalists to hear their concerns and answer questions, or setting up demonstration areas that would show local residents how the project site would look once the work was done. However, such steps were not common, and in fact some managers told us that the NEPA process alone allows for sufficient public participation in their projects. They said that as a result—and without guidance to the contrary—they did not feel that additional efforts to involve communities were necessary or justified. In fact, one Forest Service official at the Burns Creek project site in Virginia told us that management of the forest might be better left to forestry professionals than to a collaborative group of well-meaning—but untrained—community members. Some project managers may be missing opportunities to improve their projects, as the majority of the project managers we spoke with touted the benefits of involving the community in stewardship contracting projects. Although some project managers noted that community involvement activities require an additional investment of time and effort upfront, several believe that this effort will pay off in the end. Project managers cited a variety of benefits from community involvement, including improved project design and implementation, better lines of communication with the public, and enhanced public trust in the agencies. Several project managers indicated that they valued the project monitoring teams’ expertise and input, and some noted improvements to their projects as a result of team and other community input. For example, the manager of the Upper Blue project in Colorado told us that public involvement in her project led to the development of more stringent criteria for protecting water quality during project activities. The Main Boulder project manager in Montana told us that public involvement in his fuels reduction project led to improved relations with the public, which in turn persuaded a neighboring landowner to offer the agency access across his land to an isolated parcel of public land needing fuel reduction. This allowed the manager to add an additional 40 acres to the project’s planned fuel reduction activities. Some managers viewed their interaction with the project monitoring team as an opportunity to get back in touch with the community and improve the agency’s credibility, and some sought to involve a cross section of the community—including environmentalists and loggers—on their monitoring teams to improve the agency’s relationship with the community. The manager of the Sheafman Restoration project in Montana said she wanted a cross section of the community on her project’s team because she believes “any time you can get people from different sides of an issue together to talk, good things happen.” The Priest-Pend Orielle project manager observed that in his community—as in so many others—the Forest Service had lost touch with the local community. He sees tremendous benefits in the agency’s new collaboration process with the community, and suggested the agency will have greater opportunities to build credibility with the community on future projects because local individuals have seen the agency responding to their input. The manager of the Red-Cockaded Woodpecker Habitat project in Georgia told us that by attending the meetings of other community organizations and taking an active interest in what those groups are doing, she has improved communications with the community—leading to increased public input on Forest Service projects, which in turn helps the agency better focus its projects to meet community needs. However, benefits were often limited because most of the monitoring teams were formed after the projects completed NEPA requirements, meaning that these teams generally participated only during the implementation phase of the projects rather than during project design. Several project managers suggested that stewardship contracting projects could be more effective if the community were brought to the table during the earliest project discussions to assist in drafting proposals of needed work. Despite the many project managers who told us they wanted additional guidance on obtaining and incorporating community involvement, the Forest Service’s recent stewardship contracting handbook does not contain specific guidance in this area, and BLM’s guidance document is similarly lacking. In commenting on a draft of this report, Forest Service officials noted that the agency’s intent was to allow local agency officials the flexibility to determine the appropriate level of collaboration for their communities. Although the agencies’ 2004 guidance documents repeatedly mention “community involvement” and “collaboration,” they do not specify what these terms mean or how agency staff are to accomplish them. For example, the Forest Service handbook indicates that forest supervisors should ensure that all stewardship contracting projects are developed “using collaboration with Tribal governments, local governments, nongovernment organizations, individuals, and other groups, as appropriate.” However, the handbook neither provides guidance on how to effectively involve these various groups and individuals nor defines “appropriate” collaboration. (In contrast, the handbook’s guidance on contracting and financial activities includes defined lists of appropriate and inappropriate activities.) In fact, the closest either guidance document comes to saying what form this collaboration should take is a statement about what collaboration is not. According to the Forest Service handbook, “The use of scoping letters alone does not meet the intent of collaborative efforts for stewardship contracting projects.” Moreover, while the Consolidated Appropriations Resolution of 2003 eliminated the requirement for multiparty monitoring teams to assess each project, it did not specify what form of community involvement should take its place. Project managers are concerned that without guidance on best practices from other projects, they may be inefficiently developing community involvement mechanisms independently. Guidance on the minimum requirements for community involvement in each stewardship project, including examples of best practices, could increase both the efficiency of managers’ efforts and the extent of community involvement in the projects. By providing more definitive guidance, the Forest Service and BLM could reasonably expect to enhance the effectiveness of stewardship contracting and more fully realize its potential. Both the Forest Service and BLM plan to use stewardship contracting in the future. The Forest Service expects to award at least 67 stewardship contracts in fiscal year 2004. BLM, which was granted stewardship authority only in 2003, has begun 2 projects and plans about 34 more in fiscal year 2004. The agencies did not provide specific data for years beyond 2004, but agency officials said they intend to continue expanding the use of stewardship authority in the future. According to Forest Service and BLM officials, both agencies plan to collect information on stewardship contracting projects to assess the utility of stewardship contracting relative to other contracting mechanisms. According to an official with the Forest Service’s Forest and Rangeland Management Group, the agency awarded 49 stewardship contracts in fiscal year 2003 and 7 more as of March 2004, and expects that an additional 60 or more contracts may be awarded during the remainder of fiscal year 2004. However, the Forest Service does not track the authority under which it awards stewardship contracts, and as a result the agency could not determine how many of these contracts pertain to new projects and how many pertain to the 77 pilot projects we analyzed. BLM has begun two stewardship contracting projects, both in Oregon. One project, in Applegate, is expected to be completed in 2004; the other, near Baker City, does not yet have an estimated completion date. Two additional projects—one in Idaho and one in Utah—are being developed, and two more (one in California and one in Oregon) have been approved. BLM plans to begin about 30 additional projects in fiscal year 2004. Each agency’s recent guidance contains provisions for monitoring and assessing the use of stewardship contracting, and agency officials told us that monitoring and assessment serve two purposes—they enable the agencies to provide information both to the Congress on stewardship contracting and to field staff responsible for stewardship contracting projects. BLM’s guidance states that “one objective of this monitoring effort is to analyze the effectiveness of stewardship contracting relative to other management tools.” The Forest Service’s handbook states that “results from the longer term programmatic monitoring generate information about the utility of stewardship contracting authority.” Officials with both agencies told us that the results of the monitoring will be used to construct the agencies’ required annual reports to the Congress on stewardship contracting. The agencies are required to report on the status of development, execution, and administration of stewardship contracts; the specific accomplishments that have resulted; and the role of local communities in development of contract plans. Officials also told us that the results of the monitoring will be provided to agency field staff to assist staff in designing and implementing projects. For example, a Forest Service official told us that information on both successful and problematic projects would be shared with field staff to help them determine whether certain types of projects are more suitable for stewardship contracting than others, or whether certain stewardship contracting procedures are more effective than others in certain situations. To carry out their monitoring efforts, the agencies are jointly developing a request for proposal for a contractor to develop and implement a mechanism for monitoring and evaluating stewardship contracting projects. Agency officials estimated that the request would be issued in spring 2004 and expect to issue a single monitoring contract covering stewardship contracting projects in both agencies. As the Forest Service and BLM undertake projects to achieve land management objectives—particularly their efforts to reduce fuels under the Healthy Forests Restoration Act—they are likely to rely increasingly on stewardship contracting. This tool has the potential to help the agencies achieve their objectives while meeting community needs. Community involvement is a critical component of stewardship contracting: It enables the agencies not only to construct projects that are targeted toward community needs but also to develop community relationships, thereby enhancing future efforts to collaborate with communities. However, while we observed contracting and financial controls in place that we believe will provide accountability in managing projects, we believe that the agencies could do more to assist individual project managers as they seek to incorporate public involvement in their projects. Community involvement in the pilot projects most often took the form of multiparty monitoring teams, but these teams are no longer required for each stewardship project, and neither agency provides substantive guidance on incorporating community involvement. Many Forest Service project managers said they wanted more guidance in this area, but managers looking to the agencies’ 2004 stewardship contracting guidance for direction on community involvement will likely find little of use. Unless the agencies establish a minimum requirement for community involvement in stewardship projects (to replace the expired requirement for monitoring teams) and provide project managers with examples of successful community involvement practices other projects have used, the agencies may fail to capitalize fully on the potential of stewardship contracting. To enhance the ability of stewardship contracting projects to meet local needs and improve public trust in the agencies, we recommend that the Secretaries of Agriculture and the Interior direct the agencies to issue additional guidance on community involvement. Such guidance should identify, and encourage the use of, best practices in seeking and incorporating community input, and establish minimum requirements for seeking community involvement on each stewardship contracting project. We provided a draft of this report to the Secretaries of Agriculture and the Interior for review and comment. The Forest Service generally agreed with our report and provided technical suggestions that we incorporated, as appropriate. The Forest Service’s comment letter is presented in appendix IV. The Department of the Interior did not provide comments. We are sending copies of this report to the Secretary of Agriculture, the Secretary of the Interior, the Chief of the Forest Service, the Director of BLM, and other interested parties. We will also make copies available to others upon request. In addition, this report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3841. Key contributors to this report are listed in appendix V. As requested, we reviewed six stewardship contracting pilot projects identified as problematic by members of various environmental groups: the Buck, Hungry Hunter Ecosystem Restoration, and Sprinkle Restoration projects in the Forest Service’s Pacific Northwest Region; the Meadow Face and North Fork Big Game Habitat Restoration projects in the Northern Region; and the Granite Watershed Protection and Enhancement project in the Pacific Southwest Region. According to the environmental group members, these projects either did not allow for sufficient public involvement or adversely affected the environment in some way. Four of the six projects were cited for insufficient public involvement, which took the form of limited public input or lack of Forest Service commitment and support, according to environmental group members we spoke with. Ecological concerns were raised about several projects and included impacts on wildlife habitat and water quality, high road densities, and soil compaction, as well as the perceived failure of the Forest Service to consider all costs and benefits in its project analyses, including impacts on local communities and big-game habitat. The Forest Service project managers we interviewed generally agreed that public involvement was lacking at the four projects where this was cited as a concern. However, their responses to environmental concerns varied. In this appendix, we provide, for each of the six projects, a description of the project, a discussion of the concerns expressed by environmentalists, and the Forest Service’s responses to those concerns. We do not take a position on the validity of the concerns or responses. The Buck project is located in Oregon’s Wallowa-Whitman National Forest in the Forest Service’s Pacific Northwest Region. It was designed as a timber sale in 1998 before the initial stewardship contracting legislation was enacted. The project was subsequently altered to incorporate activities to reduce wildfire risk and was completed in 2004. According to a member of the Hell’s Canyon Preservation Council (HCPC), a local environmental group, HCPC was generally concerned about the lack of public input in the project’s design and implementation and about the lack of restoration activities. Specifically, this HCPC member told us the project was simply a repackaged timber sale that was not planned or designed with up-front community involvement beyond that required as part of the National Environmental Policy Act (NEPA) process, which the member did not consider a substitute for true local collaboration. Further, although the Forest Service created a monitoring team for the project, the team was formed after the NEPA process was completed and the contract awarded, minimizing the opportunity for public input. The HCPC member added that the project was too narrowly focused on the sale of timber and involved only limited restoration activities, such as culvert and road replacement. The Forest Service’s Buck project manager agreed that community involvement was lacking on the project, noting that public involvement was particularly limited during the project’s planning and design stages. He emphasized that future projects will likely involve more public input, especially during planning and design. With respect to concerns that the project’s focus was too narrow and involved limited restoration activities, the project manager noted that once the NEPA process was completed, the Forest Service was limited in the changes it could make to the project because significant alterations would have required going through the NEPA process again. Given the project’s initial focus as a timber sale, the amount of restoration activity that could be added after NEPA was limited. The Hungry Hunter Ecosystem Restoration project is in Washington’s Okanogan and Wenatchee National Forests in the Forest Service’s Pacific Northwest Region. The project was designed to remove small-diameter trees, conduct prescribed burning, rehabilitate roads to improve habitat, and reduce erosion. The Forest Service project manager told us he expected the project to get under way in early 2004, following completion of the NEPA process. A board member of the Methow Forest Watch, a local grass roots environmental group, expressed concerns about the Forest Service’s lack of commitment to and support for the project, which has delayed project implementation, as well as limited public involvement. Regarding the lack of commitment and support, she said the Forest Service has paid more attention to timber sale projects than to the Hungry Hunter project, citing a local timber sale as an example of a project that is already under way while the Hungry Hunter project is moving forward slowly. She stated that although she understands that forest fires have contributed to project delays, the Forest Service has not made the Hungry Hunter project a high priority. Concerning limited public involvement, the board member noted that although the Forest Service initially incorporated public involvement on the project, this involvement was reduced after the Consolidated Appropriations Resolution of 2003 eliminated the requirement for local monitoring teams. She also noted that although the Forest Service initially proposed 1.3 miles of road as part of the project, the agency currently proposes constructing seven miles of new road, some of it in areas that are currently roadless. The Hungry Hunter project manager disagreed with the contention that there was a lack of commitment to the project. The manager noted that the comparison to the local timber sale does not demonstrate lack of commitment because the two projects did not start at the same time and, further, that the timber sale will be about 3 years late when it is finally completed. However, the project manager acknowledged the project’s delays and stated that he understands public frustration over these delays. He noted that in addition to severe fires that have directed Forest Service resources elsewhere, lack of clear agency guidance on how to implement the project has also contributed to delays. For example, he said the permissible use of retained receipts was initially unclear, but the new legislation and guidance clearly specifies what they can be used for. In addition, he noted that time-consuming soils analyses required as part of the project’s environmental assessment also caused delays. The manager agreed that public involvement on the project has been reduced in recent months. He attributed this reduction to several factors. First, there was confusion over the requirements of the Consolidated Appropriations Resolution of 2003, including the extent of public involvement. Additionally, he was concerned about violating the Federal Advisory Committee Act (FACA) by working too closely with the project’s monitoring team; partly as a result, he reduced the team’s involvement. Finally, a potential conflict of interest arising from monitoring team members who were potential bidders on the project contract also contributed to the project manager’s decision to curtail monitoring team involvement. The manager emphasized, however, that once the environmental assessment is finalized and the project is under way, more direct and extensive public involvement will be resumed. Regarding the concern about high road densities in the Hungry Hunter project area, the project manager stated that no decision has yet been made regarding the number of miles of road in the project. He noted that four alternatives are outlined in the project’s environmental assessment, one of which would involve no new road construction. Once the public comment period is completed, he said, a decision will be made on which alternative to select. The Sprinkle Restoration project, like the Buck project, is in Oregon’s Wallowa-Whitman National Forest in the Forest Service’s Pacific Northwest Region. The project’s specific objectives are to provide long- term forest health, reduce the severity of future insect infestations, restore the forest to historical conditions, and provide for wildlife habitat. A contract for the project was awarded in July 2003, and the contractor began working on the project in the spring of 2004. A member of the Hell’s Canyon Preservation Council (the same member we spoke with regarding the Buck project) told us the group is mainly concerned about the lack of collaboration on the Sprinkle Restoration Project, but also has concerns about the project’s narrow focus on timber harvest activities to the detriment of restoration activities and the limited use of receipts retained. Regarding collaboration, the HCPC member told us that the local monitoring team was formed only after the project had been through the NEPA process and the contract had been signed and that community input on the project through NEPA is insufficient. However, he noted that the Forest Service is addressing some of the monitoring team’s concerns. For example, the team had noticed that a road that was to be decommissioned as part of the project required no action because the road area had adequately restored and regenerated itself. When the team pointed out that decommissioning the road would be unnecessary and would add sediment to a nearby creek, the Forest Service accepted the team’s suggestion and withdrew the plan to decommission the road. The HCPC member pointed out that if the Forest Service had involved the community up front, this oversight would not have occurred. The HCPC member also told us that the project focused on timber harvest activities and did not address the issue of high road density, which jeopardizes wildlife security. More broadly, he told us that the project did not contain sufficient restoration activities and noted that additional activities (such as replacing culverts or decommissioning roads) could have been added to the project to fully use the expected $300,000 in retained receipts, which had not been used. The Sprinkle project manager told us he agrees that collaboration on the project has been lacking and that NEPA had been completed and the project designed before the monitoring team was formed. He stated that the Forest Service is trying to improve collaboration on planning various forest projects. Concerning high road density, the project manager said that although road removals were planned as part of the project, road density remains high, contributing to reduced elk habitat. He noted, however, that the area is flat, making vehicle use difficult to manage. If the Forest Service closes a road, forest users are likely to simply take their vehicles off road to get where they want to go. Because it may be more ecologically sound to leave the roads in place and keep forest traffic on established roadways, there is some reluctance on the part of the Forest Service to close roads. Finally, regarding retained receipts, the project manager informed us that the agency has consulted with the monitoring team on the use of the receipts. He said the Forest Service plans to use the funds on nearby stewardship projects as well as on the Sprinkle and adjacent watersheds. For example, the agency plans to use the funds to replace culverts within the Sprinkle area. The Meadow Face project is located in Idaho’s Nez Perce National Forest in the Forest Service’s Northern Region. The project objectives are to return vegetation to its historical range; reduce fire risk, invasive plant species, and sediment; and improve stream channel conditions and recreational opportunities. No contract has been awarded on the project, and the project manager did not provide an estimate of its completion date. Members of Friends of the Clearwater and the Idaho Conservation League, two local environmental groups, expressed concerns about insufficient public involvement in the project, insufficient restoration activities, overstatement of the results of project activities, and site-specific amendments made to the 1987 forest plan that allow environmental degradation. Regarding public involvement, the Idaho Conservation League member said that the Stewards of the Nez Perce, an advisory group composed of representatives of the timber industry, the Idaho Department of Fish and Game, the Nez Perce tribe, environmentalists, and others, presented the Forest Service with a project proposal that was unanimously agreed upon by the group. However, the Forest Service ultimately ignored the group’s recommendation and came up with its own project, and the environmental group members do not believe the project will result in the completion of all restoration elements that were proposed. The Friends of the Clearwater member also commented on one element of the service work—an attempt to reduce sedimentation into area waterways—involving the stabilization of a slide area resulting from past timber harvesting. The member argues that the Forest Service is double counting the sediment savings resulting from this activity—that is, representing the savings as the effect of mitigating the prior timber harvest as well as the effect of the current Meadow Face project. Finally, the environmental group member expressed concern over three amendments that were made to the forest plan in order to allow project activities. He told us his group is concerned over forest plan amendments that will allow (1) higher levels of sedimentation in area waterways, (2) increased soil compaction in the area, and (3) logging activities within old- growth timber stands. Regarding the concern about ignoring the recommendations of the Stewards of the Nez Perce, local Forest Service officials noted that about 90 percent of what was contained in the Stewards’ recommendations is included among the activities the Forest Service intends to undertake and that, in any case, the group was told repeatedly that its recommendations would not necessarily be implemented without further adjustment or review. Further, the Stewards’ recommendations were vague in certain respects, making it difficult to determine exactly what activities the group expected. Project officials also noted that the stewardship project itself will encompass only a portion of the activities the Forest Service intends to undertake and that other contracting mechanisms—such as timber or service contracts—may also be implemented. Thus, the omission of certain activities from the stewardship project does not mean the restoration work will not be completed; rather, it simply means the Forest Service will complete the work using other means. With respect to the Meadow Creek slide area, the project manager said that the area is the result of ponds created by a homesteader, not the result of past timber harvesting. The area was included in a timber sale in order to remediate the slide area; the sediment savings resulting from this remediation were to offset the increased sediment that would result from logging activities. The timber sale is currently being implemented, but the slide area has not yet been treated, so it was included in the Meadow Face project. However, the official added that the Forest Service will not count the slide area remediation toward any “sediment savings” in the Meadow Face project. Regarding the amendments to the 1987 forest plan, the project officials told us that the water quality amendment actually tightens the water quality requirements for two watersheds in the project area, meaning that less sediment will be permitted to flow into those streams. In the case of a third waterway, sediment restrictions were eased after forest staff determined that the streambed can handle more sediment than was initially believed when the forest plan was developed. The soil compaction amendment allows greater flexibility in conducting projects, according to project officials. The forest plan originally stated that upon completion of any forest activity, the soil in the area must be less than 20 percent compacted, displaced, or puddled. However, many areas in the forest had undergone significant logging or other activities in the past and were already affected well beyond the 20 percent standard. Consequently, those areas were, in effect, off limits to any additional activities—whether timber harvesting or restoration activities—because remediating the soils to below the 20 percent standard would be difficult when they were substantially above the standard to begin with. The amendment to the 1987 forest plan states generally that the level of compaction, displacement, or puddling after a project is completed must be lower than the level before the project—which in turn would allow activities, as long as the soils are left in better condition after the project than they were before it. Finally, the officials told us that the old-growth logging amendment applies to about 710 acres of old-growth forest and allows treatment of the stands in order to maintain old-growth characteristics. The stands are becoming dense with small trees and underbrush that could serve as ladder fuels and possibly contribute to a stand-destroying fire. As a result of the amendment, the Forest Service can thin the stands, benefiting old-growth trees by reducing both ladder fuels and competition for water and nutrients. The North Fork Big Game Habitat Restoration project (also known as the Middle Black project) is located in Idaho’s Clearwater National Forest in the Forest Service’s Northern Region. The project will involve thinning on about 640 acres, and the project manager expects it to be completed in 2009. A member of Friends of the Clearwater (the same member we spoke with regarding the Meadow Face project) told us that his organization is concerned that the project focuses more on increasing the elk population than on other environmental issues and will involve thinning trees and brush in roadless areas. The project manager told us that, while the Forest Service is seeking to restore the elk population, it is also engaged in restoration activities. He acknowledged that the project began as a study undertaken at the request of a local group called the Clearwater Elk Recovery Team (CERT), which was concerned about declining elk numbers. However, he emphasized that despite its origin, the project is being conducted as an ecosystem restoration effort that will restore the forest to a more typical historical condition and reduce the likelihood of fire. As evidence that the project has not paid undue attention to the elk recovery issue, the project manager told us that CERT members “complained vigorously” about the proposed plan for the project, even filing an appeal, because the project did not adequately address their concerns about elk habitat. The manager stated that although thinning will take place in roadless areas, no new roads will be built. Thinning will be conducted manually using chainsaws. The Granite Watershed Protection and Enhancement project is located in California’s Stanislaus National Forest in the Forest Service’s Pacific Southwest Region. The project is designed to achieve several objectives, including watershed and enhancement, spotted owl habitat improvement and protection, noxious weed control, and reforestation. The project is ongoing, and the project manager expects it to be completed in 2010. Members of the Sierra Club and the Forest Conservation Council told us that their overall concern about the project is the Forest Service’s failure to account for all costs and benefits when designing the project. The members told us that while the project will open or reconstruct 63 miles of road to remove forest products, the Forest Service did not consider the project’s impacts on other issues, such as sedimentation and big-game habitat, and the financial and nonfinancial costs and benefits of these potential impacts. The Granite project manager agreed that there are many costs and benefits associated with timber sales and other forest projects beyond those assessed for the Granite project, but he stated that quantifying all costs and benefits would be impossible. For example, he noted that timber harvests might deter people from using forest lands for recreational purposes. Although forest visitors may provide financial benefits such as gasoline purchases from nearby communities, visitors also leave trash behind, creating a nonmonetary cost by degrading the recreational experience of others and potentially creating a monetary cost for cleanup expenses. In addition, visitors’ vehicle use may also contribute to watershed damage by increasing sedimentation. Given that project effects are so mixed and involve so many elements that are impossible to quantify, according to the project manager, it would be impossible to account for all costs and benefits in a project analysis. With respect to the specific impact on big-game habitat, the project manager noted that the project, as designed, would add less than one mile of road to existing roads in the forest. He added that if roads do, in fact, reduce habitat, the one additional mile of road will have little impact on this reduction. He said that the area is not known for big game; the only such game are deer and bears, and neither population has been thriving under existing conditions. Based on the congressional request letters of July 2002 and March 2003, and subsequent discussions with your staffs, we agreed to determine (1) the status of each stewardship project and the land management goals they address; (2) the extent to which the agencies have contracting and financial controls in place that ensure accountability in managing stewardship projects; (3) the steps the agencies have taken to involve communities in designing, implementing, and evaluating stewardship projects; (4) each agency’s plans for future use of stewardship contracting; and (5) the Forest Service’s response to concerns raised about 6 specific stewardship projects. To identify ongoing and completed stewardship pilot projects, we contacted officials at the Forest Service and BLM to obtain a list of such projects. The Forest Service provided a list of 81 pilot projects; an official with BLM’s Forest and Woodland Management Group stated that no projects were ongoing. To determine the status of these stewardship projects and their land management goals, we conducted a Web-based survey of all ongoing and completed stewardship projects. The survey asked respondents to provide data on project activities, costs, time frames, size, and other information, as well as the land management goals addressed by each project. Because we surveyed all stewardship projects, no sampling error and confidence intervals are associated with our work. However, the practical difficulties of conducting any survey may introduce other types of errors, commonly referred to as nonsampling errors. For example, differences in how a particular question is interpreted, the sources of information available to respondents, or the types of people who do not respond can introduce unwanted variability into the survey results. We included steps in both the data collection and data analysis stages for the purpose of minimizing such nonsampling errors. We pretested the survey at three project sites and conducted a fourth pretest by telephone. In addition, we provided a draft version of the survey to Forest Service headquarters officials familiar with the stewardship contracting program in order to obtain their comments on the draft. We modified the survey as appropriate to reflect the questions and comments we received during the pretests and Forest Service headquarters review. Project managers at 4 of the 81 projects identified by the Forest Service told us that their projects had been terminated by the time of our survey or were no longer being conducted under stewardship authority, leaving 77 projects. Of these 77 projects, 7 did not provide information in our survey. The managers for 3 projects—Butte South, Midstory Removal in Red- Cockaded Woodpecker Habitat, and Red River—told us that their projects were too preliminary to reasonably provide information. The manager of the Grassy Flats project told us that she was required to serve on firefighting duty and did not have time to complete our survey. The manager of the West Glacier project told us that because of demands on his time resulting from the 2003 wildfires in his state, he was faced with a substantial backlog of work and would not be able to complete our survey. Finally, the managers of the Grand Canyon and Yaak projects did not respond to our requests to provide data. We attempted to corroborate survey responses in two ways. First, to the extent possible, we compared survey responses from the projects we visited with information (such as contracts or other documents) we collected during those visits. The survey data generally concurred with the site visit documentation we gathered. When we encountered substantial differences we could not reconcile, we used the more conservative figure. Such discrepancies occurred in four instances, two involving the estimated value of products removed, one involving the estimated volume of products removed, and one involving estimated contract costs. We also identified one source of data—the Forest Service’s Timber Sale Accounting (TSA) system—that contains data about the volume of timber removed as part of Forest Service timber sales. Because in our survey we asked about timber volumes removed during stewardship projects, we attempted to corroborate survey responses regarding timber volumes by comparing them to TSA data. The comparison was not meaningful, however, because of differences in the way the two sets of data (ours and TSA’s) were collected, and because the preliminary nature of many of the stewardship projects meant that, while they provided us with estimates of their timber harvest volumes, such data were not yet entered into TSA. However, based on our comparison of survey responses to project documentation, we believe the data are sufficiently reliable to be used in providing descriptive information on project size, activities, land management goals, and the like. To assess the contracting and financial controls in place at stewardship projects, we conducted site visits to a nonprobability sample of 8 ongoing or completed project locations—about 10 percent of the 81 projects initially reported to us.2, 3 We used numerous criteria to select project locations to visit. First, to respond to your interest in the Forest Service’s use of retained funds and its controls over contractor activities, we narrowed our scope to include only projects using receipt retention or designation by description authorities. From such projects we selected all of those that had been completed—a total of 4 projects. (One additional project had been completed but did not use either receipt retention or designation by description authority.) To select the remaining 4 projects to visit, we first eliminated from our consideration any remaining projects in the Forest Service regions where the 4 completed projects were located, in order to obtain geographic spread in our nonprobability sample and obtain information from various Forest Service regions. We then focused on projects that were well under way, in order to ensure that sufficient contracting and financial activities had taken place for us to evaluate. Our application of these site selection criteria yielded the site visit locations shown in table 1. Results from nonprobability samples cannot be used to make inferences about a population. This is because in a nonprobability sample, some elements of the population being studied have no chance or an unknown chance of being selected as part of the sample. We also visited stewardship projects near Flagstaff, Arizona, and Fort Collins, Colorado. However, at these locations, we simply toured the project sites and did not apply our site visit methodology. At each site visit location, we reviewed the project’s contracting and financial files and interviewed Forest Service officials associated with the project, including project managers, timber sale contracting officers, procurement contracting officers, contracting officers’ representatives, supervisory accountants, and others, to determine whether appropriate controls were in place to provide accountability in managing the projects. We reviewed preaward and postaward contracting elements we identified as important for providing management accountability in awarding and administering stewardship contracts. Regarding preaward activities, we looked for evidence of solicitations and advertisements for the projects to provide public notice of work to be performed and to maximize the number of potential bidders on project contracts. We also looked for documentation of preestablished bid evaluation criteria to show that the Forest Service selected contractors fairly and equitably. In addition, given that stewardship projects may involve new ways of contracting to achieve land management objectives, we looked for evidence of meetings with prospective bidders to clarify project activities and Forest Service expectations. Regarding postaward controls, we reviewed contracts to determine whether they contained clear definitions of contract requirements as well as valuation, bond, oversight, and breach, default, and dispute resolution clauses to provide accountability in managing the projects. Clear definitions of contract requirements, accompanied by postaward conferences with contractors, ensure that contractors fully understand the Forest Service’s requirements and expectations. Appropriate valuation techniques, such as appraisals and government estimates, ensure that the government is fairly compensated for the timber or other products it is selling. Payment and performance bonds ensure that the government receives payment for timber harvested and that government funds are not required to remediate damage caused by contractor activities. Oversight activities assure the government that contractor activities are being conducted appropriately and according to schedule. Finally, breach, default, and dispute resolution clauses allow the Forest Service to address problems by issuing default notices or stop work orders to prohibit further activity on a project until the problems are resolved. In addition, at 6 of the 8 sites we visited, we met with the contractor performing the stewardship activities, in order to obtain the contractor’s perspective on the project. Finally, we spoke with officials of the Forest Service’s Forest and Rangeland Management Group, BLM’s Forest and Woodland Management Group, and various agency field staff regarding the contracting and financial guidance provided to staff implementing stewardship projects. Based on our reviews of agency files, discussions with agency staff, and interviews of contractors outside the agency, we believe the data are sufficiently reliable to be used in reporting on the contracting and financial mechanisms employed by the Forest Service in implementing stewardship projects. To determine the measures taken by the agencies to involve communities in designing, implementing, and evaluating stewardship projects, we reviewed project contracting files and interviewed agency officials at each of our 8 site visit locations. At 5 of the 8 locations, we also spoke with a member of the local monitoring team to obtain additional information on the monitoring team’s role in the project. The remaining 3 locations did not have monitoring teams. In addition to these 8 projects, we conducted structured telephone interviews with officials at a nonprobability sample of an additional 25 randomly selected projects. In order to select these projects, we first eliminated from consideration those projects that (1) indicated through our survey they were no longer viable stewardship projects, (2) were included among our 8 site visits, and (3) were among the 6 included in our assessment of projects about which concerns had been raised. Of the remaining 63 projects, 40 had completed NEPA, according to Forest Service data, and 23 had not. From these 63 projects we randomly selected a total of 25 projects to contact—15 that had completed NEPA and 10 that had not. Our nonprobability sample of 25 projects was similar to our universe of 63 projects in the percentage of projects that had and had not completed NEPA. We then contacted officials at these 25 projects to ask a set of questions regarding community involvement in the projects. Again, we included steps to minimize nonsampling errors. In lieu of pretesting the questions, we used the results of our site visits to ensure that the questions we asked were understandable, balanced, and appropriate. We also spoke with staff from the Pinchot Institute for Conservation (the Forest Service contractor overseeing multiparty monitoring and evaluation) regarding community involvement, and attended the spring 2003 meeting of the Pinchot Institute’s national stewardship monitoring team. Because we gathered complementary data from multiple sources, including Forest Service project managers, Pinchot Institute staff, and local and national monitoring team members, we believe the data we gathered are sufficiently reliable to be used in reporting on the measures taken by the agencies to involve communities in stewardship projects. To obtain information on future agency stewardship activities, we reviewed both the Forest Service’s and BLM’s January 2004 guidance on stewardship contracting. We also obtained from Forest Service and BLM headquarters officials the number of projects they currently had under way or had planned in addition to the 77 pilot projects undertaken by the Forest Service. Finally, we spoke with headquarters officials at both agencies to obtain their views on future use of stewardship contracting authority and their plans for future monitoring and assessment activities. To determine the Forest Service’s response to specific concerns raised about 6 ongoing stewardship projects by environmental group representatives, we first obtained the concerns of environmental group representatives for each of the 6 projects. To do so, we telephoned the environmental contacts listed by your staff to obtain information on their concerns. We also requested documentation such as appeal documents filed, correspondence with Forest Service officials, or other documentation that could provide information on concerns regarding the projects. Subsequently, we telephoned the Forest Service managers for each of these 6 projects to obtain their responses to the concerns that had been raised. Based on our discussions with individuals concerned about specific stewardship projects and Forest Service staff associated with the projects, as well as our review of documentation regarding the projects, we believe the data are sufficiently reliable to be used in reporting on concerns about specific stewardship projects and the Forest Service’s response to those concerns. We conducted our work between April 2003 and April 2004 in accordance with generally accepted government auditing standards. Table 2 provides pilot project information as of September 30, 2003, as reported by project officials. In addition to those named above, Paul Caban, Nancy Crothers, Timothy DiNapoli, James Espinoza, Steve Gaty, Kevin Jackson, Richard Johnson, Diane Lund, Mary Mohiyuddin, Judy Pagano, and Alana Stanfield made key contributions to this report. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site daily. The list contains links to the full-text document files. To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select “Subscribe to e-mail alerts” under the “Order GAO Products” heading. | In their efforts to reduce hazardous fuels and the risk of wildfire on the nation's public lands, the Forest Service and the Bureau of Land Management (BLM) expect that stewardship contracting will play a major role. Stewardship contracting involves the use of contracting authorities--such as the exchange of goods for services--first authorized in 1998 and intended to help the agencies achieve land management goals that meet community needs. GAO was asked, among other things, to determine (1) the contracting and financial controls the agencies use to ensure accountability in managing stewardship contracting projects and (2) the steps the agencies have taken to involve communities in the projects. Although the Forest Service provided limited initial guidance on establishing contracting and financial controls, the eight stewardship projects GAO visited had incorporated such controls. (BLM was first granted stewardship authority in 2003 and had no projects under way at the time of GAO's review.) The projects generally used pre- and post-award controls, such as reviews of contractor bids using preestablished criteria, and performance and payment bonds to ensure completion of required activities. GAO's review of selected financial controls at the projects we visited showed that they appeared to have procedures in place to account for retained receipts, including tracking funds received and expended, and had incorporated procedures designed to ensure the completion of specific work tasks before contractors were paid. Both the Forest Service and BLM issued guidance in January 2004 containing such controls for future projects. The Forest Service initially provided minimal guidance on soliciting and incorporating public involvement in stewardship contracting projects and, as a result, the type and extent of efforts to involve communities varied considerably among the projects GAO reviewed. However, managers who did not incorporate public input may have missed valuable opportunities to strengthen their projects. For example, one project manager said that public involvement led to more stringent criteria for protecting water quality, and another reported that public involvement improved agency access to public lands needing fuel reduction. Although most managers GAO spoke with said they wanted additional guidance on public involvement, the Forest Service's recently issued stewardship contracting handbook does not contain specific guidance for obtaining community input--and BLM's recent guidance is similarly lacking. Without such guidance, each project manager must independently determine the type and extent of community involvement to solicit and then develop and implement community involvement procedures--an inefficient process that could lead to variation in community involvement across stewardship contracting projects in both agencies. |
There is growing agreement on the need to better link individual pay to performance. Establishing such linkages is essential if we expect to maximize the performance and assure the accountability of the federal government for the benefit of the American people. As a result, from a conceptual standpoint, we strongly support the need to expand broad banding approaches and pay for performance-based systems in the federal government. However, moving too quickly or prematurely at DOD or elsewhere can significantly raise the risk of doing it wrong. This could also serve to severely set back the legitimate need to move to a more performance- and results-based system for the federal government as a whole. Thus, while it is imperative that we take steps to better link employee pay to performance across the federal government, how it is done, when it is done, and the basis on which it is done can make all the difference in whether or not such efforts are successful. In our view, one key need is to modernize performance management systems in executive agencies so that they are capable of adequately supporting more performance-based pay and other personnel decisions. Unfortunately, based on GAO’s past work, most existing federal performance appraisal systems, including a vast majority of DOD’s systems, are not designed to support a meaningful performance-based pay system. At the request of Representative Jo Ann Davis and Senator George Voinovich, we identified key practices leading public sector organizations both here in the United States and abroad have used in their performance management systems to link organizational goals to individual performance and create a “line of sight” between an individual’s activities and organizational results. These practices can help agencies develop and implement performance management systems with the attributes necessary to effectively support pay for performance. The bottom line, however, is that in order to implement any additional performance-based pay flexibility for broad based employee groups, agencies should have to demonstrate that they have modern, effective, credible, and, as appropriate, validated performance management systems in place with adequate safeguards, including reasonable transparency and appropriate accountability mechanisms, to ensure fairness and prevent politicalization and abuse. As a result, Congress should consider establishing statutory standards that an agency must have in place before it can implement broad banding or a more performance-based pay program. At the request of Congressman Danny Davis, we developed an initial list of possible safeguards for Congress to consider to help ensure that any pay for performance systems in the government are fair, effective, and credible: Assure that the agency’s performance management systems (1) link to the agency’s strategic plan, related goals, and desired outcomes, and (2) result in meaningful distinctions in individual employee performance. This should include consideration of critical competencies and achievement of concrete results. Involve employees, their representatives, and other stakeholders in the design of the system, including having employees directly involved in validating any related competencies, as appropriate. Assure that certain predecisional internal safeguards exist to help achieve the consistency, equity, nondiscrimination, and nonpoliticization of the performance management process (e.g., independent reasonableness reviews by Human Capital Offices and/or Offices of Opportunity and Inclusiveness or their equivalent in connection with the establishment and implementation of a performance appraisal system, as well as reviews of performance rating decisions, pay determinations, and promotion actions before they are finalized to ensure that they are merit-based; internal grievance processes to address employee complaints; and pay panels whose membership is predominately made up of career officials who would consider the results of the performance appraisal process and other information in connection with final pay decisions). Assure reasonable transparency and appropriate accountability mechanisms in connection with the results of the performance management process (e.g., publish overall results of performance management and pay decisions while protecting individual confidentiality, and report periodically on internal assessments and employee survey results). The above items should help serve as a starting point for Congress to consider in crafting possible statutory safeguards for executive agencies’ performance management systems. OPM would then issue guidance implementing the legislatively defined safeguards. The effort to develop such safeguards could be part of a broad-based expanded pay for performance authority under which whole agencies and/or employee groups could adopt broad-banding and move to more pay for performance oriented systems if certain conditions are met. Specifically, an agency would have to demonstrate, and OPM would have to certify, that a modern, effective, credible, and, as appropriate, validated performance management system with adequate safeguards, including reasonable transparency and appropriate accountability mechanisms, is in place to support more performance-based pay and related personnel decisions, before the agency could implement a new system. OPM should be required to act on any individual certifications within prescribed time frames (e.g., 30-60 days). This alternative approach would allow for a broader-based yet more conceptually consistent approach to linking federal employee pay and other personnel decisions to performance. It would help to assure that agencies have the reasonable flexibility they need to modernize their human capital policies and practices, while maximizing the chances of success and minimizing the potential for abuse. This alternative approach would also facilitate a phased-implementation approach throughout government. Congress should also consider establishing a governmentwide fund whereby agencies, based on a sound business case, could apply for funds to modernize their performance management systems and ensure those systems have adequate safeguards to prevent abuse. This approach would serve as a positive step to promote high-performing organizations throughout the federal government while avoiding human capital policy fragmentation within the executive branch. With almost 700,000 civilian employees on its payroll, DOD is the second largest federal employer of civilians in the nation, after the Postal Service. Defense civilian personnel, among other things, develop policy, provide intelligence, manage finances, and acquire and maintain weapon systems. NSPS is intended to be a major component of DOD’s efforts to more strategically manage its workforce and respond to current and emerging challenges. This morning I will highlight several of the key provisions of NSPS that in our view are most in need of close scrutiny as Congress considers the DOD proposal: The DOD proposal would allow the Secretary of Defense to jointly prescribe regulations with the Director of OPM to establish NSPS. However, unlike the legislation creating the Department of Homeland Security (DHS), the Defense Transformation for the 21st Century Act would allow the Secretary of Defense to waive the requirement for joint issuance of regulations if, in his or her judgment, it is “essential to the national security” which is not defined in the act. Therefore, the act would, in substance, provide the Secretary of Defense with significant independent authority to develop a separate and largely autonomous human capital system for DOD. As I have noted, performance-based pay flexibility for broad-based employee groups should be grounded in performance management systems that are capable of supporting pay and related decisions. DOD’s personnel demonstration projects clearly provide helpful insights and valuable lessons learned in connection with broad banding and pay for performance efforts. At the same time these projects and related DOD efforts involve less than 10 percent of DOD’s civilian workforce and expanding these approaches to the entire department will require significant effort and likely need to be implemented in phases over several years. Similarly, the NSPS would increase the current total allowable annual compensation limit for senior executives up to the Vice President’s total annual compensation. The Homeland Security Act provided that OPM, with the concurrence of the Office of Management and Budget, certify that an agency has performance appraisal systems that, as designed and applied, make meaningful distinctions based on relative performance before an agency is allowed to increase the annual compensation limit for senior executives. NSPS does not include such a certification provision. On the other hand, the Senior Executive Service needs to take the lead in matters related to pay for performance. The NSPS would include provisions intended to ensure collaboration with employee representatives in the planning, development, and implementation of a human resources management system. As discussed at the Civil Service and Agency Organization Subcommittee, Committee on Government Reform hearing on Tuesday, direct employee involvement in the development of the NSPS legislative proposal has thus far been limited. Moving forward, and aside from the specific statutory provisions on consultation, the active involvement of employees will be critical to the success of NSPS, or for any human capital reform for that matter. The legislation has a number of provisions designed to give DOD flexibility to help obtain key critical talent. These authorities give DOD considerable flexibility to obtain and compensate individuals and exempt them from several provisions of current law. While we have strongly endorsed providing agencies with additional tools and flexibilities to attract and retain needed talent, the broad exemption from some existing ethics and other personnel authorities without prescribed limits on their use raises some concern. Congress should consider building into the NSPS appropriate numerical or percentage limitations on the use of these provisions and basic safeguards to ensure such provisions are used appropriately. The NSPS proposal would provide DOD with a number of broad authorities related to rightsizing and organizational alignment. Authorities such as voluntary early retirements have proven to be effective tools in strategically managing the shape of the workforce. I have exercised the authority that Congress granted me to offer voluntary early retirements in GAO in both fiscal years 2002 and 2003 as one element of our strategy to shape the GAO workforce. In DOD’s case, while it has used existing authorities to mitigate the adverse effects of force reductions in the past, the Department’s approach to those reductions was not oriented toward strategically shaping the makeup of the workforce. Given these problems, there is reason to be concerned that DOD may struggle to effectively manage additional authorities that may be provided. Importantly, the NSPS provisions would create an uneven playing field among agencies in competing for experienced talent. The legislation would also allow DOD to revise Reduction-in-Force (RIF) rules to place greater emphasis on an employee’s performance. I conceptually support revised RIF procedures that involve much greater consideration of an employee’s performance. However, as noted above, agencies must have the proper performance management systems in place to effectively and fairly implement such authorities. Furthermore, DOD proposes to lower the degree of preference provided to veterans under current law. The proposed NSPS would allow the Secretary, after consultation with the Merit Systems Protection Board, to prescribe regulations providing fair treatment in any appeals brought by DOD employees relating to their employment. The proposal states that the appeals procedures shall ensure due process protections and expeditious handling, to the maximum extent possible. This provision is substantially the same as a similar provision in the Homeland Security Act of 2002 allowing DHS to prescribe regulations for employee appeals related to their employment. Given the transparency of the federal system dispute resolution and its attendant case law, the rights and obligations of the various parties involved are well developed. It is critical that any due process changes that DOD would make under this authority are not only fair and efficient but, importantly, minimize any perception of unfairness. In summary, many of the basic principles underlying DOD’s civilian human capital proposals have merit and deserve serious consideration. They are, however, unprecedented in their size, scope, and significance. As a result, they should be considered carefully—and not just from a DOD perspective. The DOD proposal has significant precedent-setting implications for the human capital area in government in general, and for OPM in particular. The DOD civilian human capital proposal raises several critical questions both for DOD as well as for governmentwide policies and approaches. Should DOD and/or other federal agencies be granted broad-based exemptions from existing law, and if so, on what basis? Does DOD have the institutional infrastructure in place to make effective use of the new authorities? Our work has shown that while progress is being made, additional efforts are needed by DOD to integrate its human capital planning process with the department’s program goals and mission. The practices that have been shown to be critical to the effective use of flexibilities provide a validated roadmap for DOD and Congress to consider. We believe it would be more prudent and appropriate to approve the broad banding and pay for performance issues on a governmentwide basis. Nevertheless, if additional authorities are granted to DOD, Congress should consider establishing additional safeguards to ensure the fair, merit-based, transparent, and accountable implementation of NSPS. This includes addressing the issues I have raised in this statement. As I have suggested, Congress should consider providing governmentwide broad banding and pay for performance authorities that DOD and other federal agencies can use provided they can demonstrate that they have a performance management system in place that meets certain statutory standards and can be certified to by a qualified and independent party, such as OPM. Congress should also consider establishing a governmentwide fund whereby agencies, based on a sound business case, could apply for funds to modernize their performance management systems and ensure that those systems have adequate safeguards to prevent abuse. This would serve as a positive step to promote high- performing organizations throughout the federal government while avoiding further fragmentation within the executive branch in critical human capital policies and approaches. We look forward to continuing to support Congress and work with DOD in addressing the vital transformation challenges it faces. Chairman Hunter, Mr. Skelton, and Members of the Committee, this concludes my prepared statement. I would be pleased to respond to any questions that you may have. For further information on human capital issues at DOD, please contact Derek Stewart, Director, Defense Capabilities and Management on (202) 512-5559 or at [email protected]. For further information on governmentwide human capital issues, please contact J. Christopher Mihm, Director, Strategic Issues, on (202) 512-6806 or at [email protected]. Individuals making key contributions to this testimony included William Doherty, Clifton G. Douglas, Jr., Christine Fossett, Bruce Goddard, Judith Kordahl, Janice Lichty, Bob Lilly, Lisa Shames, Ellen Rubin, Edward H. Stephenson, Jr., Tiffany Tanner, Marti Tracy, and Michael Volpe. | DOD is in the midst of a major transformation effort including a number of initiatives to transform its forces and improve its business operations. DOD's legislative initiative would provide for major changes in civilian and military human capital management, make major adjustments in the DOD acquisition process, affect DOD's organization structure, and change DOD's reporting requirements to Congress, among other things. DOD's proposed National Security Personnel System (NSPS) would provide for wide-ranging changes in DOD's civilian personnel pay and performance management, collective bargaining, rightsizing, and a variety of other human capital areas. The NSPS would enable DOD to develop and implement a consistent DOD-wide civilian personnel system. This testimony provides GAO's preliminary observations on aspects of DOD's legislative proposal to make changes to its civilian personnel system and discusses the implications of such changes for governmentwide human capital reform. This testimony summarizes many of the issues discussed in detail before the Subcommittee on Civil Service and Agency Organization, Committee on Government Reform, House of Representatives on April 29, 2003. Many of the basic principles underlying DOD's civilian human capital proposal have merit and deserve serious consideration. The federal personnel system is clearly broken in critical respects--designed for a time and workforce of an earlier era and not able to meet the needs and challenges of our current rapidly changing and knowledge-based environment. DOD's proposal recognizes that, as GAO has stated and the experiences of leading public sector organizations here and abroad have found, strategic human capital management must be the centerpiece of any serious government transformation effort. More generally, from a conceptual standpoint, GAO strongly supports the need to expand broad banding and pay for performance-based systems in the federal government. However, moving too quickly or prematurely at DOD or elsewhere, can significantly raise the risk of doing it wrong. This could also serve to severely set back the legitimate need to move to a more performance- and results-based system for the federal government as a whole. Thus, while it is imperative that we take steps to better link employee pay and other personnel decisions to performance across the federal government, how it is done, when it is done, and the basis on which it is done, can make all the difference in whether or not we are successful. One key need is to modernize performance management systems in executive agencies so that they are capable of supporting more performance-based pay and other personnel decisions. Unfortunately, based on GAO's past work, most existing federal performance appraisal systems, including a vast majority of DOD's systems, are not currently designed to support a meaningful performance-based pay system. The critical questions to consider are: should DOD and/or other agencies be granted broad-based exemptions from existing law, and if so, on what basis? Do DOD and other agencies have the institutional infrastructure in place to make effective use of any new authorities? This institutional infrastructure includes, at a minimum, a human capital planning process that integrates the agency's human capital policies, strategies, and programs with its program goals and mission, and desired outcomes; the capabilities to effectively develop and implement a new human capital system; and, importantly, a set of adequate safeguards, including reasonable transparency and appropriate accountability mechanisms to ensure the fair, effective, and credible implementation of a new system. In GAO's view, as an alternative to DOD's proposed approach, Congress should consider providing governmentwide broad banding and pay for performance authorities that DOD and other federal agencies can use provided they can demonstrate that they have a performance management system in place that meets certain statutory standards, that can be certified to by a qualified and independent party, such as OPM, within prescribed timeframes. Congress should also consider establishing a governmentwide fund whereby agencies, based on a sound business case, could apply for funding to modernize their performance management systems and ensure that those systems have adequate safeguards to prevent abuse. This approach would serve as a positive step to promote high-performing organizations throughout the federal government while avoiding further human capital policy fragmentation. |
Inherently governmental functions require discretion in applying government authority or value judgments in making decisions for the government; as such, they should be performed by government employees—not private contractors. The Federal Acquisition Regulation (FAR) provides 20 examples of functions considered to be, or to be treated as inherently governmental (see Appendix I), including determining agency policy and priorities for budget requests, directing and controlling intelligence operations, approving contractual requirements, and selecting individuals for government employment. The closer contractor services come to supporting inherently governmental functions, the greater the risk of their influencing the government’s control over and accountability for decisions that may be based, in part, on contractor work. Table 1 provides examples of the range of services contractors provide to the federal government—from basic activities, such as custodial and landscaping, to more complex professional and management support services—and their relative risk of influencing government decision making. The potential for the loss of government management control and accountability for decisions is a long-standing governmentwide concern. For example, in 1981, we found that the level of contractor involvement in management functions at the Departments of Energy and Defense was so extensive that the agencies’ ability to develop options other than those proposed by the contractors was limited. More recently, in 2006, government, industry, and academic participants in GAO’s forum on federal acquisition challenges and opportunities and the congressionally mandated Acquisition Advisory Panel noted how an increasing reliance on contractors to perform services for core government activities challenges the capacity of federal officials to supervise and evaluate the performance of these activities. FAR and Office of Federal Procurement Policy (OFPP) guidance state that services that tend to affect government decision-making, support or influence policy development, or affect program management are susceptible to abuse and require a greater level of scrutiny and an enhanced degree of management oversight. This would include assigning a sufficient number of qualified government employees to provide oversight and to ensure that agency officials retain control over and remain accountable for policy decisions that may be based in part on a contractor’s performance and work products. A broad range of program-related and administrative activities was performed under the professional and management support services contracts we reviewed. DHS decisions to contract for these services were largely driven by the need for staff and expertise to get programs and operations up and running. While DHS has identified core mission-critical occupations and plans to reduce skill gaps in core and key competencies, it has not directly addressed the department’s use of contractors for services that closely support the performance of inherently governmental functions. A broad range of activities related to specific programs and administrative operations was performed under the professional and management support services contracts we reviewed. The categories of policy development, reorganization and planning, and acquisition support were among the most often requested in the 117 statements of work, as well as in the nine case studies. For example, TSA obligated $1.2 million to acquire contractor support for its Acquisition and Program Management Support Division, which included assisting with the development of acquisition plans and hands-on assistance to program offices to prepare acquisition documents. A $7.9 million OPO human capital services order provided a full range of personnel and staffing services to support DHS’s headquarters offices, including writing position descriptions, signing official offer letters, and meeting new employees at DHS headquarters for their first day of work. Contractor involvement in the nine case studies ranged from providing two to three supplemental personnel to staffing an entire office. Figure 1 shows the type and range of services provided in the nine cases and the location of contractor performance. Many of the program officials we spoke with said that contracting for services was necessary because they were under pressure to get program and administrative offices up and running quickly, and they did not have enough time to hire staff with the right expertise through the federal hiring process. For example: According to officials at TSA, federal staff limitations was a reason for procuring employee relations support services. Specifically, the agency needed to immediately establish an employee relations office capable of serving 60,000 newly hired airport screeners—an undertaking TSA Office of Human Resources officials said would have taken several years to accomplish if they hired qualified federal employees. DHS human capital officials said there were only two staff to manage human resources for approximately 800 employees, and it would have taken 3 to 5 years to hire and train federal employees to provide the necessary services. In prior work, GAO has noted that agencies facing workforce challenges, such as a lack of critical expertise, have used strategic human capital planning to develop long-term strategies for acquiring, developing, motivating, and retaining staff to achieve programmatic goals. While DHS’s human capital strategic plan notes that the department has identified core mission-critical occupations and seeks to reduce skill gaps in core and key competencies, DHS has not determined the right mix of government performed and contractor performed services or assessed total workforce deployment across the Department to guide decisions on contracting for selected services. We have noted the importance of focusing greater attention on which types of functions and activities should be contracted out and which ones should not, while considering other reasons for using contractors, such as a limited number of federal employees. DHS’s human capital plan is unclear as to how this could be achieved and whether it will inform the Department’s use of contractors for services that closely support the performance of inherently governmental functions. While program officials generally acknowledged that their professional and management support services contracts closely supported the performance of inherently governmental functions, they did not assess the risk that government decisions may be influenced by, rather than independent from, contractor judgments—as required by federal procurement policy. In addition, none of the program officials and contracting officers we spoke with was aware of these requirements, and few believed that their professional and management support service contracts required enhanced oversight. Federal guidance also states that agency officials must retain control over and remain accountable for policy and program decisions. For the nine cases we reviewed, the level of oversight DHS provided did not always help ensure accountability for decisions or the ability to judge whether contractors were performing as required; however, DHS’s Chief Procurement Officer is implementing an acquisition oversight program with potential to address this issue. To help ensure the government does not lose control over and accountability for mission-related decisions, long-standing federal procurement policy requires attention to the risk that government decisions may be influenced by, rather than independent from, contractor judgments when contracting for services that closely support inherently governmental functions. The nine cases we reviewed in detail provided examples of conditions that we have found need to be carefully monitored to help ensure the government does not lose control over and accountability for mission-related decisions. Contractors providing services integral to an agency’s mission and comparable to those provided by government employees: In seven of the nine cases, contractors provided such services. For example, one contractor directly supported DHS efforts to hire federal employees, including signing offer letters. In another case, a contractor provided acquisition advice and support while working alongside federal employees and performing the same tasks. Contractors providing ongoing support: In each of the nine case studies, the contractor provided services for more than 1 year. In some of these cases, the original justification for contracting had changed, but the components extended or recompeted services without examining whether it would be more appropriate for federal employees to perform the service. For example, OPO established a temporary “bridge” arrangement without competition that was later modified 20 times, and extended for almost 18 months, to avoid disruption of critical support including budget, policy, and intelligence services. Subsequently, these services were competed and awarded to the original contractor under six separate contracts. Broadly defined requirements: In four of the case studies, the statements of work lacked specific details about activities that closely support inherently governmental functions. In addition, several program officials noted that the statements of work did not accurately reflect the program’s needs or the work the contractors actually performed. For example, a Coast Guard statement of work for a $1.3 million order initially included services for policy development, cost- benefit analyses, and regulatory assessments, though program officials told us the contractors provided only technical regulatory writing and editing support. The statement of work was revised in a later contract to better define requirements. Federal acquisition guidance highlights the risk inherent in services contracting—particularly those for professional and management support services—and federal internal control standards require assessment of risks. OFPP staff we met with also emphasized the importance of assessing the risk associated with contracting for services that closely support the performance of inherently governmental functions. While contracting officers and program officials for the nine case studies generally acknowledged that their professional and management support services contracts closely supported the performance of inherently governmental functions, none assessed whether these contracts could result in the loss of control over and accountability for mission-related decisions. Furthermore, none were aware of federal requirements for enhanced oversight of such contracts. Contracting officers and program officials, as well as DHS acquisition planning guidance, did not cite services that closely support the performance of inherently governmental functions as a contracting risk and most did not believe enhanced oversight of their contracts was warranted. Current DHS initiatives may have the potential to address oversight when contracting for services that closely support inherently governmental functions. DHS’s Chief Procurement Officer is in the process of implementing an acquisition oversight program that is intended to assess contract administration, business judgment, and compliance with federal acquisition guidance. This program was designed to allow flexibility to address specific procurement issues and is based on a series of reviews at the component level that could address selected services. Both the FAR and OFPP policy state that when contracting for services— particularly for professional and management support services that closely support the performance of inherently governmental functions—a sufficient number of qualified government employees assigned to plan and oversee contractor activities is needed to maintain control and accountability. While most contracting officers and program officials that we spoke with held the opinion that the services they contracted for did not require enhanced oversight, we found cases in which the components lacked the capacity to oversee contractor performance due to limited expertise and workload demands. For example: One Contracting Officer’s Technical Representative (COTR) was assigned to oversee 58 tasks, ranging from acquisition support to intelligence analysis to budget formulation and planning, across multiple offices and locations. Program and contracting officials noted the resulting oversight was likely insufficient. To provide better oversight for one of the follow-on contracts, the program official assigned a new COTR to oversee just the intelligence work and established monthly meetings between the COTR and the program office. According to program officials, this change was made to ensure that the contract deliverables and payments were in order, not to address the inherent risk of the services performed. Similarly, a DHS Human Capital Services COTR assigned to oversee an extensive range of personnel and staffing services provided by the contractor lacked technical expertise, which the program manager believed affected the quality of oversight provided. To improve oversight for the follow-on contract, the program manager assigned a COTR with more human resources experience along with an employee with human resources expertise to assist the COTR. DHS components were also limited in their ability to assess contractor performance, which is necessary to ensure control and accountability, in a way that addressed the risk of contracting for professional and management support services that closely support the performance of inherently governmental functions. Assessing contractor performance requires a plan that outlines how services will be delivered and establishes measurable outcomes. However, none of the related oversight plans and contract documents we reviewed contained specific measures for assessing contractors’ performance of the selected services. Until the department provides greater scrutiny and enhanced management oversight of contracts for selected services—as required by federal guidance—it will continue to risk transferring government responsibility to contractors. To improve the department’s ability to manage the risk associated with contracting for services that closely support the performance of inherently governmental functions and help ensure government control and accountability, the report we are releasing today recommends that the Secretary of Homeland Security take several actions. These actions include establishing strategic-level guidance for determining the appropriate mix of government and contractor employees, assessing the risk of using contractors for selected services, more clearly defining contract requirements, assessing the ability of the government workforce to provide sufficient oversight when using selected services, and reviewing contracts for selected services as part of the acquisition oversight program. DHS generally concurred with our recommendations and provided information on what actions would be taken to address them. However, DHS partially concurred with our recommendation to assess the risk of selected services as part of the acquisition planning process and modify existing guidance and training, noting that its acquisition planning guidance already provides for the assessment of risk. Our review found that this guidance does not address the specific risk of services that closely support the performance of inherently governmental functions. DHS also partially concurred with our recommendation to review selected services contracts as part of the acquisition oversight program. DHS stated that rather than reviewing selected services as part of the routine acquisition oversight program, the Chief Procurement Officer will direct a special investigation on selected issues as needed. We did not intend for the formal oversight plan to be modified, rather we recognize that the program was designed with flexibility to address specific procurement issues as necessary. We leave it to the discretion of the Chief Procurement Officer to determine how to implement the recommendation. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions you or other members of the committee may have at this time. For further information regarding this testimony, 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 product. Staff making key contributions to this statement were Amelia Shachoy, Assistant Director; Katherine Trimble; Jennifer Dougherty; Karen Sloan; Julia Kennon; and Noah Bleicher. Federal Acquisition Regulation (FAR) section 7.503 provides examples of inherently governmental functions and services or actions that are not inherently governmental, but may approach being inherently governmental functions based on the nature of the function, the manner in which the contractor performs the contract, or the manner in which the government administers contractor performance. These examples are listed in tables 1 and 2. | In fiscal year 2005, the Department of Homeland Security (DHS) obligated $1.2 billion to procure four types of professional and management support services. While contracting for such services can help DHS meet its needs, using contractors to provide services that closely support inherently governmental functions increases the risk of government decisions being influenced by, rather than independent from, contractor judgments. This testimony summarizes our September 2007 report to this Committee and others and focuses on (1) the types of professional and management support services DHS has contracted for and the circumstances that drove its contracting decisions, and (2) DHS's consideration and management of risk when contracting for such services. GAO analyzed 117 statements of work and 9 case studies in detail for selected contracts awarded in fiscal year 2005 by the Coast Guard, the Office of Procurement Operations, and the Transportation Security Administration. A broad range of program-related and administrative activities was performed under the four types of professional and management support services contracts we reviewed--program management and support, engineering and technical, other professional, and other management support. DHS decisions to contract for these types of services were largely driven by the need for staff and expertise to get programs and operations up and running. While DHS has identified core mission critical occupations and plans to reduce skill gaps in core and key competencies, it is unclear whether this will inform the department's use of contractors for services that closely support the performance of inherently governmental functions. Program officials generally acknowledged that their professional and management support services contracts closely supported the performance of inherently governmental functions, but they did not assess the risk that government decisions may be influenced by, rather than independent from, contractor judgments--as required by federal procurement guidance. In addition, none of the program officials and contracting officers we spoke with was aware of these requirements, and few believed that their professional and management support service contracts required enhanced oversight. Federal guidance also states that agency officials must retain control over and remain accountable for policy and program decisions. For the nine cases we reviewed, the level of oversight DHS provided did not always help ensure accountability for decisions or the ability to judge whether contractors were performing as required. DHS's Chief Procurement Officer is implementing an acquisition oversight program--designed to allow flexibility to address specific procurement issues--with potential to address this issue. |
In general, royalty rates for onshore federal oil and gas leases are 12- 1/2 percent of the value of the oil and the gas produced, whereas royalty rates for offshore leases are generally 16- 2/3 percent. MMS also administers programs under which royalties are reduced or suspended to encourage exploration and production. The administration of cash royalty payments has been challenging for MMS. MMS relies upon royalty payors to self- report the amount of oil and gas they produce, the value of this oil and gas, and the cost of transportation and processing that they deduct from cash royalty payments. With 22,000 producing leases and often several companies paying royalties on each lease each month, the auditing of these cash royalty payments has become a formidable task. In addition, payors and MMS often disagree over the value of the oil and gas and the transportation and processing deductions, leading to time-consuming and costly appeals and litigation for those disagreements that they cannot resolve. MMS claims that compared to cash royalty payments, RIK can substantially simplify the administration of royalties because it reduces these disagreements and the time that MMS must spend resolving them. While RIK offers the promise of simplified administration, MMS must also consider the revenue impact of RIK. The Mineral Leasing Act of 1920 and the Outer Continental Shelf Lands Act authorize taking royalties in kind. These two acts directed the Secretary of the Interior to obtain fair market value for the oil and gas taken in kind. The Outer Continental Shelf Lands Act defined “fair market value” as the average unit price for the mineral sold either from the same lease or, if such sales did not occur, in the same geographic area. Moreover, the fiscal years 2001 through 2004 Appropriation Acts for Interior and related agencies directed MMS to collect at least as much revenue from RIK sales as MMS would have collected from traditional cash royalty payments. In recent years, MMS conducted three major RIK pilots involving (1) oil in Wyoming, (2) oil in the Gulf of Mexico, and (3) natural gas in the Gulf of Mexico. For oil in Wyoming, MMS has taken royalties in kind since October 1998. Although the amount of royalty oil that MMS takes in kind in Wyoming is less than 1 percent of all federal royalty oil, MMS has gained valuable experience during these sales. MMS has also taken royalty oil in kind in the Gulf of Mexico in two 6-month sales between November 2000 and March 2002. Unlike in Wyoming, the amount of royalty oil that MMS took in the Gulf approached 20 percent of all federal royalty oil during the second 6-month sale from October 2001 through March 2002. MMS’s RIK oil pilot in the Gulf was put on hold when the president directed that MMS use royalty oil to fill the nearby Strategic Petroleum Reserve (SPR). Finally, for natural gas in the Gulf of Mexico, MMS has consistently taken natural gas in kind since December 1998. MMS currently takes about 19 percent of total federal royalty gas in pilots conducted in the Gulf of Mexico, and this program continues to grow. While there are substantial administrative savings in auditing royalty collections that are attributable to the RIK pilots, there are no quantified savings in the overall administration of royalty collections. MMS’s overall budget to administer royalties has declined slightly as MMS increased the use of RIK, but the development of many other changes in royalty administration during the same time makes it difficult to assess the relative impact of RIK. MMS only began collecting detailed administrative cost information starting in fiscal year 2003, so it is not possible to attribute costs to the different royalty administration activities before then. MMS’s development of a more specific cost information system in 2003 may help with future impact assessments, but will not allow any comparison to the past. MMS claims that the administrative cost savings from using RIK comes primarily from a reduction in audit and litigation activities that would have occurred under cash royalty collections. Information collected by MMS starting in 2003 has supported MMS’s assertion that RIK pilots can create savings by reducing the costs of auditing royalty payments. While MMS has redirected auditing resources it saved to auditing more cash payments, it is not yet able to determine the benefit of this increased audit effort on overall royalty collection. Regarding litigation savings, no litigation cost information has been collected nor have any savings been identified. Finally, these potential savings must be weighed against additional specific costs that would otherwise not be incurred under cash royalties, such as operating costs in fiscal year 2003 of $1.7 million to conduct the RIK sales. MMS also incurred a capital investment of $13 million to purchase information systems. In October 2001, MMS reorganized and created the Minerals Revenue Management organization (MRM) within MMS to collect, disburse, and audit royalty revenues. Since its creation, MRM’s budget has declined by about 7 percent, from $86.5 million in fiscal year 2002 to $80.4 million in fiscal year 2004. Approximately 41 percent of MRM’s budget over this period supported financial management, including the collection and disbursement of royalty revenues. Nearly all of the remaining 59 percent of the budget supported compliance asset management, a major function of which is the auditing of oil and gas royalty revenues. Budget documents indicate that MRM has maintained about 572 full-time personnel from fiscal years 2002 through 2004, of which 184 were assigned to financial management and 388 were assigned to compliance asset management. An official within the Department of the Interior added that the actual number of employees on board was 558 in 2004, with some of this difference due to a decrease in the number of personnel assigned to compliance asset management. Within compliance asset management is the RIK Office that oversees RIK pilot sales, the Small Refiners Program, and the filling of the SPR. Other developments in the administration of royalty collection have made it difficult to attribute changes in the MRM budget to RIK activities. Whereas RIK sales significantly change the processes for collecting royalty revenues, other developments, including the substantial change in the duties of the personnel responsible for auditing oil and gas revenues and for ensuring compliance with applicable rules and regulations, have ultimately affected the way MMS deploys its personnel—a major component of MRM’s budget. For example, in June 2000 MMS implemented new oil valuation regulations that provide more specific guidance on what prices companies must report to MMS on the sales of oil to their affiliates, and this should decrease discrepancies between MMS auditors and royalty payors. Similarly, MMS’s increased willingness to write formal agreements on these prices is also expected to decrease such disagreements. The change in the way MMS audits oil and gas revenues since its reorganization is also expected to decrease its workload. For example, MMS auditors no longer routinely compare all production volumes reported by the operators of oil and gas leases against all sales volumes reported by royalty payors to search for possible underpayments. Instead, MMS auditors now perform this activity on a case-by-case basis as needed. MMS auditors are also increasingly selecting the property as the entity to audit rather than selecting an individual company. Finally, when MMS does select a company to audit, there are fewer companies to select because of the recent mergers of the large oil and gas companies. Prior to fiscal year 2003, MMS lacked the necessary data to conclusively quantify the difference in administrative costs under different royalty collection methods. Under Interior’s agencywide initiative, MMS implemented an activity-based cost (ABC) management system in fiscal year 2003. The system identifies specific work activities in order to measure their costs, monitor and evaluate program performance and results, and improve the way MMS does its work. In essence, MMS personnel record the hours spent on specific work activities, such as RIK audits, and convert these hours into labor costs. These labor costs are then added to nonlabor costs, such as travel and materials costs, to produce total direct costs for the identified work activities. MMS has captured the costs of the work activities included in the collection and auditing of royalty revenues during fiscal year 2003. Such information may help MMS compare the costs of administering the RIK sales to the costs of administering cash royalty collections; however, there is no way to make this comparison prior to fiscal year 2003. According to MMS, the auditing and compliance effort is significantly reduced under RIK because MMS and the RIK purchaser agree to a contractual price before the sale and because transportation deductions are no longer an issue when MMS sells the oil or gas at the lease. MMS further explained that auditing RIK leases can be done within as little as 120 days after the sale because it has all the necessary price information at that time, while up to 3 years transpire before MMS initiates an audit of cash royalty payments. During such cash royalty audits, MMS personnel must physically collect and inspect collaborative pricing and transportation documents, often at the payors’ offices, while similar pricing information for RIK sales is instantly available in MMS’s information systems. The data from MMS’s newly implemented ABC management system does support MMS’s assertion that the auditing of certain RIK sales revenues is less costly on a per-lease basis than the auditing of comparable cash royalty payments. A review of the auditing and compliance costs for oil and gas leases in the Gulf of Mexico and Wyoming—two locations in which MMS received both cash and in-kind royalty payments during fiscal year 2003— showed that the costs to audit cash sales per lease were substantially higher than the costs to audit in-kind royalties in both areas. In the Gulf of Mexico, MMS reported spending $6,765,000 to audit cash sales from 242 oil and gas leases, or $27,956 per lease, while spending $458,000 to audit all 297 gas leases included in the RIK pilot sales, or $1,542 per lease. Similarly, MMS reported spending $820,000 to audit cash royalties from 912 oil and gas leases in Wyoming, or $899 per lease, while spending $38,000 to audit all 580 RIK oil leases in Wyoming, or $66 per lease. While the ABC data suggest that the auditing costs for RIK sales revenues are less than the auditing costs for cash royalty payments, this difference does not necessarily mean that MMS is spending less money as it moves more leases into its RIK sales. MMS explained that instead of decreasing its audit budget, it has used these freed-up resources to audit additional cash royalty payments that it would not have otherwise audited. In addition, MMS has stated that auditing additional cash royalty payments could result in the collection of additional revenues. For fiscal year 2000, the latest year for which audit data are available, MMS reported that its audit activities, together with state and tribal audits of federal royalty revenues, generated about $219 million (or 5 percent) on royalty revenues of about $4.6 billion. However, MMS will not know the results of auditing additional cash royalty payments for several years because it takes time to select leases for audit, conduct the audits, and resolve related appeals and litigation. In the future, it is possible that MMS may experience different rates of revenue increase, either upwards or downwards, as it expands its audit coverage because of the different leases it selects for audit. MMS’s new ABC system provided costs associated with taking royalties in kind during fiscal year 2003, but it did not capture the costs associated with specific types of litigation performed by others for MMS. Litigation sometimes arises after MMS or state and tribal auditing efforts identify a discrepancy that cannot be resolved by MMS and the payors. Such discrepancies commonly involve the value of oil and gas or the costs of transporting this oil and gas to market. MMS has maintained that the taking of royalties in kind reduces litigation. However, the savings that could result from avoiding litigation cannot be quantified by MMS because MMS does not conduct the litigation. Instead MMS relies primarily upon the Department of the Interior’s Solicitor’s Office, which does not track specific types of litigation costs for MMS. Officials in the Solicitor’s Office reported that since fiscal year 1999, between two and four of their attorneys worked full-time on MMS royalty issues. In addition, these officials said that attorneys within the Department of Justice represent MMS in court. Officials in the Solicitor’s Office could not attribute any decrease in litigation to an increase in the use of RIK. They also stated that the nature of the royalty litigation could change as a result of RIK; while litigation over valuation and transportation deductions may decrease, litigation over RIK contracts and discrepancies over volumes sold may increase. They also cautioned that future litigation over administrative decisions and rule making is impossible to predict. Finally, regardless of the volume of RIK sales, they cautioned that as long as MMS receives some cash royalty payments, there would always be the potential for litigation on valuation issues and transportation allowances. The administration of the RIK pilot sales includes additional activities that are not necessary when accepting cash royalty payments and therefore add to the cost of collecting royalties in kind. Such activities include identifying properties from which to sell oil and gas, calculating minimum acceptable bids, awarding and monitoring contracts, billing purchasers, negotiating transportation rates, and reconciling discrepancies in volumes. In fiscal year 2003, MMS’s preliminary ABC data showed direct costs of $1.7 million to conduct activities for the RIK pilot sales that it would not have incurred had it accepted cash royalty payments. Of this $1.7 million, MMS reportedly spent $475,000 to identify properties, calculate minimum acceptable bids, and conduct sales; $464,000 to market the royalty oil and gas; $176,000 to monitor the credit worthiness of purchasers; $496,000 for auditing leases and reconciling volumes; and $127,000 for policy compliance and legal support. MMS also incurred one-time costs of more than $13 million to acquire three information systems, part of whose functions are to bill, collect, and report on revenues from the RIK pilots. When fully implemented, these systems may help address the management control weakness that we previously identified involving the manual entry of data into unlinked computer spreadsheets. The first of these systems, the gas information system, is wholly dedicated to the administration of the RIK gas pilot sales and cost $7.3 million. Implemented in January 2003, the system automates the billing, collecting, and reporting functions. MMS’s second system, the liquids information system, cost almost $5 million and was implemented in June 2003. Like the gas system, it is designed to automate the billing, collecting, and reporting functions, but unlike the gas system it is not wholly dedicated to the RIK pilot sales, but also supports the Small Refiners Program and the filling of the SPR. MMS’s third system, the Risk and Performance Management System, cost about $0.9 million and is designed to measure the results of the RIK gas sales and the Small Refiners Program for periods during 2003. In addition, MMS’s preliminary ABC data shows that MMS incurred direct costs of $682,000 in fiscal year 2003 to develop and maintain these information systems. MMS will also incur additional costs in future years to operate and maintain these systems. Our analysis of sales in three RIK pilots indicates a mixed performance when comparing RIK sales revenue to what might have been collected under cash royalty payments. Specifically, (1) RIK sales in Wyoming increased revenues by about 2.6 percent, for an estimated gain of $967,000 on sales of about $37 million; (2) a 6-month oil sale in the Gulf of Mexico decreased revenues by 5.5 percent, for an estimated loss of $7.2 million on sales of about $131 million; and (3) natural gas sales in the Gulf of Mexico produced more revenues than would have been collected from cash royalty payments—an increase of about 2 percent, for an estimated gain of $4 million on revenues of $210 million. These sales represented about 11 percent of the gas and 57 percent of the oil that MMS took in kind from inception of the pilots through November 2003. Our attempts to review the revenue impact of more RIK sales were precluded by specific limitations in MMS financial data and the availability of only two independent MMS draft reports. As we observed in our January 2003 report, MMS continues to expand its RIK pilots without analyzing and documenting the revenue impacts of all its RIK sales. MMS is making some progress in this area, but still has not demonstrated that it has received fair market value, or at least as much as it would have received in cash royalty payments. MMS chose to conduct its first RIK oil sales in Wyoming because of the state’s active oil markets and the cooperative spirit of state officials. MMS offered for sale the federal government’s royalty share of oil together with the state of Wyoming’s royalty oil that was for 6-month periods beginning in October 1998. Bidders offered a fixed amount of money either more or less than published market prices, such as Wyoming posted prices, Canadian posted prices, and the oil futures contract on the New York Mercantile Exchange (NYMEX). The winning bidders, which included companies that market, refine, transport and/or produce oil in Wyoming and adjacent states, accepted delivery of the oil at the lease. Although MMS’s RIK sales in Wyoming accounted for only about 1 percent of total federal royalty oil, MMS acquired significant knowledge on how to conduct sales and market oil onshore. For example, MMS determined that companies more commonly bid on royalty oil from properties that are connected to pipelines and prefer flexibility in choosing a specific price upon which to base their bid. In addition, MMS learned in 2002 that it was not profitable to transport the volumes from many scattered leases to one central location for sale. In a draft report issued in March 2001, updated in June 2002, and finalized in March 2004, MMS estimated that it received slightly more revenue in its first three RIK sales than it would have received in cash royalty payments. Specifically, MMS reported that it collected $810,000 more from RIK sales than it would have received in cash royalty payments, or an increase of about 2.9 percent on sales of $27.66 million from October 1998 through March 2000. MMS based its conclusion on a comparison of winning RIK bids to severance taxes that producers reported and paid to the state of Wyoming. State severance taxes are calculated as a percentage of the value of all oil that companies sell, regardless of whether the oil is produced from federal, state, or private lands. Because the state of Wyoming’s oil valuation statutes are similar to how the federal government values oil, MMS assumed that the price that companies reported for state severance taxes on RIK properties was equal to the price that the government would have received in cash royalty payments. However, MMS did not demonstrate that the average sales prices for cash royalty payments were equal to the average sales prices used to calculate Wyoming severance taxes, initially creating some uncertainty about MMS’s revenue calculations. To address the uncertainty in MMS’s assumption about the relationship between cash royalty payments and severance tax prices, we analyzed the relationship. For nine federal properties that accounted for about 47 percent of the oil that MMS sold in Wyoming during the first seven RIK sales, we compared Wyoming severance tax data with MMS’s financial data for the 33-month period prior to the RIK sales and concluded that Wyoming severance tax prices are a reasonable proxy for cash royalty payments. Therefore, based on Wyoming severance tax data, we estimated that MMS collected $967,000 more from the RIK sales from October 1998 through March 2002 than it would have collected in cash royalty payments—an increase of about 2.6 percent on sales of about $37 million. The results of our analysis of selected Wyoming RIK sales are consistent with MMS’s conclusion that the RIK sales that it analyzed resulted in slightly more revenue that it would have realized if it had accepted cash royalty payments. A more detailed discussion of our analysis appears in appendix I. Although MMS has a long-standing history of selling royalty oil through the Small Refiners Program, MMS did not sell offshore royalty oil directly to other qualified purchasers until November 2000. MMS sold, through two separate 6-month sales, up to 20 percent of the federal government’s royalty share of oil in the offshore Gulf of Mexico to all purchasers meeting predetermined financial qualifications, whether they were small refiners, large refiners, producers, or marketers. Winning bidders offered a fixed amount of money that was more than or less than a formula based on one of two widely published oil prices—Koch’s published price for West Texas Intermediate oil in the first sale and the NYMEX futures contract in the second sale. During the first sale, MMS offered about 39,000 barrels of oil per day, but awarded contracts for only about 7,600 barrels per day. Only two companies submitted bids. MMS attributed the lack of interest to the delivery points for the oil being at market centers onshore rather than offshore near the lease. During the second sale, which commenced in October 2001, MMS offered and awarded approximately 48,000 barrels of oil from six major pipeline systems. Nearly all of the oil consisted of two types, referred to as the Mars and Eugene grades, produced in water depths up to about 4,000 feet. The delivery point for the oil was offshore near the lease, and competition was robust. MMS terminated the Gulf RIK oil pilots after the second sale when ordered by a Presidential directive to transfer oil from these properties to the SPR. As of July 2003, MMS had not evaluated the revenue impacts of either sale. Because of the larger amount of oil sold during the second sale, we chose to analyze this sale and estimated that MMS received about $7.2 million less in revenues than it would have received had it accepted cash royalty payments—a 5.5 percent loss on sales of about $131 million. We selected 13 of the 26 leases included in the second sale that collectively accounted for about 89 percent of the oil offered and sold. For the 16-month period prior to the start of the second oil sale, we compared the average monthly sales price for oil from each lease to the price as prescribed by MMS’s oil valuation regulations for sales between affiliated parties (transactions not at arm’s-length). We then computed a weighted average difference in the monthly prices for the entire 16-month period and assumed that this weighted average difference would have persisted over the 6-month RIK sales period had royalties been paid in cash. A detailed explanation of our analysis appears in appendix I. Because revenue from RIK sales and from cash sales can differ considerably in any given month, a longer period of evaluation is needed to determine whether a specific type of RIK sales can generate at least as much royalty revenue as cash sales. The reason that RIK and cash sales revenues differ month to month is that they are generally based on different sets of market prices. For example, the formula that MMS used to award RIK bids in the second Gulf of Mexico sale differs from the formula prescribed in the oil valuation regulations primarily in two ways: (1) the bidding formula relies on prices from a period that is almost a month earlier than that prescribed by the oil valuation regulations, thereby creating a timing difference and (2) the bidding formula relied on an adjustment to NYMEX futures price, referred to as “the roll.” The roll is an adjustment that compensates for differences in oil futures prices for subsequent months. If futures prices for the next three trade months trend downward, the roll is a positive adjustment. If futures prices trend upward for the next three trade months, the roll is a negative number. Rising oil futures prices that accompanied uncertainty in the financial markets after the September 11 terrorist attacks resulted in generally lower-than- anticipated RIK royalties caused by the timing differential and a negative roll, thereby contributing significantly to the negative performance of the second sale. MMS officials agree that a 6-month term is an insufficient period of time during which to evaluate a sales methodology. Specifically, MMS added that it had intended to continue the oil sales in the Gulf of Mexico but that the President directed that royalty oil be used to fill the SPR, and royalty oil from the leases included in the pilot sales was the only feasible source. Although MMS generally agrees with the magnitude of the revenue impact that we identified during the 6-month period of the second sale, MMS believes that we should have examined a longer period of time, even though the oil that was sold during this sale was thereafter transferred to the SPR. After learning of our analysis, MMS conducted its own evaluation of many of the same leases. MMS combined the results of the 6-month second sale with the following 12 months during which oil from these same leases was transferred to the SPR. MMS estimated that during this combined 18-month period, its sales methodology increased revenues by $4.9 million. This estimate, however, does not mean that MMS collected $4.9 million more than it would have collected in cash royalty payments. MMS’s estimate is based on combining cash collections from RIK sales in the first 6 months with market index prices at the time that MMS transferred the oil to the Department of Energy (DOE) for filling of the SPR. MMS estimated that it lost $6 million in cash during the first six months and that the value of the oil transferred to DOE was $10.9 million more than it would have received in cash royalties had the RIK pilot sales continued for the next 12 months. We do not believe that MMS’s evaluation of the SPR program is necessarily indicative of how the RIK program would have performed had it been allowed to continue. The SPR program does not generate royalty income for the federal government in the same way as the RIK program does. In the SPR program, the royalty oil, or an equivalent amount from another source, is pumped into the reserve, and revenues will only be generated upon its removal and sale at some unspecified period in the future. In addition, the data that MMS used in estimating the revenue impacts of its Gulf of Mexico oil sales was problematic in several ways. First and most important, MMS did not adjust its revenue estimate by quality bank adjustments. Quality bank adjustments are either positive or negative adjustments to sales revenues that pipeline companies compute because the royalty oil is of either better or worse quality than the average quality of oil in the pipeline. Payors either add or subtract these adjustments from both their cash and in-kind royalty payments to MMS. Quality bank adjustments can be substantial—during the second RIK sale, they lowered MMS’s revenues on the leases we examined by $2.5 million. Second, MMS did not use the actual transfer volumes to the SPR in its financial database, opting instead to use volumes recorded in its production database or to use estimates of these volumes, adding uncertainty to the accuracy of its revenue calculations. For example, we examined the production volumes for 8 of the 13 leases we reviewed during the 6-month sale and found significant discrepancies between these volumes and the volumes in its financial database. Similarly, independent auditors performing an audit of MMS’s fiscal year 2002 financial statements noted that MMS’s use of estimated volumes did not ensure an accurate calculation of the SPR amounts transferred to DOE. Third, we identified some minor discrepancies in the prices MMS used to calculate the value of the SPR transfers, such as using an index other than that used during the 6-month sale and assuming that companies bid exactly the same on the SPR transfers as they did in the 6-month sale, but it is unclear as to whether these discrepancies would significantly alter MMS’s calculations. After initial experimentation with selling royalty gas in 1995 and simultaneously with the contracting of gas marketers in 1999, MMS established sales procedures for offshore royalty gas similar to those in 2003. Beginning in June 1999, MMS tested the sale of offshore royalty gas from 11 federal offshore leases. Production from these leases flowed through the Matagorda Offshore Pipeline System or through the Blessing Pipeline System. MMS entered a cooperative agreement with the Texas General Land Office to conduct the RIK sales because under section 8(g) of the Outer Continental Shelf Lands Act, royalty revenues for federal leases located in coastal waters are to be shared with the state. MMS sold the royalty gas for 1-month periods at competitive auctions, during which purchasers who met minimum financial qualifications bid an increment or decrement relative to applicable published gas indexes. Several months into the pilot, MMS started dividing the gas into two separate packages—a larger package (base volume), for which MMS guaranteed that it would deliver the specified volume at a fixed first-of-the-month price, and a smaller package (swing volume), for which MMS did not guarantee the volume delivered and which MMS offered at published prices that varied daily. Beginning in 2000, MMS began combining its monthly gas sales into two sales periods for administrative reasons. MMS now conducts gas sales for delivery from April through October, corresponding to the period during which natural gas is used extensively for air conditioning, and for delivery from November through March, corresponding to the period during which natural gas is used extensively for heating. In accordance with its cooperative agreement with the Texas General Land Office, MMS issued a draft report in March 2002 on the analysis of its gas sales from the Blessing and the Matagorda Offshore Pipeline Systems from June 1999 through December 2000. The report stated that the RIK sales increased revenues by nearly $1 million over what it would have collected in cash royalties—an increase of about 1 percent on sales of almost $100 million. MMS obtained this estimate by comparing RIK sales revenues to cash royalty sales from 18 other leases located in the same geographic area. However, because of limitations with its financial data, MMS did not subtract the costs of transporting the gas to its sales points onshore, comparing gross unit prices rather than prices net of transportation allowances. After reviewing MMS’s study and conducting our own analysis, we reached conclusions similar to those of MMS—that revenues from the sale of RIK gas from the Blessing and Matagorda Offshore Pipeline Systems were higher than MMS would have received in cash royalty payments. We included additional RIK leases in our analysis, excluded some cash royalty payments that MMS later identified as not coming from leases on the same pipeline systems, and extended the time frame of our study to December 2001. We estimated that, including the cost to transport the RIK gas to its onshore sales points, revenues were increased by about 2 percent. Hence, we estimate that MMS realized about $4 million more than it would have collected in cash royalties, or a gain of about 2 percent on sales of about $210 million. A more detailed description of our analysis appears in appendix I. In analyzing RIK sales, we identified specific limitations in MMS’s financial data that inhibited our analysis and precluded us from conducting a comprehensive computer-based assessment of all RIK sales. A small amount of erroneous, missing, and improperly coded financial data, together with other anomalous but legitimate financial data, required time- consuming inspections of these data and complex edit checks to ensure data reliability and integrity. For example, in our analysis of the three RIK pilot sales, we analyzed almost 60,000 financial transactions, followed at times by a line-by-line inspection of some of these data, discussions with MMS personnel, and manual checks of source documents. MMS staff confirmed that the financial data in their raw form were unreliable in assessing program performance; in some instances, MMS staff chose to use contract prices or production volumes in lieu of the financial data because they lacked confidence in the available financial data. In addition, the lack of a systematic method to electronically combine data in its financial database with well, pipeline, product quality, and market center data also prevented us from analyzing the revenue impacts of all offshore RIK sales. Although MMS obtains and records these data for individual properties included in its RIK sales, MMS personnel must manually obtain these data for each property through time-consuming phone calls and searches of industry databases. According to its procedures, MMS performs these data collection efforts each time it expands the RIK program into new areas. However, MMS’s unsystematic collection and recording of these data may slow the development of benchmarks against which to compare RIK sales in the future. In 2001, MMS took steps to improve its collection and management of royalty data and to develop the means to identify and correct erroneous financial data. For example, MMS began to develop a more consistent coding of RIK transactions, and MMS personnel in the RIK Office began to take a more active role in entering RIK transactions for the purpose of ensuring data reliability. In October 2001, MMS revised its electronic form for collecting royalty data in an attempt to correct erroneous data. More recently, MMS sought external assistance in developing software to identify erroneous data that can then be corrected or eliminated. While some of the data problems may have been resolved by MMS, other problems continue to be evident. Specifically, the misallocation of SPR volumes to some individual leases and the aggregating of sales from multiple gas leases will continue to complicate future analyses unless these problems are corrected. MMS says that it plans to correct these deficiencies as it further refines its newly acquired oil and gas information systems. See appendix I for more detailed information on data problems. Our ability to assess the revenue impact of RIK sales was further limited by the failure of MMS to analyze and document the results of its sales. We reported in January 2003 that MMS quantified the revenue impacts of only 9 percent of the 15.8 million barrels of federal royalty oil that it sold from October 1998 through July 2002 and about 44 percent of the 241 billion cubic feet of federal royalty gas that it sold from December 1998 through March 2002. MMS has since sold an additional 201 billion cubic feet of gas in the Gulf of Mexico and an additional 1.4 million barrels of oil in Wyoming through November 2003, but has not published an analysis of the revenue impacts of these sales. In total, we estimate that MMS has analyzed only 8 percent of the 17.2 million barrels of royalty oil and 24 percent of the 442 billion cubic feet of royalty gas sold during RIK pilot sales through November 2003. This limited analysis of revenue impacts could be a significant issue as RIK sales expand in the future. Based on MMS’s estimates for further expansion of the program, we estimate that MMS could be collecting between $1.5 billion and $2.5 billion per year in revenue from the RIK pilot sales by 2008. MMS has not systematically analyzed and documented the results of all its RIK sales for four main reasons. The first and most significant reason is that MMS has no requirement that all sales results be analyzed and documented. Although the Congress directs MMS to (1) obtain fair market value and (2) collect at least as much revenue from the RIK sales as MMS would have collected from traditional cash royalty payments, MMS is not required to document how this directive is met. While MMS does analyze factors that will affect the revenues of upcoming sales, MMS lacks a systematic process for analyzing the final results of each of its sales. Second, staff responsible for conducting sales already believe that they have enough information on sales results. For example, MMS staff cited the second 6-month oil sale in the Gulf of Mexico in which market conditions unexpectedly moved in a manner that resulted in revenue collections that were less for this period than what would have been expected from cash royalty collections. MMS stated that they had enough information on the market conditions that drove the sales results even before completion of the 6-month sale. Third, insufficient staff is available for analyzing sales. We observed that staff who conduct sales are busy with identifying properties for inclusion in sales, establishing minimum acceptable bids, evaluating bids, and expanding the program. MMS has only one staff member independent of the RIK Program whose duties involve selectively analyzing RIK sales results at the direction of MMS management. To ensure proper management control and to remove the appearance of a conflict of interest, it is best to segregate the responsibility of a program’s operation from the responsibility of reviewing the program, which MMS correctly did when it reviewed the Wyoming oil and the Gulf of Mexico gas sales. Fourth, a lengthy management review process limits the usefulness of analyses that are conducted. For example, MMS’s report on the Wyoming pilot sales dated March 2001 and its report on gas sales in the Gulf of Mexico dated March 2002 remained in draft form pending final management approval until March 2004. In addition, a study of subsequent gas sales in the Gulf of Mexico, completed in April 2003, is still being reviewed and modified under the direction of MMS management. Since our last report, MMS has hired an industry consulting group to develop a strategic plan to guide the transition of the RIK pilots through the end of 2008. MMS intends to develop a 5-year business plan based largely upon the consulting group’s plan. The consulting group, among other things, has proposed that MMS (1) develop benchmarks that are indicative of fair market value; (2) develop a consistent process for monitoring RIK sales at regular time periods against these benchmarks; (3) develop a consistent process for deciding whether to accept cash royalty payments or to take RIK; (4) track administrative efficiency expressed as the cost per unit of royalty oil and gas sold; and (5) measure the amount of time it takes to collect, report, audit, and reconcile RIK revenue collections. The consulting group intends that the benchmarks satisfy MMS’s congressional mandates that RIK sales achieve fair market value and generate at least what would have been collected in cash royalty payments. The consulting group has developed a timetable for MMS to develop benchmarks for fair market value by March 2004 and benchmarks for administrative efficiency by March 2005. While much of the data collection for developing benchmarks will remain a manual process, MMS anticipates that overall calculation of RIK Program performance will be facilitated by MMS’s newly acquired RIK information systems. MMS stated that while data on RIK sales are available in less than 30 days after the sales month, RIK purchasers continue to submit data on quality adjustments and volume imbalances after these sales, and MMS must enter these data into its financial systems and audit the final figures. MMS believes that 120 days after an RIK sale, it will have completed these audits and has set this 120-day period as a formal objective. Within 180 days, MMS stated that it would be able to report on the results of these sales. However, many RIK sales only have a length of about 180 days or less, so obtaining performance results 180 days after a sale is not timely enough to use these results to modify the next sale. Recognizing this limitation, the consulting group recommended that performance be measured on a monthly or quarterly basis, and MMS believes this will be possible with its newly acquired RIK information systems. RIK can be an important tool for managing the collection of royalty revenues from federal oil and gas leases. In light of the possibility of revenue collections from RIK sales approaching $1.5 billion to $2.5 billion by 2008, it is important that MMS measure and document the revenue impact and costs of administering RIK relative to cash royalty payments, to ensure itself and the public that royalties are collected in the most efficient manner. In doing so, MMS may be able to conclusively show that it has reduced overall administrative costs or collected more than traditional cash royalty payments. MMS has made some progress in analyzing the revenue impacts of some of its sales, but many sales remain unanalyzed, and MMS has yet to implement a more systematic and timely approach to analyzing these sales. Also, completely quantifying the administrative efficiency of these RIK sales continues to be a challenge. While key data from MMS’s new activity-based cost management system have shed some light on the difference in costs to administer RIK and cash royalties, MMS has been unable to quantify any overall benefit that may arise from shifting resources to auditing more cash royalty payments and from changes in litigation due to RIK. Unless steps are taken to quantify the impacts of these changes, MMS and the Congress will be unable to determine the efficiency of RIK. Because MMS has not systematically assessed and documented the overall administrative cost and revenue impacts of many RIK sales, knowledge of MMS’s RIK Program is insufficient to determine whether MMS should expand or contract the use of RIK. Should the Congress seek a more systematic and timely evaluation of RIK efforts, the Congress may want to consider directing MMS to implement a systematic process for evaluating all future RIK sales in a timely manner and to quantify any changes in the administrative cost and revenue impact on royalty collections as a result of RIK. We provided the Department of the Interior with a draft of this report for review and comment. Interior generally agreed with our observations and emphasized the steps that they are taking to improve their measurement of RIK sales performance. Interior said that the insights and conclusions contained in the report are timely and will be valuable in their efforts to improve the RIK Program. Their comments and our response to these comments are reproduced in appendix II. As agreed with your offices, and unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies of this report to the Secretary of the Interior; the Director of the Office of Management and Budget; and other interested parties. We will also make copies available to others upon request. This report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you have any questions about this report, please call Mark Gaffigan or me at (202) 512-3841. Key contributors to this report are listed in appendix III. To determine the administrative cost savings associated with RIK, we first examined MMS’s two draft studies on RIK sales—Wyoming Oil Royalty In Kind Pilot, Evaluation Report (June 1, 2002) and Texas General Land Office/Minerals Management Service 8(g) Gas Royalty In-Kind Pilot, A Report (March 27, 2002). We reviewed MMS’s logic and assumptions in these reports concerning the quantification of administrative savings and benefits attributable to RIK. We used the data in these reports, MMS’s budgetary data, and testimonial evidence from MMS officials to identify which aspects of administrative savings and benefits to investigate. We then obtained data from the activity-based cost (ABC) management system for the entire fiscal year 2003 and solicited MMS’s assistance in understanding the individual activities and in identifying which direct costs were attributable to RIK sales and which were attributable to cash royalty collections. We also obtained one-time expenditures for MMS’s new information systems from MMS officials and supporting documentation since not all of these costs were reflected in the fiscal year 2003 ABC data. To calculate costs for auditing cash royalty payments and RIK sales revenue on a per-lease basis, we used ABC data, together with the numbers of the different types of leases that MMS audited in fiscal year 2003, as supplied by MMS. We obtained data on additional royalty revenue obtained through auditing and compliance activities from MMS’s report entitled Report of Royalty Management and Delinquent Account Collection Activities, Fiscal Year 2000. We interviewed MMS personnel on the costs of appeals, and we interviewed attorneys in the Department of the Interior’s Solicitor’s Office to obtain information on the impact of RIK sales on litigation. Finally, we audited revenue from all RIK sales during fiscal year 2002 to determine the benefit of early collections. To evaluate all of MMS’s RIK pilot sales, we planned to compare RIK sales revenues with cash royalties from comparable federal leases. We started with sales in the Gulf of Mexico by attempting to identify comparable leases through the electronic matching of attributes, such as type of oil, sulfur content, market center, well location, pipeline available for shipment, and distance to the nearest market center. To do so necessitated combining data on these attributes in MMS’s offshore geographic information system with data on sales values, sales volumes, royalty values, royalty volumes, transportation deductions, and quality bank adjustments in MMS’s financial system. We examined data from January 1997 through July 2003, but we did not independently verify the integrity of MMS’s financial database. Unfortunately, we could not perform the intended analysis because of two reasons: (1) we were unable to link the data in the financial system with data in the offshore geographic information system, and (2) we identified many data anomalies in MMS’s financial database. We were unable to link the financial data with data in the offshore geographic information system because the common link—the lease number—had been compromised during some RIK gas sales. Specifically, MMS personnel who entered these data had combined RIK sales revenue from multiple leases and entered these data under a new lease number referred to as a “dummy lease number.” We also found that some data that would be helpful in identifying comparable oil leases, such as the quality of oil and the sulfur content, were not present in MMS’s geographic information system. Upon examination of the financial data, we discovered many data anomalies that prevented us from reliably and easily aggregating the monthly transactions to the same lease and payor. Within the data aggregated to the month-lease-payor level, anomalies included negative sales volumes, missing sales values, negative sales values, and missing quality measures for gas prior to fiscal year 2002. Some of these anomalies were obvious errors, but many more appeared to be correct and legitimate data entries. With no explanations in the financial data documentation to indicate which anomalies were accurate and which were not, resolving the anomalies required line-by-line inspection of the data and, in some cases, manual checks with other documentation. As a result of the large number of data anomalies and the time-consuming process required to correct and verify the royalty data, we undertook case studies of MMS’s RIK pilots in three sales areas: (1) RIK oil sales in Wyoming, (2) RIK oil sales in the Gulf of Mexico, and (3) RIK gas sales on two pipelines in the Gulf of Mexico. In analyzing the integrity and reliability of MMS’s financial data that we used to evaluate RIK oil sales in Wyoming, we selected nine properties that provided about 47 percent of the oil sold during the RIK sales we analyzed. We selected properties that produced the three different types of crude oil that MMS sold in its RIK sales—asphaltic, general sour, and Wyoming sweet oils. We obtained MMS’s financial data for all nine properties from January 1996 through March 2002 and aggregated these 32,823 financial transactions to the property-month level rather than the lease level because we anticipated that the financial impact of the smaller leases would not be as significant. We found that 3.3 percent of property months contained erroneous or missing data, but we were able to correct or obtain these data. To estimate the revenue impact of Wyoming RIK oil sales, we attempted to determine if Wyoming severance tax prices were a good proxy for what MMS would have received in cash royalty payments. We first obtained the state of Wyoming’s severance tax data for the same nine properties. We then proceeded to examine the average sales price per barrel and the number of barrels produced from each property during each of the 33 months immediately preceding the first RIK sale. The Bureau of Land Management, which leased the nine federal properties in Wyoming, grouped federal leases into these properties based on the geological boundaries of the oil fields. Personnel with the state of Wyoming, however, group producing leases into clusters for tax purposes. At our request, a Wyoming state official attempted to match these clusters as closely as possible to the federal properties. However, some clusters included additional state or private leases that they could not segregate, and in some instances, the state official could not precisely match the properties. We then graphed the volumes reported to the state of Wyoming for severance taxes and the volumes reported to MMS for cash sales for each of the nine properties. The graphs suggested that seven state properties contained many of the same federal leases. We then graphed the state severance tax prices and MMS’s cash royalty prices for each property. We determined that the severance tax prices and MMS’s cash royalty prices are essentially the same for eight properties. The severance tax prices for the ninth property were on average about 50 cents higher than MMS’s cash royalty prices. See figures 1, 2, and 3 for graphs of these prices that aggregate properties according to type of oil. To evaluate the integrity and reliability of MMS’s financial data that we used to evaluate the second RIK oil sale in the Gulf of Mexico, we examined MMS’s financial data from January 1997 through March 2002 for 16 of the 26 leases in the sale. We removed all transactions involving the SPR and small refiners so that we could compare sales from the second RIK sale to cash royalty payments only. We found this initial task difficult because MMS inconsistently used transaction codes for sales to small refiners and for transfers to the SPR during the time frame of our study. We aggregated 7,725 transactions to the payor-lease-month level and found that 1.9 percent of the payor-lease-months contained erroneous or missing data, and about 9 percent of the aggregated data was compromised by payors using multiple payor codes. Payors also inconsistently reported or did not report royalty volumes when reporting transportation deductions prior to October 2001 and inconsistently reported or did not report sales values when reporting quality bank adjustments. We subsequently reduced the period of our analysis to June 2000 through March 2002, reduced our leases to the 13 that accounted for about 89 percent of the oil sold during the sale, and corrected the single significant error that we found in this data set. To estimate the revenue impact of the October 2001 through March 2002 RIK oil sale in the Gulf of Mexico, we first chose a sample of leases included in the RIK sale and determined the relationship of their cash sales prices before the RIK sale to the prices as prescribed by MMS’s royalty valuation regulations for sales to affiliated companies (also known as transactions not at arm’s length). We analyzed only those leases that produced Mars and Eugene Island sweet oil because these two oil grades collectively accounted for 96 percent of the production. We then selected only the Mars and Eugene Island leases that had cash royalty sales during at least 8 of the 16 months between June 2000—the first month that the current oil valuation regulations became effective, and September 2001— the month immediately preceding the RIK sale. These selection criteria produced the 13 leases for our detailed analysis. Eleven of the 13 leases had cash royalty sales during all 16 months. For each of the 13 leases, we then calculated the average monthly cash sales price (net of any transportation allowances and quality bank adjustments) from data in MMS’s financial database for each of the 16 months preceding the RIK sale. Next, we obtained the average monthly price from MMS for Mars and Eugene Island sweet oils as prescribed in MMS’s oil valuation regulations for sales not at arm’ length at the market center for the same time period. We then subtracted these monthly prices from the average monthly cash prices and multiplied this difference by the barrels of oil sold each month to yield monthly revenue for each lease relative to MMS’s regulations. Next, we summed these monthly revenues and divided the sum by the total barrels of oil sold to obtain a weighted average difference per barrel for the entire 16- month period. This value, -$1.36, indicates that MMS received on average $1.36 less than the market center price for each barrel of royalty oil produced from these 13 leases from June 2000 through September 2001. We attribute most of this difference to the payors’ costs of transporting the oil to market. Finally, for the 6-month term of the RIK sale, we calculated a weighted average difference per barrel between the RIK sales price and the price as prescribed by MMS’s valuation regulations for transactions not at arm’s length. This value, -$2.24, indicates that MMS received on average $2.24 less than the average market center price for each barrel of oil that MMS sold during its RIK sale from October 2001 through March 2002. We then assumed that if MMS had not conducted this RIK sale, it would have received cash royalty payments that on average would have been $1.36 less than the market center price as we previously computed. We subtracted $2.24 from $1.36 to estimate that MMS lost on average $0.88 on every barrel that MMS sold during this RIK sale. Since MMS sold 8.2 million barrels during this sale, MMS lost approximately $7.2 million. In analyzing MMS’s financial data on gas sales in the Gulf of Mexico, we discussed with MMS officials the financial data limitations that they identified while conducting their analysis of RIK gas sales—limitations that prompted MMS personnel to use invoice prices rather than the sales data in MMS’s financial database. We then obtained 19,211 financial transactions for all the cash and RIK sales on the Blessing and Matagorda Offshore Pipeline Systems (MOPS) from January 1997 through December 2001. Upon aggregating these data to the payor-lease-month level and researching anomalous data, we found that 6 percent of the RIK summary data remained anomalous. Consequently, we decided to use the RIK invoice data, adjusted for transportation costs, to compute net unit prices for the RIK transactions. To estimate the revenue impacts of RIK gas sales in the Gulf of Mexico, we relied on financial data aggregated to the lease-month for all cash sales on the Blessing Pipeline System and on MOPS from January 1997 through December 2001. On each of the pipeline systems, MMS determined that the leases from which it received cash royalty payments were comparable to the leases from which it collected RIK. For each lease connected to the Blessing Pipeline System, we calculated the average cash sales price net of all reported transportation costs per MMBtu for each month and subtracted it from the average RIK sales price net of all transportation costs per MMBtu for each month. We then multiplied these figures by the quantity of royalty gas (in MMBtu) sold in kind each month to obtain the monthly revenue impacts, and we then summed the monthly revenue impacts to yield total revenue impacts of the RIK sales on the Blessing Pipeline System. To determine the revenue impacts of RIK sales on MOPS, we followed the same procedure as that on the Blessing Pipeline System, using data specific to sales on that pipeline. We then summed the revenue impacts from RIK sales on both systems to yield the total estimated revenue gain of about $4 million on sales of about $210 million. Our case studies did not include other overall factors that may affect revenues from RIK sales. First, differences in the timing of royalty collections can affect total revenue collections because an earlier collection of these revenues allows the Treasury to earn interest on the funds collected. Revenues from the sale of royalty oil are due 10 days earlier than cash royalties, while revenues from the sale of gas are due 5 days earlier than cash royalties. We reviewed MMS’s revenue collections from all RIK pilot sales during fiscal year 2002 and determined that 98 percent of the oil and 92 percent of the gas revenues were collected according to this early schedule. For fiscal year 2002, we calculated the combined benefit to be about $128,500, or about 0.03 percent on a total of $454 million collected in RIK pilot sales. MMS may have also realized relatively small amounts of money from interest on those revenues that were late. Future benefits will depend upon the amount of oil and gas sold in kind, interest rates, and the sales prices of oil and gas. Secondly, during the time frame of our revenue analysis, data were not available on a lease- by-lease basis that would enable us to estimate how much additional revenue had accrued to MMS as the result of the audit process. Hence, we could not determine whether any additional funds collected as a result of auditing were included in MMS’s financial data. For example, Wyoming state auditors who audit the federal leases in Wyoming that we included in our revenue analysis stated that they audited some of these leases for some of the time frame. While any additional audit collections would be expected to affect unit prices in both MMS’s financial database and the state’s severance tax database, additional collections were not necessarily recorded for every lease. We did not examine how any additional collections resulting from audits were recorded for oil and gas leases in the Gulf of Mexico because of the difficulty in accessing individual leases in the information system that tracks auditing efforts. In addition, some of the time frame that we included in our revenue analyses had not yet been audited by MMS when we initiated our work. The following are GAO’s comments on the Department of the Interior’s letter dated April 5, 2004. 1. We clarified our report to reflect these comments. 2. We included the costs of $496,000 for auditing leases and reconciling volumes because MMS reported it as a direct cost of the RIK pilot sales, and because it is unknown how many of these leases would have been selected for auditing if they had not been in the RIK Program. 3. We acknowledge that there are considerable costs for systems that support financial and compliance activities. However, the financial system supports both the collection of cash royalty payments and RIK payments, so its costs are incurred regardless of whether royalties are collected in cash or in kind. We acknowledge MMS’s observation that the compliance system has associated costs and that these costs are incurred predominantly with the collection of cash royalties. However, it was not our intent to compare systems costs under different methods of collecting royalties. We intended only to mention the incremental costs associated with collecting royalties in kind because MMS will continue to incur costs associated with collecting cash royalty payments. 4. We clarified the report by stating that there is only one staff independent of the RIK Program whose duties involve analyzing RIK sales results. We acknowledge that additional RIK Program staff and managers analyze sales results. However, we believe that proper management controls require that staff independent of the RIK Program should analyze sales results for MMS management. We also acknowledge and state in this report that an independent contractor has assisted with developing a strategy for analyzing sales. We believe that this is a significant step towards comprehensively and systematically analyzing RIK sales results. 5. MMS’s technical comments on its Gulf oil sale related to two issues: (1) removing the effect of quality bank adjustments and (2) the validity of extending its analysis for an additional 12 months. Because of the variability of quality bank adjustments, MMS stated that it is necessary to remove these adjustments before conducting an analysis, and MMS believes that it has done so. We acknowledge the variability of quality bank adjustments and also note that transportation allowances associated with the leases that we reviewed are also variable, albeit to a lesser degree. However, when we conducted our analysis, there was insufficient data on quality bank adjustments for the time period prior to the second RIK sale to effectively remove their effect from our analysis. To compensate for the variability of both quality bank adjustments and transportation allowances among the 13 leases we examined, we chose to establish our relationship between cash royalty payments and MMS’s royalty valuation regulations for a relatively long time period prior to the 6-month RIK sale. We assumed that the effects of variability would be minimized over the 16-month period for which we established our relationship. Concerning the validity of extending the time period of analyzing the Gulf of Mexico oil sale, MMS restated its belief that analyzing the transfer of oil to the SPR during the subsequent 12 months is a valid technique. We already discussed the limitations of using this technique in the report. In addition to those named above, Ron Belak, Robert Crystal, Art James, Lisa Knight, Jonathan McMurray, Franklin Rusco, Dawn Shorey, and Maria Vargas made key contributions to this report. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site daily. The list contains links to the full-text document files. To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select “Subscribe to e-mail alerts” under the “Order GAO Products” heading. | In fiscal year 2003, the federal government collected $5.6 billion in royalties from oil and gas production on federal lands. Although most oil and gas companies pay royalties in cash, the Department of the Interior's Minerals Management Service (MMS) has the option to take a percentage of the oil and gas produced and sell this product-- known as "taking royalties in kind (RIK)." MMS has taken royalties in kind continuously since 1998 with the goal of achieving administrative savings while maintaining revenue. GAO attempted to (1) quantify the administrative savings that may be attributable to the RIK sales and (2) compare the sales revenues from RIK sales to what would have been collected in cash royalty payments. Although data on administrative savings are limited, there are substantial audit savings attributable to RIK sales, but there are no quantified savings in the overall administration of royalty collections. MMS has anticipated savings in auditing and litigation expenses. While MMS data showed that auditing costs for RIK sales were less than auditing costs for cash sales on a per lease basis, MMS redirected the resources it saved to auditing additional leases. At this time, MMS cannot quantify the benefit from additional auditing. The costs of litigation, which the Solicitor's Office in the Department of the Interior performs for MMS, are not tracked. However, officials with the Solicitor's Office were unable to attribute any savings in litigation to the increased use of RIK and said that future litigation costs are difficult to predict. Finally, MMS must weigh these benefits against additional costs required to conduct RIK sales. Despite limitations in MMS's analyses and revenue data that prevented a more comprehensive assessment of all RIK sales, our estimate of the revenue impacts from RIK sales in three areas indicates a mixed performance. Specifically, RIK oil sales in Wyoming increased revenues by 2.6 percent, for a gain of $967,000 on sales of $37 million. RIK oil sales in the Gulf of Mexico decreased revenues by $7.2 million, for a loss of 5.5 percent on sales of $131 million. RIK gas sales in the Gulf increased revenues by $4 million, for a gain of 2 percent on revenues of $210 million. However, these sales only represent 11 percent of the gas and 57 percent of the oil that MMS took in kind from inception of the pilots through November 2003. MMS does not analyze all sales because there is no requirement to do so, staff considers existing information on sales sufficient, few staff are assigned to analyzing sales, and MMS management has a lengthy review process for finalizing sales analyses. |
Throughout this report, we refer to program integrity activities as those activities designed to prevent fraud, waste, and abuse of government resources. Program integrity activities may encompass a broad range of activities, such as identifying improper payments or improper access to federal programs or benefits. An improper payment is defined by statute as any payment that should not have been made or that was made in an incorrect amount (including overpayments and underpayments) under statutory, contractual, administrative, or other legally applicable requirements. Among other things, it includes payment to an ineligible recipient, payment for an ineligible good or service, and any duplicate payment. In the context of this report, improper access to a federal program or benefit refers to access that should not have occurred under statutory, contractual, administrative, or other legally applicable requirements. Additionally, Standards for Internal Control in the Federal Government states that management should use information that is appropriate, current, complete, accurate, and provided on a timely basis to achieve an entity’s objectives. To do this, management obtains relevant data from reliable internal and external sources in a timely manner based on the identified information requirements, which may vary depending on the program’s objectives. Management uses the quality information to make informed decisions and evaluate the entity’s performance in achieving key objectives and addressing risks, such as the risk of fraud, waste, and abuse. As such, information and communication are a key component of agencies’ internal control over their programs. Commercial data may or may not help agencies meet these information needs. Throughout this report, we refer to commercial data and data service providers. These include private companies and nonprofit entities that gather and maintain data as well as provide a variety of analytical and consulting support to federal agencies as part of their data services. The types of data these entities provide access to may include data from federal government entities, such as death information from the Social Security Administration (SSA); data from state and local government entities, such as real estate and personal property ownership records; and data from commercial entities, such as the name and address of a private business that the data service provider collects, maintains, and updates through its own efforts. Figure 1 shows examples of the types of data that agencies may obtain from data service providers. In addition to aggregating information from multiple data sources and providing access to various databases, commercial data service providers may provide technical and analytical support to federal agencies, such as by developing user-friendly interfaces for agency staff and producing analytical reports that agencies can use to identify potential fraud. As mentioned, agencies may pay for commercial data and data services in different ways, such as through contracts for a set amount or through rates based on usage. Additional background information on each of the five commercial data service providers we selected as part of our nonprobability sample appears later in this report. RELX Group is a public company that provides data services to private sector and government agencies. These data services include those provided through LexisNexis Risk Solutions and the Accuity Asset Verification Solution. LexisNexis Risk Solutions can provide access to public, proprietary, and third-party data—such as data on an individual’s name, current address, and criminal history information—as well as data analytics as part of a data service. The Accuity Asset Verification Solution allows federal agencies to obtain information from the U.S. banking community to verify applicants’ financial assets as part of program eligibility determinations, such as through SSA’s Access to Financial Institutions initiative. Equifax Inc. is a public company that provides data services that include consumer and commercial information as well as workforce information. For example, Equifax provides automated verification of employment and income to both the public and private sectors through its proprietary The Work Number® database. According to Equifax officials, Equifax performed 74 million employment verifications through The Work Number® in 2015. In addition to The Work Number, Equifax provides its eIDVerifier product to the Internal Revenue Service (IRS), which IRS uses to support the authentication of taxpayers in a call center environment as part of its Taxpayer Protection Program. NAPHSIS is a nonprofit membership organization representing the 57 vital records jurisdictions that collect, process, and issue vital records in the United States. Vital records jurisdictions review, edit, process, and officially register births and deaths based on information submitted to them by various parties. The jurisdictions are then responsible for maintaining registries of such vital events and for issuing certified copies of birth and death records. NAPHSIS has worked to promote the adoption of electronic death registration systems and is developing an online tool that federal agencies and others may use to verify birth and death certificate information. Thomson Reuters Corporation is a public company and a multinational media and information firm that sells data services to its customers. Among these data services is the Thomson Reuters CLEAR data product, which allows users to search both public and proprietary records as part of research or investigations. According to representatives from Thomson Reuters, the CLEAR data service is used predominately in the law enforcement and inspector general communities for investigative purposes. D&B is a public company that provides both public and commercial data and data analytics services to its customers. The federal government has contracted with D&B since 1978 to provide Data Universal Numbering System (DUNS) identification numbers for all government contractors. A DUNS number is a unique nine-digit number that is assigned to every business entity in D&B’s global business database, which according to D&B contains more than 240 million records. In addition to the right to use DUNS numbers as a unique identification number, the General Services Administration (GSA) also contracts with D&B to provide business information and related services on all existing and potential government contractors and awardees. This information is linked to the business entity through the DUNS number. The DUNS number and associated business information are owned and controlled by D&B, but licensed to the government to be used for selected federal award management purposes. Officials from SSA, the Department of Labor (DOL), the U.S. Department of Homeland Security (DHS), GSA, and IRS told us that using commercial data services can help their agencies to access proprietary private sector data that are not available from government sources and improve the efficiency of program integrity activities. Commercial bank account information from private financial institutions may not be available from government sources, and this proprietary private sector information may help a federal agency to identify improper payments. For example, as part of SSA’s Access to Financial Institutions initiative, SSA contracts with Accuity to use its Asset Verification Solution to electronically search for account ownership and balances at financial institutions, such as commercial bank accounts where Supplemental Security Income (SSI) program recipients have a direct deposit account. These searches can provide SSA with independent data on a recipient’s financial institution accounts when a new SSI claim is filed or when the agency periodically redetermines program eligibility for some SSI recipients. Similarly, in August 2012 DOL contracted with Accuity for a pilot project that explored how accessing data from commercial financial institutions, which are not available from a government source, could help detect and prevent overpayments in the Unemployment Insurance (UI) program. The pilot project tested whether obtaining financial transaction data—such as deposits that could represent wages from work—through a data match with commercial financial institutions would allow three states to more accurately determine whether UI claimants had returned to work and therefore may no longer have been eligible for UI benefits. The results of this pilot indicated a significant increase in the number of UI claimants detected with unreported income, translating into a more than $80 million increase in the amount of potential improper payments identified during the 15-month period of the pilot project. However, in January 2015, Accuity and its project partner informed DOL that it no longer wished to participate in the project, absent legislation compelling the financial institutions to do so. DOL officials we spoke with during our review indicated that they are currently exploring a new pilot to use wage data from another commercial data service provider to identify improper UI payment stemming from unreported income from work. Additionally, officials from DOL, DHS, and GSA as well as representatives of the commercial data service providers told us that, while some data sets they obtain are available from federal agencies, some federal agencies likely could not provide the level of data service they receive from commercial data service providers without making significant investments in various data service activities. These various data service activities include collecting, maintaining, and verifying data from both public and proprietary sources; providing IT infrastructure; providing data analytics services; and providing user-friendly interfaces and output, among other activities. Consequently, officials from these agencies speculated that relying on these commercial data service providers likely costs their agencies less than if they attempted to provide a similarly extensive data service using only agency resources. Using commercial data may also help realize efficiencies by freeing up agency staff to perform other mission-oriented work. For example, IRS officials told us that using commercial data service providers to provide web and phone-based services to help authenticate certain taxpayers’ identities allowed their staff to focus on other work rather than deal with large volumes of in-person requests for identity authentication. IRS’s Taxpayer Protection Program reviews suspicious returns flagged by IRS’s identity theft filters and requires taxpayers to confirm their identities before IRS issues a refund. To do this, IRS asks authentication questions about personal information that only the taxpayer should know, such as: “Who is your mortgage lender?” or “Which of the following is your previous address?” IRS’s Taxpayer Protection Program database includes data from LexisNexis and Equifax. If the individual’s identity cannot be authenticated, IRS removes the tax return from processing, an action designed to prevent the agency from issuing a fraudulent tax refund. The IRS officials we spoke with indicated that using these web and phone based services likely required fewer IRS resources than authenticating identities in person at an IRS office. Further, the IRS officials we spoke with as part of this review also stated that using commercial data services to provide web and phone-based services to authenticate taxpayers’ identities may reduce the burden on taxpayers who live far from an IRS office or are otherwise unable to visit an office in person. Factors agencies may consider in determining whether data from nongovernmental data services meet their information requirements for conducting program integrity activities include the accuracy of data; the currency and timeliness of data; the completeness of data; and technical aspects of using the data for these purposes, according to officials we spoke with. As mentioned, our work was based on a nonprobability sample of agencies and nongovernmental entities, and the information and perspectives that we obtained are not generalizable to other federal agencies and data service providers. Officials from DOL, SSA, and DHS told us that these federal agencies consider the accuracy of data and related laws and policies when determining whether commercial data meet their information requirements for conducting program integrity activities. For example, DOL officials noted that individuals who are legitimately eligible for federal programs could be unfairly denied program benefits if agencies rely on inaccurate data to make a determination about their eligibility for a program. SSA officials stated that using less accurate data in making eligibility and payment determinations could also place undue burdens on applicants and payment recipients and increase the agency’s appeals workload, which could create inefficiencies in the agency’s program integrity efforts. At the same time, representatives of some commercial data service providers we spoke with stated that they work continuously to ensure the accuracy of their data, but also acknowledged that it is unreasonable to expect all data to be perfectly accurate. As part of our review, OMB staff described provisions of the Computer Matching and Privacy Protection Act of 1988 (“Computer Matching Act”) designed to mitigate the risk of agencies using inaccurate data in conducting program integrity activities. Specifically, OMB staff noted that the Computer Matching Act generally requires that agencies independently verify information produced through data matching and provides due process rights to individuals whose benefits may be affected by the data obtained through computer matching activities. OMB staff emphasized that agencies must consider relevant provisions of the Computer Matching Act when using commercial data to conduct program integrity activities. Additionally, DHS and DOL officials cited agency policies designed to ensure that officials verify data obtained from commercial data sources before making final program determinations. For example, officials from DHS’s United States Citizenship and Immigration Services provided us with a document of their standard operating procedure that requires officers investigating immigration benefit fraud—such as fraud committed to obtain a visa—to provide adjudicators with original source documents rather than summarizing information contained in commercial databases. These DHS officials stated that they use information from commercial data sources such as LexisNexis and Thomson Reuters CLEAR as “leads” to original or primary sources rather than as the basis for making final program determinations. Similarly, DOL officials told us that they issued an advisory to the state workforce agencies that administer UI payments citing the need to independently verify information received through various analytic techniques before suspending, terminating, reducing, or making a final denial of UI benefits. Officials from DHS, DOL, and SSA told us these federal agencies consider how the currency and timeliness of data obtained through commercial data services meet their information requirements for conducting program integrity activities. For example, DHS officials told us that outdated information, such as a name or address that may have been previously, but not currently, associated with an individual, could hinder the efficiency of tracking down that individual. Similarly, representatives from some commercial data service providers we spoke with described the need for data to be up-to-date, such as by continually updating information on whether entities are still in business or have changed addresses. These representatives described steps they take to do so, such as by electronically and manually verifying information in their databases on a regular basis. Moreover, the timeliness of data can be an important factor in identifying and preventing improper payments. For example, DOL officials told us that state UI agencies could likely improve their ability to identify and prevent improper UI payments to claimants who return to work by obtaining wage data from Equifax’s Work Number system, which are generally more recent than quarterly wage data that UI agencies receive from employers. Specifically, the officials noted that state UI agencies currently rely on wage data from employers that are usually reported on a quarterly basis, while Equifax’s Work Number data can be obtained on a “real time” basis corresponding to the weekly, biweekly, or monthly pay period of the employer. Because a significant proportion of overpayments in the UI program occur because individuals return to work without notifying the state workforce agency that administers those benefits, obtaining these data may be an opportunity for UI agencies to improve their efforts to reduce UI improper payments, according to DOL officials. In April 2016, DOL officials told us that the agency is currently working with three states and Equifax to conduct a pilot project to examine the use of Equifax’s Work Number data to identify improper payments to UI recipients with disqualifying income from work. The DOL officials expect the pilot project to last for up to 4 months. Similarly, a provision of the Social Security Benefit Protection and Opportunity Enhancement Act of 2015, which goes into effect in November 2016, authorizes SSA to enter into data exchanges with payroll providers, such as Equifax’s Work Number system, to help prevent improper Disability Insurance and SSI payments to individuals with relevant work and income by helping SSA access timely information on wages and income. SSA’s preliminary cost estimates, which were prepared before the enactment of the legislation, suggest that the agency would realize savings by accessing and using wage data from commercial databases. However, the SSA officials we spoke with also stated that because the agency’s savings estimates were completed prior to actual implementation planning and before the Social Security Benefit Protection and Opportunity Enhancement Act became law, they expect the estimates to change as the agency implements provisions of the Act. Officials from SSA told us that they also consider the completeness of data from various governmental and commercial sources when determining whether data meet their information requirements for conducting program integrity activities. For example, death data can help agencies to prevent improper payments to deceased individuals, but the completeness of death data varies depending on the source. For example, SSA receives death reports from multiple sources, including state vital records agencies, family members, and other federal agencies in order to administer its programs. During our review, SSA officials told us that obtaining death data helps them to prevent around $50 million in improper payments each month. In accordance with the Social Security Act, SSA shares its full set of death data with certain agencies that pay federally funded benefits, for the purpose of ensuring the accuracy of those payments. For other users of SSA’s death data, including commercial data service providers, SSA extracts a subset of records into a file called the Death Master File (DMF), which, to comply with federal law, excludes state-reported death data. Agencies and commercial data service providers can purchase a DMF subscription through the Department of Commerce’s National Technical Information Service, which reimburses SSA for the cost of providing the file. However, the death information included in the publicly available DMF is less complete than the death information contained in SSA’s full death file because the publicly available DMF does not include state-reported death information. Further, during our review, SSA officials said they expect the percentage of state-reported deaths as a proportion of all of SSA’s death records to increase, which over time will lead to a smaller portion of all of SSA’s death records being included on the DMF. In that scenario, federal, state, or local agencies that use death data from the DMF will receive increasingly less complete and therefore less useful information than agencies that use death data from SSA’s full death file. While SSA has a role collecting and distributing death records as described above, SSA officials told us that the most important step in ensuring the quality and completeness of their death records would be for all vital records agencies to use electronic death registration systems. According to SSA officials, electronic death registration systems automate the death reporting process and allow vital records agencies to verify the name and Social Security Number of a deceased individual before they issue the death certificate or transmit a report of death to SSA. As of November 2015, 46 of 57 vital records agencies have implemented electronic death registration systems, according to NAPHSIS. NAPHSIS and SSA officials told us that they are continuing efforts to expand electronic death record reporting, and NAPHSIS officials cited the need for additional funding to facilitate the adoption and use of electronic data registration systems by all 57 jurisdictions. Additionally, NAPHSIS is developing an online tool that may provide agencies the ability to access death information maintained by vital statistics agencies, which could provide federal agencies access to a more complete set of death records than SSA’s full death file. However, at the time of this report, this tool is in a preliminary testing phase, and no federal agencies currently access the system. Officials from IRS, SSA, and GSA told us that federal agencies also consider technical aspects of commercial data services when determining whether commercial data meet their information requirements for conducting program integrity activities, such as restrictions on batch versus manual data processing. For example, IRS officials told us that large-scale, batch processing can be more efficient than manual, case- by-case processing, which would be unfeasible for analyses involving large populations or large amounts of data from various sources. The IRS officials noted that the agency determined that some potential data service providers could not meet their requirements because the potential providers’ processing capability was limited to manual or case-by-case processing. Similarly, SSA officials stated that data providers may place restrictions on whether agencies can access and process data on a manual, case-by-case basis or in batches, and these restrictions can affect the efficiency of their program integrity activities. For example, SSA officials noted that batch processing could save operational and administrative resources compared to case-by-case or manual database searches for its SSI program. The SSA officials stated that their current process involves staff requesting data on a single case basis, reviewing the response, and transcribing information into the agency’s case processing system. According to SSA officials, batch processes would afford technicians more time to focus on other critical agency workloads. Additionally, SSA officials stated that routine batch processes would potentially allow the agency to detect unreported income and resources before an improper payment is made, which could save administrative resources on the back end related to processing improper payments. Commercial data service providers may also place restrictions on how agencies can use data. For example, D&B’s DUNS—a proprietary, unique identifier for businesses—helps the federal government track entities across various data systems, but D&B has placed restrictions on how GSA can use the data. During our review, officials from GSA noted that using D&B’s proprietary DUNS number allowed the federal government to track contracts, grants, awards, and other business with that entity across various agencies and data systems, which can help identify “bad actors” that are barred from holding federal contracts. However, due to the proprietary nature of DUNS numbers, D&B has placed restrictions on how GSA can use them. These restrictions limit the purposes for which the government can use the data and hampers the ability to switch to a new numbering system. The federal government is currently exploring alternatives to the DUNS, but GSA officials noted that the costs of switching to a new unique numbering system across all government information systems were unknown. Representatives of one data service provider told us that their customers may also consider issues related to the infrastructure needed to conduct large-scale, data-intensive program integrity activities when determining whether commercial data meet its information requirements. Specifically, NAPHSIS representatives stated that, at the conclusion of their current testing phase, NAPHSIS may need to expand its infrastructure to accommodate increased data traffic for its online tool that federal agencies and others may use to verify death information. The NAPHSIS officials we spoke with stated that they were partnering with LexisNexis Risk Solutions on this project, which required significant investments from both parties. According to NAPHSIS officials, NAPHSIS is also in the process of upgrading software and hardware at some vital statistics agencies to support its online tool. As mentioned, this tool is in a preliminary testing phase and no federal agencies currently access the system. Additionally, agency officials may consider the design of software associated with a data service when determining whether commercial data meet their information requirements for conducting program integrity activities, as illustrated by an example from prior GAO work. In June 2015, we reported that we examined practice location addresses of providers and suppliers listed in Centers for Medicare & Medicaid Services (CMS) data and found that an estimated 23,400 (22 percent) of 105,234 were potentially ineligible. Potentially ineligible addresses include those that are associated with a certain type of a Commercial Mail Receiving Agency (CMRA) or vacant or invalid addresses. To do this, we used a software package that provides more detailed information on provider practice location addresses than that used by CMS. To help improve the Medicare provider and supplier enrollment-screening procedures, we recommended in June 2015 that that the Acting Administrator of CMS modify the CMS software integrated into CMS data to include specific flags to help identify potentially questionable practice location addresses, such as CMRA, vacant, and invalid addresses. In its comments on the June 2015 report, the Department of Health and Human Services (HHS) agreed with our recommendation and noted plans to configure the provider and supplier address-verification system in CMS data to flag CMRAs, vacancies, invalid addresses, and other potentially questionable practice locations. Because HHS has not yet initiated specific actions to implement our recommendations, it is too early for us to determine whether the actions the agency outlined in its official comments on a draft of that report would fully address the intent of the recommendations. However, if effectively implemented, the actions could prevent ineligible providers from enrolling into the Medicare program and obtaining Medicare funds, thus potentially reducing the amount of improper payments. We plan to continue to monitor the agency’s efforts in this area. We are not making recommendations in this report. We provided a draft of this report to OMB, GSA, DOL, IRS, SSA, DHS, and Fiscal Service for review and comment. OMB provided comments, which are reproduced in appendix I, that describe ongoing efforts to use data analytics for federal program integrity efforts. GSA and DOL provided technical comments, which we incorporated as appropriate. IRS, SSA, DHS, and Fiscal Service had no comments on this report. We are sending copies of this report to the Commissioner of the Bureau of the Fiscal Service, the Administrator of GSA, the Secretary of Homeland Security, the Commissioner of Internal Revenue, the Secretary of Labor, the Director of OMB, the Commissioner of Social Security, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-6722 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II. In addition to the contact named above Jennifer Cook, Marcus Corbin, Gabrielle Fagan (Assistant Director), Colin Fallon, Michele Fejfar, Barbara Lewis, Maria McMullen, James Murphy, Jonathon Oldmixon, and Anna Maria Ortiz made key contributions to this report. | Federal agencies may use commercial data services in conducting program integrity activities designed to identify fraud and improper payments, which pose a significant risk to the integrity of federal programs. For example, federal agencies may obtain commercial data—subject to applicable laws and protections—that identifies individuals' deaths, income and assets, or other information that may help the agency determine whether individuals or entities are eligible for a government program or benefit. GAO was asked to review issues surrounding the use of commercial data in conducting program integrity activities. This report identifies and describes the views of selected agency officials and commercial data service providers regarding (1) reasons selected agencies have used commercial data services in conducting program integrity activities; and (2) factors agencies may consider in determining whether commercial data services meet their information requirements for conducting program integrity activities. To do this, GAO reviewed documents and conducted interviews with federal agency officials and representatives of commercial data service providers selected as part of a nonprobability sample of 12 entities selected to represent a range of program integrity activities and commercial data services. The information and perspectives that GAO obtained are not generalizable to other agencies and providers. GAO is making no recommendations in this report, which incorporates various technical comments from the agencies. Officials from selected federal agencies told GAO that using commercial data services can help their agencies improve the efficiency of program integrity activities. For example, Internal Revenue Service (IRS) officials told GAO that using commercial data service providers to provide web and phone-based services to help authenticate certain taxpayer's identities likely allowed their staff to focus on other work rather than deal with large volumes of in-person requests for identity authentication. Commercial data services can also provide federal agencies access to private sector data, such as bank deposit information, that is not available from federal government sources. This financial information may help agencies to determine whether individuals have income from work or assets that indicate they are not eligible for certain programs, such as disability programs. Applicable laws generally require that agencies independently verify instances of matching data identified by computer matching programs before taking action and provide minimum notice to affected individuals. The figure below shows examples of the types of data that agencies may obtain from data service providers. Federal agencies may consider various factors in determining whether data from commercial data services meet their information requirements for conducting program integrity activities. These factors include the accuracy of data; the currency and timeliness of data; the completeness of data; and technical aspects of using the data for these purposes, according to officials from agencies in GAO's nonprobability sample. For example, Department of Labor (DOL) officials told GAO that state Unemployment Insurance (UI) agencies could likely improve their ability to identify and prevent improper UI payments to claimants who return to work by obtaining commercially available wage data from a data service provider that are generally more recent than quarterly wage data that UI agencies receive directly from employers. DOL officials also told GAO that the agency is currently working with three states and a provider to conduct a pilot project to examine the use of the provider's payroll data to identify improper payments to UI recipients with disqualifying income from work. DOL expects the pilot to last up to 4 months. |
Networks of related entities are a feature of modern business organizations. Many legitimate reasons explain why a business owner (or owners) may choose to use a network of related entities to conduct operations. While this list is not exhaustive, a network may be used legitimately to: isolate one line of business from the potential liabilities or risk of business loss of another; isolate regulated industries into separate entities to manage ownership, reporting, or licensing requirements; manage a business’s financing arrangements; separate ventures based in different states and countries; or separate activities for which ownership is restricted from those for which ownership is not restricted (such as when subchapter S corporation ownership restrictions apply). A variety of entities can be linked in networks and report taxes in different ways. Table 1 briefly describes some of the entities that will be discussed in this report. Certain entities file tax returns with IRS to report their taxes owed, such as subchapter C corporations (C corporations), which file Form 1120, U.S. Corporation Income Tax Return. Other entities may operate as pass-throughs. A pass-through entity generally has the legal right to impute or pass net income or losses through to its partners, shareholders, and beneficiaries untaxed. Pass-through entities are required to provide each partner, shareholder, or beneficiary with a Schedule K-1 stating the individual share of net income or loss to be reported. The entities also provide this information to IRS. The partners, shareholders, or beneficiaries are responsible for reporting this income or loss on their individual income tax returns and paying any tax. Entities that may serve as pass-throughs include subchapter S corporations (S corporations) and partnerships. The various types of entities that make up networks can be linked in multiple ways. Table 2 summarizes how a select set of individuals, various forms of businesses, and trusts may own or control other entities. The ownership, beneficiary status, or family connections within a network may not be initially apparent. Individual entities connected to an owner may in turn own other entities or be the beneficiaries of other trusts, thus creating the potential for a large, complex network. For illustrative purposes, appendix II includes diagrams showing how certain entities can be linked and how the income generated by these entities can pass around a network. When taxpayers use multiple pass-through entities, they create what IRS calls a “multitiered” network. In IRS’s definition, a multitiered network exists when a pass-through entity is itself a partner, shareholder, or beneficiary of another pass-through entity, leading to a situation where income is allocated from one pass-through entity to another. Figure 1, adapted from an IRS study, is an illustration of a hypothetical, complex network. In IRS’s example, the allocation from the observed partnership on the far left side of the diagram crosses nine pass-through entities along the red line before it reaches one of its ultimate owners on the right. Owners of a network could use transactions among entities in the network to create tax evasion schemes in which taxpayers improperly conceal property ownership or income by diverting assets or income from one entity to another; improperly inflate an asset’s basis to reduce capital gains taxes by selling the asset within the network; improperly generate losses or tax deductions, which are passed through to other entities that use the losses or tax deductions to offset gains; inappropriately shift losses, deductions, or credits from entities not subject to U.S. federal income tax, such as foreign entities, to those who are; or inappropriately shift income from those entities subject to U.S. federal income tax to those entities that are not. One example of a network tax evasion scheme is what IRS calls an installment sale bogus optional basis transaction (iBOB). In an iBOB scheme, taxpayers use commonly owned or controlled entities to artificially adjust the basis of an asset and evade capital gains taxes. The scheme can involve many layers of ownership, can take place over many tax years, and can be shrouded by legitimate transactions. IRS understands how the scheme works and has alerted examiners to its existence. IRS’s Web site also describes a similar abusive transaction. In cooperation with IRS, we developed a video explaining how an iBOB works and the challenges IRS faces in ensuring those who are engaged in such schemes are caught. In our simplified example, a hypothetical taxpayer, Mr. Jones, sells a hotel that has appreciated in value resulting in capital gains that are taxable income. Mr. Jones uses an iBOB to evade paying capital gains taxes. Successful tax evasion schemes exacerbate the tax gap, which is the difference between the tax amount—including individual income, corporate income, employment, estate, and excise taxes—that should have been paid voluntarily and on time and the amount that was actually paid for a specific year. IRS most recently estimated that the tax gap was a net of $290 billion in 2001. The tax-gap estimate relies on National Research Program (NRP) data. NRP compiled data on taxpayers’ noncompliance by randomly sampling from the population of individual filers, intensively reviewing tax returns in the sample to determine the extent of noncompliance, and using the sample results to produce noncompliance estimates for the entire population. IRS has four operating divisions—Wage and Investment (W&I), Small Business/Self-Employed (SB/SE), Large and Mid-Size Business (LMSB), and Tax Exempt and Government Entities (TE/GE). Each division has its own compliance programs, such as conducting examinations. W&I generally addresses individual taxpayers filing Form 1040; SB/SE addresses small businesses with assets of less than $10 million and self- employed taxpayers; LMSB addresses C corporations, S corporations, and partnerships with assets of $10 million or more; and TE/GE addresses pension plans, exempt organizations, and government entities. IRS’s Criminal Investigation (CI) unit also investigates cases of fraud that may involve networks. CI has investigative jurisdiction over tax, money laundering, and bank secrecy laws. The Office of Tax Shelter Analysis (OTSA), the Lead Development Center (LDC), and the Servicewide Abusive Transaction Executive Steering Committee (SAT ESC) are three groups within IRS with responsibilities that may touch on network tax evasion. OTSA is an LMSB group that collects and analyzes information, some of which is reported by taxpayers about certain tax shelters. LDC in SB/SE acts as the clearinghouse to receive, identify, and develop leads on individuals and entities that promote and/or aid in the promotion of abusive tax avoidance transaction schemes. IRS has charged SAT ESC with coordinating information about tax shelter schemes—including those that might involve networks—that individual operating divisions identify. IRS does not have an estimate of the total amount of revenue lost through network tax evasion because of cost and complexity constraints. IRS faces challenges in developing an NRP-type study to estimate the amount of network tax evasion because it does not know the population of networks. Therefore, IRS does not know what portion of the $290 billion net tax gap is network related. Nor does IRS routinely track the amount of network tax evasion it identifies through its enforcement programs. As will be discussed in more detail below, IRS’s enforcement programs have traditionally focused on single entities as the unit of analysis, such as an individual or corporation, rather than networks. While IRS does not know the population of networks, it has estimated the size of a subset of that population. Based on a study of networks with two or more pass-through entities, IRS estimated that in tax year 2008, more than 1 million of these networks existed, of which about 2 percent had 11 or more different entities’ returns. Although IRS lacks an estimate of network tax evasion, IRS officials said they have evidence of a problem because of their experiences with abusive tax shelters. Some of the tax schemes that IRS considers impermissible necessarily involve, or could involve, networks. IRS maintains a list of tax avoidance transactions on its Web site; any taxpayer engaging in such a listed transaction, or a transaction substantially similar to a listed transaction, must disclose to IRS certain information about that transaction. IRS’s list of tax avoidance transactions includes examples of abusive tax shelters involving networks. The iBOB scheme previously described is an example of network tax evasion involving a tax shelter. IRS officials have cited trends that they said indicate an increased risk of network tax evasion. These officials noted the increased use of pass- through entities. This suggested to them that the use of networks is growing, that networks are becoming increasingly complex, and that the risk of tax evasion is growing. Figure 2 illustrates the extent to which partnership and S corporation tax return filings have increased from creased from calendar years 1998 to 2008. calendar years 1998 to 2008. Schedule K-1 filings from pass-through entities also have increased. From 2008 to 2009, submission of Schedules K-1 increased from 19.8 million to 21.2 million for partnerships filing Form 1065, U.S. Return of Partnership Income. Meanwhile, submission of Schedule K-1 forms for S corporations filing Form 1120S, U.S. Income Tax Return for an S Corporation, stayed about the same at about 7 million from 2008 to 2009. IRS examiners we spoke with who have experience in network-related examinations said that, anecdotally, they have noticed an increase in the use of disregarded entities in a network, which they said is another risk factor for network tax evasion. A disregarded entity can be part of a network, but its connection to a taxpayer may not be clear in the tax information IRS uses to detect network tax evasion. The total number of disregarded entities is unknown, but IRS estimated that there were at least 443,000 disregarded entities during a period between July 2007 and August 2008. IRS’s programs for addressing network-related tax evasion include its examinations (or audits) in which IRS examiners analyze taxpayers’ records to ensure that the proper tax was reported. IRS’s examination practices have made contributions to tax enforcement. In fiscal year 2009, IRS examined 1.6 million tax returns, identifying over $49 billion in additional recommended tax. IRS traditionally has conducted examinations on a return-by-return basis, beginning with a single tax return in a particular tax year as the unit of analysis and examining other tax returns connected with the original return, if necessary, in what can be called a bottom-up approach. The examination selection process generally involves identifying a pool of high-risk returns and from that group, determining which returns to examine. CI follows a similar approach. It starts with a taxpayer suspected of criminal violations of the Internal Revenue Code or related financial crimes and then branches out to related entities. When investigators want to find connections between the suspected taxpayer and other entities, they use Reveal, a network visualization tool. Reveal draws on data from multiple sources that CI uses to analyze intelligence and to detect patterns of criminal and terrorist activities. Data that Reveal uses include certain cash transactions, tax information, and counterterrorism information. Its outputs include a visual representation containing names, Social Security numbers, addresses, and other personal information of individuals suspected of financial crime or terrorist activity. Because of CI’s authority to access sensitive information, only in rare instances do non-CI staff use Reveal, according to CI data security staff. IRS’s traditional enforcement efforts are not designed to identify networks, select those networks that appear to be involved in tax evasion, or follow up with in-depth examination or investigation. Specifically, IRS’s traditional efforts are challenged in dealing with network tax evasion by the combined effects of a number of factors such as the following. A bottom up approach focusing on a single taxpayer. As with the businesses in the iBOB scheme previously described, an entity involved in a network may not raise suspicions when examined in isolation. The tax evasion may only be apparent in how it relates to other entities in the network. Internal divisional boundaries. A single network may contain many types of entities that cross the responsibilities of IRS’s operating divisions (i.e., W&I, SB/SE, LMSB, TE/GE). While IRS has the SAT ESC in place for overseeing abusive transaction issues, examiners on any particular audit may not have the expertise or authority to pursue the network connections of the taxpayer under review. For example, SB/SE examiners auditing a small partnership may not have the time, expertise, or authority to recognize or pursue a related large S corporation that is a member of the partnership. Single tax year examinations. IRS examiners typically begin examinations by looking at tax return data for a single tax year, limiting their opportunity to notice multiyear schemes. The iBOB is an example of a scheme in which the transactions creating the tax evasion can occur in multiple tax years. Competing time and resource priorities. IRS generally aims to conduct examinations in a manner that maximizes the amount of tax noncompliance found while minimizing an examiner’s time commitment. Network examinations may be highly time-consuming for an examiner and the outcome is less predictable. Examiners’ ability to follow network connections also is restricted in another way. The Taxpayer Browsing Protection Act prohibits federal employees from willfully inspecting taxpayer information without authorization. To comply with the law, IRS restricts the access examiners have to certain tax information. According to IRS, the law helps protect the confidentiality of taxpayer information, but examiners told us it also may restrict an examiner’s flexibility to explore leads, without manager approval, across different tax forms that could reveal network abuse. IRS has been creating specific programs and tools that address network tax evasion more directly than its traditional examination approach. Under GHWI, IRS identifies certain high-wealth individuals and then examines each individual’s network. According to the Commissioner of Internal Revenue, the intent is to take a unified look at the entire complex web of business entities controlled by a high-wealth individual to assess the tax compliance of the network, rather than of the separate entities individually. IRS initiated GHWI in 2009. Although it resides in LMSB, IRS plans for GHWI to include staff with expertise that crosses divisional boundaries. For example, GHWI examiners might address small partnerships included in a network, even though small partnerships otherwise would be under the purview of SB/SE. As a result, GHWI is expected to directly examine tax issues that otherwise might have been missed. SB/SE launched the EOT project in January 2010 to gather data on the owners and locations of new businesses through employer identification number (EIN) applications. Primarily, IRS officials said they are interested in identifying what they refer to as the responsible party, which is the true beneficial owner of the business in this context. As of January 2010, the EIN application form requests additional information from business owners, such as the Social Security number of the responsible party and location of incorporation, which IRS previously did not request. The goal of the project is to link the new data to existing information in IRS’s databases for identifying related businesses or a network of businesses. As the operating division responsible for the EIN process, W&I will implement the program once design is complete, which is tentatively scheduled for January 2012. The network tool that is furthest along in development and most widely used at IRS is yK-1. yK-1 is a network visualization tool that is now being used by some IRS staff in doing examinations and in reviewing networks. Users enter a taxpayer identification number (TIN) into the yK-1 software, which produces a picture showing how that TIN is connected to other entities through information filed on Schedule K-1. Figure 3 shows an example of yK-1 output. In this example, the numbers along the arrows represent the flow of money among the three different types of entities. yK-1 diagrams can help examiners and other yK-1 users determine a specific entity’s sources and amounts of income and whether other entities in the taxpayer’s network need further examination. Examiners and users can then access other tax information about the entities in the network from IRS databases as well as non-IRS information from sources such as Accurint, a financial information database, and the Internet. Programmers are continuing to work on expanding yK-1’s capabilities, such as adding estate and gift tax data and data on international taxpayers. IRS’s Research, Analysis and Statistics group is developing another tool related to yK-1 called GraphQuery. GraphQuery is a pattern-matching tool being designed to facilitate top-down identification and selection of those networks that have the highest risk for noncompliance. In this top-down approach, users would enter into GraphQuery a specified pattern, such as the structure of a known tax evasion scheme; the program would search for other networks showing the same pattern and list the TINs of the entities in those networks. IRS’s Office of Performance Evaluation and Risk Analysis has demonstrated a program called NetReveal, which can build a diagram of related entities or individuals using a wider variety of data, including nontax return data, than are used by yK-1. NetReveal, which is unrelated to CI’s Reveal program, remains under consideration by IRS and has not yet been made available to the operating divisions for tax compliance purposes. Judged according to 14 network analysis criteria we developed, IRS’s work on creating new network programs and tools already shows promise. We used interviews with academic experts and users of network analysis programs at other federal agencies to develop the 14 criteria, which are listed in table 3, for assessing network analysis programs and tools. Appendix I discusses what the criteria entail and how we developed them. While the criteria describe good management practices that could apply to a wide variety of programs, the experts we spoke with cited these criteria as directly relevant to network analysis. In particular, the criteria highlight the crosscutting nature of network-related problems. The experts we spoke with also noted that network problems, such as network tax evasion, include by definition multiple entities that could cut across databases and an oversight agency’s organizational units. As a logical consequence, they emphasized using criteria that call for an agencywide strategy, access to a wide range of data, and good collaboration across an agency’s organizational structures. For IRS, criteria focused on the crosscutting nature of network analysis are directly relevant to the problem of network tax evasion. A variety of entities could comprise a network, which could be under the purview of different IRS divisions. Similarly, data on the tax accounts for the different entities could be in different IRS databases. Our assessment of IRS’s new programs and tools against the criteria is shown in table 3. The assessment is of IRS’s progress to date—the programs and tools are still under development. The assessment also indicates areas where IRS’s efforts to date do not satisfy the criteria. These areas present opportunities to make further progress. As table 3 indicates, IRS’s efforts to focus more directly on network tax evasion, while still under development, are consistent with our criteria for judging network analyses but do not fully satisfy them. The efforts are supported by upper management, offer new analytical approaches that more directly address network tax evasion, and attempt to cut across IRS’s divisional boundaries and databases. As a result, these efforts show promise at being able to detect and pursue network tax evasion more effectively than IRS’s traditional enforcement programs. However, table 3 also shows where opportunities exist to provide more overall direction to IRS’s efforts and perhaps hasten the development of specific programs and tools. For example, the table notes the lack of agencywide strategy and goals for IRS’s various network efforts that are spread throughout the agency. Without agencywide strategy or goals to coordinate and prioritize these efforts, two risks exist. First, IRS could make redundant investments; second, IRS could fail to concentrate investments on the programs and tools with the greatest potential. IRS may need to take an incremental approach to managing these risks because of the uncertainties. As already discussed, the population of networks is not known, networks can be complex, and IRS does not know which programs and tools will be most effective. Further, the costs could be significant. IRS’s current organizational structure, work processes, and data systems do not support using a network as a unit of analysis and adjusting them to do so could disrupt other important priorities and programs. In light of this uncertainty about potential benefits and the cost, IRS will need to be careful in reallocating resources from other compliance programs to its new network efforts. As IRS gathers more information, management will be better positioned to more fully develop its strategy. IRS also faces challenges in responding to the criteria for programming and data. As noted in table 3, adding new data, updating existing data, and making existing data more readily available in electronic form all could enhance IRS’s capabilities to identify and pursue network tax evasion. Similarly, IRS could potentially benefit from more complete consideration of the potential relevance of the array of analytical techniques developed in the research literature and available in existing software applications. However, as also noted above, such efforts would have costs. This reinforces the need for a strategy that would prioritize investments in better data and analytical capabilities. IRS has not assessed the impact and effectiveness of its new network analysis tools, as described in table 3. For example, the benefits of using yK-1 relative to the additional time it takes examiners to use it have not been studied, but anecdotal evidence from users and management indicate yK-1 is a useful tool. Effectiveness assessments have costs which can be managed by judgments about the depth of the assessment needed. However, without effectiveness assessments, IRS managers are left without information that could help with the development of a strategy and with decisions about prioritizing investments in better data. Table 3 stresses the importance of regular communications and training among all types of staff involved in identifying, analyzing, and pursuing network evasion schemes. Without these, auditors could be missing information they need and network schemes could go undetected. IRS officials said that the direct costs for these actions tend to be minor, but that they must be mindful of how these actions might affect other priorities. For example, they said the initial 2-hour training for yK-1 imposes minor costs. However, the officials also said that learning yK-1 requires accessing it enough to appreciate all of its capabilities. IRS’s network compliance efforts have the potential to address a significant part of the tax gap. However, IRS does not know the extent of this compliance problem or how effective its new programs and tools will be. Nor does IRS have a strategic approach to coordinate these network efforts across the agency. IRS needs to walk a middle course between doing too much too soon versus doing too little too slowly. If it does too much, IRS risks taking resources from other priorities without assurance that the investment in the network efforts will reduce network tax evasion. If it does too little, IRS runs the risk of not learning more about networks and how to detect their tax evasion schemes. To successfully balance these trade-offs, IRS would benefit from having a more strategic approach to coordinate and focus its various network efforts across the agency. As IRS learns more, that strategic approach would work toward developing a set of goals and measures to guide future efforts and consider ways to assess the impacts of the various programs and tools that are to be developed. Effectiveness assessments have costs, but without any assessments, managers lack valuable information. With such information, IRS would have a better sense of the pace at which it should invest its resources into expanding the network analysis program, including adding the analytical tools, data, and staff expertise that would be needed to address the specific compliance issues that IRS would be discovering. IRS’s efforts to develop network programs and tools would also be enhanced by ensuring that staff understand the benefits of using the tools and are provided with a mechanism to provide feedback on the tools’ and programs’ effectiveness. We recommend that the Commissioner of Internal Revenue take the following three actions. Establish an IRS-wide strategy with goals, which may need to be developed incrementally, to coordinate and plan ongoing and future efforts to identify and pursue network tax evasion. The strategy should include: assessing the effectiveness of network analysis tools, such as yK-1; determining the feasibility and benefits of increasing access to existing IRS data, such as scanning additional data from Schedule K-1, or collecting additional data for use in its network analysis efforts; putting the development of analytical techniques and tools that focus on networks as the unit of analysis, such as GraphQuery, on a specific time schedule; and deciding how network efforts will be managed across IRS, such as whether a core program team or management group is needed. Ensure that staff members who will be using current and additional network tools fully understand the tools’ capabilities. Establish formal mechanisms for front-line users to interact directly with tool programmers and program analysts to ensure future network analysis tools, such as GraphQuery, are easy to use and help achieve goals. In a September 8, 2010, letter responding to a draft of this report (app. IV), IRS’s Deputy Commissioner for Services and Enforcement provided comments on our findings and recommendations as well as information on additional agency efforts, changes, and studies to address network tax noncompliance. The letter also provided technical comments that we incorporated into our report as appropriate. The Deputy Commissioner said that IRS agreed with our draft on the challenges involving network tax compliance and the status of IRS’s network-related efforts. IRS also generally agreed with our recommendations to establish an IRS-wide strategy with goals, ensure that staff understand the capabilities of IRS’s network tools, and establish a more formal way for IRS staff to collaborate as new network tools are developed and implemented. In agreeing with our strategy recommendation, IRS’s response noted that it may be more effective for IRS to consciously and appropriately include network issues in broader strategic plans, rather than develop a separate strategy for networks. We agree. Our recommendation is that IRS develops a strategy. We leave IRS with the discretion on how to articulate the strategy and point out that it may need to be developed incrementally. As agreed with your offices, unless you publicly release the contents earlier, we plan no further distribution of this report until 30 days from its date. At that time, we will send copies to interested congressional committees, the Secretary of the Treasury, the Commissioner of Internal Revenue, and other interested parties. The report will also be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please 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. GAO staff who made major contributions to this report are listed in appendix V. The objectives of this report were to (1) describe what the Internal Revenue Service (IRS) knows about network tax evasion and how well IRS’s traditional enforcement efforts address network tax evasion and (2) assess IRS’s progress in addressing network tax evasion and opportunities, if any, in making further progress. To describe what IRS knows about network tax evasion and how well the traditional enforcement efforts the agency has in place address network tax evasion, we reviewed IRS statistics, policy manuals, and planning documents, including strategic plans. We also interviewed relevant IRS officials and staff. We developed a video to highlight one type of network tax evasion. To develop this video describing the installment sale bogus optional basis adjustment (iBOB), we reviewed IRS technical information on iBOB schemes, out of which we developed a simplified, hypothetical example. IRS suggested the iBOB as a scheme that would make an appropriate example. IRS management and technical staff reviewed the video throughout its development, and we incorporated their technical comments where appropriate. Because no existing criteria that we could find directly applied to reviewing the progress of IRS’s network analysis programs, we developed our own. We conducted two groups of interviews with network analysis users and experts to develop our criteria for network analysis program development and implementation. The first group of interviews was with academic researchers considered to be experts whom we identified through detailed literature reviews and recommendations from other experts. The second group of interviews was with federal agencies that use network analysis tools. We also interviewed IRS auditors about their work. To identify relevant academic experts, we reviewed the research literature using network analysis and related methods. We then created a literature search matrix and entered all studies obtained through the search that involved some quantitative/automated form of network analysis and an empirical application to a substantive area that had potentially direct applications to our review. We selected a subset of these studies for a more detailed review and used professional judgment to focus on studies of most immediate relevance. The literature review was the primary tool used for selecting researchers and experts for further follow up, which was ultimately based on ensuring a balance of experts with expertise across the entire array of substantive research topics and methodological approaches that we identified in our search and on determining that individual experts’ research agendas were both broad and deep. We conducted semistructured interviews with these experts, during which time we asked for recommendations of other network analysis and data mining experts. Often these recommendations were for researchers or experts we had already identified. Not every expert we identified was available to speak with us. The experts we spoke with included Wayne E. Baker, University of Michigan; Stephen P. Borgatti, University of Kentucky; Kathleen M. Carley, Carnegie Mellon University; Sean Everton, Naval Postgraduate School; Mark Granovetter, Stanford University; David Jensen, University of Massachusetts Amherst; Mark Mizruchi, University of Michigan; Carlo Morselli, University of Montreal; Daniel M. Schwartz, Criminal Intelligence Service Ontario; Duncan Watts, Yahoo! Research; and Jennifer Xu, Bentley University. We used our interviews with these experts to aid only in developing our criteria; they did not otherwise contribute to the content of the report. To identify federal agencies to interview, we first reviewed academic literature and reports on government agencies that conduct network analyses, including our own reports. Through this review, we identified Customs and Border Patrol (CBP); Federal Bureau of Investigation; Financial Crimes Enforcement Network; Immigration and Customs Enforcement; Risk Management Agency at the United States Department of Agriculture; and the Securities and Exchange Commission. We also identified the Financial Industry Regulatory Authority (FINRA), which is not a federal agency but has an oversight and enforcement component similar to that of federal financial regulators. We conducted semistructured interviews with relevant program staff that use network analysis tools at these agencies and FINRA. During each interview, we asked about what works well in their network analysis program; what about their network analysis program needs improvement; what tools they feel could improve their program; what are best practices for developing a network analysis program; and what other agencies use network analysis programs. Of those other agencies that were mentioned that had network analysis programs, we chose not to meet with the Central Intelligence Agency and National Security Agency due to time constraints and data sensitivity issues. The Drug Enforcement Agency (DEA) was also recommended to us to speak with; while we did not directly speak with DEA due to time constraints, we were able to speak with a DEA liaison at CBP who briefly described DEA’s network analysis program. From these two rounds of interviews, we distilled the common themes in those responses to establish the criteria. We first read through all the interviews, recording potential criteria. We then systematically reviewed the entire set of interviews to identify all that contained our initial criteria; this resulted in the rephrasing or elimination of some of these criteria, as well as the addition of a number of new ones. The themes that emerged from the interviews fell into the following categories: strategy, management support, program evaluation, data management, staffing, collaboration, methodology, and other. We determined that for our review of IRS, it would not be appropriate to set criteria for the exact methodology the agency should use in its network analysis program, or particular software packages. Therefore, we eliminated any particular research or methodological approaches and techniques from our final criteria list. We also eliminated ideas where there was a clear division of opinion among the experts we interviewed. For example, experts and users did not agree on the benefits of including narrative data in network analysis programs. We presented the criteria to IRS for its feedback. The final 14 criteria were categorized by theme: overall strategy; programming and data; and collaboration. The criteria were neither prioritized nor made to be specific to IRS. Each criterion was supported, at minimum, by five interviews; many were supported by eight or more interviews. The criteria with the fewest interviews for support generally pertain to organizational structure issues. The academic experts generally did not address these issues because they tend to use network analysis programs for research purposes compared to a federal agency’s use for enforcement purposes. In these instances, we also had support from prior GAO work. To assess IRS’s progress in identifying and addressing network tax noncompliance, we reviewed IRS documentation on its auditing procedures and interviewed officials involved with identifying and addressing noncompliance related to networks. We then compared the evidence we collected in these reviews and interviews with the criteria we had developed and identified specific instances where IRS has demonstrated progress towards meeting each of the criteria. We also identified opportunities for further progress in meeting the criteria. We determined for the purposes of this review that the data used were reliable. Because some of the efforts to address noncompliance were under development during the time of our review, we presented the assessment to IRS officials for their feedback and for related updates that might affect the assessment. Our review of key studies applying quantitative network analysis methods to areas of noncompliance or illicit activity (see app. III) focused on identifying analytical approaches that individuals developing network analysis systems may find useful. The criteria for selection of these studies were similar to those used in selecting experts. In particular we ensured that the studies taken as a whole group covered a broad set of topics and methodologies and also that the individual studies were supported by broad and deep individual research agendas. We included two additional criteria to ensure more direct applicability of the studies to the report topic. The selected studies applied network analysis directly to a specific set of activities most directly related to the report topic, particularly criminal intelligence, organized crime, fraud detection, public safety or security, and international trafficking. Studies focused on counterterrorism applications of network analysis and studies in the link analysis research area, which is focused on algorithms for identifying relationships among items in large databases of textual/narrative information, were largely excluded. We conducted this performance audit from June 2009 through September 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. A network may comprise a variety of entities. Four types of entities that IRS recognizes that also can form networks are corporations, partnerships, trusts, and individuals. While these are not the only types of entities or connections that may exist in networks, they are entities that the Internal Revenue Service (IRS) has emphasized. The following examples show how networks can be connected and how income can flow among different entities. These examples are hypothetical and any resemblance with a known network is purely coincidental. Figure 4 shows a network that includes two C corporations and two partnerships. Here, income and tax attributes (such as expenses, deductions, and losses) earned by the partnerships would flow back to C corporation B. However, the extent that C corporation A might also have received income from C corporation B depends on their business arrangements. S corporation A and Individuals A and B represent other partners that overlap with C corporation A’s network. S corporations are pass-through entities that pass income on to shareholders. In figure 5, Individual A receives income and other tax attributes earned by S corporations A and B and Partnership A. Likewise, Individuals B and C receive income and tax attributes earned by S corporation C, which in turn receives income from Partnership B. S corporation A passes income on to all three individuals in this example. Figure 6 shows how partnerships can be layered and seemingly unconnected individuals can be connected. Individuals A and D have no direct connection but both ultimately receive income and other tax attributes from Partnership A. Individuals A through D are also connected to Individual E because of the financial ties between Individuals D and E through Partnership X. Trusts can be connected to other entities in a network in several ways. In figure 7, Trusts A and B are partners in Partnership B and, along with Individual A, receive income and tax attributes from Partnership B. Trust A is a type of trust that is allowed to own shares in S corporation X, which passes income and tax attributes to its beneficiary, Individual B. Trust C is a partner in Partnership C and, along with Trust B, sends its income and tax attributes to Individual D. This appendix presents examples of research that have used formal quantitative network analysis techniques and methods to analyze network noncompliance, criminal, or illicit activity. Individuals developing network analysis programs may find relevant analytical approaches and techniques from this research. The research is summarized under four approaches to network analysis of illicit or criminal behavior. Key technical terms used in this summary include the following. Network: A set of actors and the set of ties representing some relationship or lack of relationship between the actors. Centrality: The number of direct contacts between a given network member and all other network members. Brokerage/network efficiency: Extent to which network members’ connections are not to each other or are not within the same group (nonredundancy). Cut-point: A network member that serves as the only connection among people or groups of people within a network. Key players: The set of network members whose removal will most disrupt or who can most efficiently diffuse information through a network. Density: The proportion of existing links out of all possible links in a network. Centralization: Extent to which a network is organized around a few central members. Clustering: Extent to which a network is subdivided into distinct, heavily interconnected subgroups. Connectedness: Extent to which all network members can reach each other along unbroken paths. Hierarchy: Extent to which the links in a network flow in one direction. Chain: A network structure where a high proportion of network members can only reach each other via some other network member. These studies use network visualization and measurement techniques to develop qualitative explanations of illicit/criminal behavior. This research has two major implications for network tax noncompliance. First, these studies suggest that both individual- and network-level measures of position and structure may be useful diagnostics for identifying criminal/illicit behavior. For example, higher centrality of individuals in a network may be associated with higher levels of criminal activity. Further, high levels of brokerage/network efficiency may be associated with a leadership role in a criminal network and with success in criminal activity. At the network level, chain structures often characterize criminal networks, though more interconnected structures (measured as density) in criminal networks may correspond with higher- risk activities. Second, tracking how network measures change may provide insight into how criminal behavior evolves. One study suggests that network leaders more effectively disguise involvement in criminal networks over time by using indirect relationships. Changes in the structure of noncompliance networks may correspond to changes in strategy and management. For example, management crisis in a noncompliance network may produce new relationships between previously disconnected individuals or change the extent of hierarchy in the network. Numerous studies have used core network visualization and measurement techniques to develop interventions into criminal networks for enforcement purposes. A key implication is that intervention decisions should arise from analyzing network structures and processes. These studies suggest that effectively identifying intervention strategies may require varied network analysis approaches, ranging from basic to complex. Basic network measures and constructs such as centrality or cut-points may effectively identify interventions in some contexts but not others. For example, in some contexts, using algorithms to find sets of key players may enable more efficient disruption or surveillance of criminal networks than approaches using centrality measures and cut-points. Extending the key player approach by incorporating data on individuals’ or entities’ attributes also may help. Approaches identifying cohesive subgroups and clusters, including the presence or absence of links between them, may suggest effective interventions. For example, if a network has disconnected or weakly connected subgroups that are themselves heavily connected, it may be appropriate to focus on the more cohesive subgroups, rather than on central individuals across the network. Relatedly, it may be more productive to disrupt decentralized criminal networks than more centralized ones. This research covers various approaches from the computational sciences, relying on data-mining, machine learning, and simulation techniques. The approaches develop methods that may help detect unknown aspects of noncompliance networks. Possibilities include the following: relational machine learning approaches that identify systems of statistical relationships among attributes of network entities, such as individual roles, status and experience, and firms’ locations, using complex relational data; risk-assessment methods that use probabilistic models to identify firms and employees with a high risk for misconduct. For example, algorithms have been developed to identify individuals that are atypically moving together among locations or organizations, which may help assess non- compliance risk; methods for identifying links, identities, or groups in a network. Link prediction, for example, uses machine-learning to identify unknown links in a network. An alternative method is anomalous link detection, which identifies links that are more likely to involve illicit/criminal/fraud activity. A third method is anonymous identity matching, which uses known relationships of unknown entities to predict their identities. Pattern matching or clustering algorithms can identify groups of entities occupying similar positions in the overall network; and dynamic simulation approaches that model networks’ likely responses to varied interventions and assess the effectiveness of the interventions. These studies use regression analysis or other multivariate statistical methods to examine collusion, unethical behavior, and adoption of illegal innovations. They emphasize statistically significant associations and causal relationships between measures of network position, overall structure, behaviors, and outcomes, while controlling for an array of individual and organizational attributes. Key implications include: Comparing different types of networks by their structural characteristics can help identify illicit activity. For example, illegitimate networks may be more hierarchical than legitimate networks. A network’s need for secrecy, typically associated with illicit activity, as well as its information- processing demands, may determine the degree of centralization exhibited by the network. Important relationships between network and non-network variables can influence illicit behavior. For example, common codes of conduct may mitigate the likelihood that hierarchical or asymmetric relationships produce unethical behavior. While lower-status middle managers usually are the most vulnerable network participants, higher-status upper-level managers may be more vulnerable in centralized networks than in decentralized networks. Appendix IV: Comments from the Internal Revenue Service GAO recommends that the Commissioner of the Internal Revenue Service take the following actions: Establish an IRS-wide strategy with goals, which may need to be developed incrementally, to coordinate and plan ongoing and future efforts to identify and pursue network tax evasion. The strategy should include: 1. Assessing the effectiveness of network analysis tools, such as yK-1 2. Determining the feasibility and benefits of increasing access to existing IRS data, such as scanning additional data from Schedule K-1, or collecting additional data for use in its network analysis efforts 3. Putting the development of analytical techniques and tools that focus on networks as the unit of analysis, such as GraphQuery, on a specific time schedule 4. Deciding how network efforts will be managed across IRS, such as whether a core program team or management group is needed Because of the broad impact of networks and the complex organizational responses required, developing a separate strategy to address network compliance will be useful, but may not be as effective as ensuring that network issues are consciously and appropriately included in broader strategic plans. In any event, a better articulated strategy for deploying, maintaining, and improving tools for network analysis is needed. The IRS agrees that it is useful to assess the effectiveness of analysis tools, but it would be necessary to balance the costs of such an assessment. The IRS agrees with this recommendation. The IRS agrees that it would be useful to better structure and support the development of analytical tools. The IRS will look at this issue. It may not be possible nor appropriate to manage network compliance activity centrally. However, at a minimum, we will consider how to manage better the analytic tools and whether a core program team would be useful in this regard. Ensure that staff members who will be using current and additional network tools fully understand the tools’ capabilities. The IRS agrees that training of compliance employees in the use of analytic tools can be improved. Establish formal mechanisms for front-line users to interact directly with tool programmers and program analysts to ensure future network analysis tools, such as GraphQuery, are easy to use and help achieve goals. Currently, the system developers have access to appropriate field employees, but we will consider improving the ability of field employees to have direct input and feedback to systems and risk assessment activities. In addition to the contact named above, Tom Short, Assistant Director; Lydia Araya; Katie Arredondo; Russ Burnett; David Dornisch; Robert Gebhart; Eric Gorman; Sherrice L. Kerns; Melissa L. King; Adam Miles; Danielle Novak; Melanie Papasian; Ernest L. Powell Jr.; and A.J. Stephens made key contributions to this report. | A taxpayer can control a group of related entities--such as trusts, corporations, or partnerships--in a network. These networks can serve a variety of legitimate business purposes, but they also can be used in complex tax evasion schemes that are difficult for the Internal Revenue Service (IRS) to identify. GAO was asked to (1) describe what IRS knows about network tax evasion and how well IRS's traditional enforcement programs address it and (2) assess IRS's progress in addressing network tax evasion and opportunities, if any, for making further progress. To do this, GAO reviewed relevant documentation about IRS programs and interviewed appropriate officials about those programs and IRS's plans for addressing such tax evasion. GAO also interviewed relevant experts and agency officials in developing criteria needed to perform the assessment. IRS views network-based tax evasion as a problem but does not have estimates of the associated revenue loss in part because data do not exist on the population of networks. IRS does know that at least 1 million networks existed involving partnerships and similar entities in tax year 2008. IRS also knows that many questionable tax shelters and abusive transactions rely on the links among commonly owned entities in a network. IRS generally addresses network-related tax evasion through its examination programs. These programs traditionally involve identifying a single return from a single tax year and routing the return to the IRS division that specializes in auditing that type of return. From a single return, examiners may branch out to review other entities if information on the original return appears suspicious. However, this traditional approach does not align well with how network tax evasion schemes work. Such schemes can cross multiple IRS divisions or require time and expertise that IRS may not have allocated at the start of an examination. A case of network tax evasion also may not be evident without looking at multiple tax years. IRS is developing programs and tools that more directly address network tax evasion. One, called Global High Wealth Industry, selects certain high-income individuals and examines their network of entities as a whole to look for tax evasion. Another, yK-1, is a computerized visualization tool that shows the links between entities in a network. These efforts show promise when compared to GAO's criteria for assessing network analyses. They represent new analytical approaches, have upper-management support, and cut across divisions and database boundaries. However, there are opportunities for more progress. For example, IRS has no agencywide strategy or goals for coordinating its network efforts. It has not conducted assessments of its network tools, nor has it determined the value of incorporating more data into its network programs and tools or scheduled such additions. Without a strategy and assessments, IRS risks duplicating efforts and managers will not have information about the effectiveness of the new programs and tools that could inform resource allocation decisions. Among other items, GAO recommends that IRS establish an IRS-wide strategy that coordinates its network tax evasion efforts. Also, IRS should assess its network programs and tools and should evaluate adding more data to its current tools. IRS generally agreed with these recommendations and noted additional organizational changes the agency is making that will address networks. |
The Section 202 and Section 811 programs are two federally funded programs intended to expand the supply of affordable housing for very low-income elderly persons and individuals with disabilities, respectively. The Housing Act of 1959, as amended, established the Section 202 Direct Loan Program to provide direct loans to nonprofit organizations to develop housing and provide supportive services for low-income older adults and individuals with disabilities. Under this loan program, over 278,000 units were funded from 1959 through 1990. In 1990, the Cranston-Gonzalez National Affordable Housing Act amended the Housing Act of 1959 and created separate programs: (1) the Section 202 Supportive Housing for the Elderly program to support affordable housing for very low-income elderly persons and (2) the Section 811 program for very low-income persons with disabilities. Section 202 households must be very low income (at or below 50 percent of area median income) and must include at least one member who is at least 62 years old. Section 811 households must also be very low income with at least one adult member with a disability (such as a physical or developmental disability or chronic mental illness). Since 1990, the Section 202 program has provided approximately 120,000 affordable housing units for older adults. As of fiscal year 2011, Section 811 has provided approximately 31,000 units for individuals with disabilities. Since 1990, the Section 202 and Section 811 programs have provided financing to nonprofit organizations known as sponsors through capital advances for the construction, acquisition, or rehabilitation of new affordable housing units. Section 202 and Section 811 sponsors are not required to repay the capital advance as long as they continue to make supportive housing affordable to eligible households for 40 years. HUD also provides rental assistance payments to Section 202 and Section 811 sponsors to cover the difference between the unit’s rent and the household’s rental contribution, which is typically equal to 30 percent of the household income. For Section 202, sponsors can also use rental assistance payments to help pay for activities of daily living and instrumental activities of daily living, such as eating, dressing, managing finances, and managing medications. Funding for Section 202 and Section 811 capital advances and rental assistance has decreased in recent years (see table 1). The combined fiscal years 2010 and 2011 Notice of Funding Availability was the last capital advance competition for new units in both programs. Beginning with fiscal year 2012, appropriations have not been made for the production of new units. In the combined fiscal years 2010 and 2011 capital advance competition cycle, HUD awarded 99 Section 202 capital advances in 33 states and 86 Section 811 capital advances in 34 states. With the suspension of funding for new construction or rehabilitation, housing developers must now rely on other funding sources, such as Low Income Housing Tax Credits, if they wish to build housing for these populations. Although Congress continues to appropriate funds for rental assistance for existing Section 202 and Section 811 units, these appropriations also declined from 2011 to 2013. According to HUD, most Section 202 and Section 811 projects that received funding in fiscal year 2008, fiscal year 2009, or the combined fiscal year 2010/ 2011 funding cycle have been completed but some are still in the process of being completed. Until fiscal year 2012, when funding for new units ceased, HUD used a two-phase process to allocate and award Section 202 and Section 811 capital advances (see fig. 1). First, HUD headquarters allocated the total amount of appropriated funds for capital advances to each of the 18 Hubs (which in this report we refer to as regional offices) based on a funding formula, which accounted for regional housing needs and cost characteristics. Second, applicants submitted applications online and staff from the applicable regional office evaluated applications using a technical review and a point system and awarded capital advances to the highest-scoring applicants. While our discussion of funding below analyzes the number of capital advances and the amount by state, award determinations were based on applications received in each regional office. For the Section 202 program, HUD used a needs-based funding allocation formula that reflected the relevant characteristics of prospective program beneficiaries in each regional office. Under the Section 202 program, HUD allocated 85 percent of the total capital advance amount to metropolitan areas and 15 percent to nonmetropolitan areas within each regional office. HUD then applied a “fair share” factor for each metropolitan and nonmetropolitan portion of each of the 18 regional offices, which allowed it to adjust the allocated funds per region based on the number of elderly very low-income adults with housing conditions and geographic costs of providing housing in each region. According to HUD officials, in fiscal year 2010, HUD implemented changes in the way it distributed capital advances among the regional offices to better target resources for the Section 202 program. Prior to 2010, HUD allocated funds to each of the 18 regional offices and then further subdivided the funds among 52 local program offices associated with each regional office. At that time, each local program office received a minimum set-aside for metropolitan and nonmetropolitan areas. The set-aside was intended to provide enough funding to support the development of at least 20 units in metropolitan areas and 5 units in nonmetropolitan areas. However, in the combined fiscal year 2010/2011 capital advance competition, HUD did not subdivide the funds to local offices and discontinued the minimum set-aside of 20 units in metropolitan and 5 units in nonmetropolitan areas in order to fund properties at a higher level. According to HUD headquarters officials, by eliminating the field office set-aside, HUD could develop affordable housing in a more cost-effective manner. HUD officials said that while the 2010 Notice of Funding Availability no longer had a minimum set-aside, the process for reviewing applications and making award determinations remained the same. Prior to 2010/2011, under the Section 811 program, each local office received capital advance funds for a minimum of 10 units. Similar to Section 202, the Section 811 program applied a “fair share” factor to distribute capital advances. The Section 811 funding formula for fiscal years 2010/2011 used the number of institutionalized persons age 16 to 64 with a disability, as well as geographic costs of providing housing, to allocate funding to each region. Unlike for Section 202, for Section 811 HUD did not require that a portion of the funding be allocated to metropolitan and nonmetropolitan areas. Both Section 202 and Section 811 followed a similar competitive process for awarding capital advances. After HUD announced the availability of funds, applicants submitted applications online and were then routed on to the applicable regional office. The review process involved a technical review followed by a rating process. During the technical review, regional office staff examined each application to determine adherence to eligibility requirements, such as responsiveness to local housing needs, project size, and development cost limits. They also assessed each application to identify deficiencies that are curable—for example, incomplete information submitted by the applicant that is not part of the scored application. If an application included curable deficiencies, the regional office notified the applicant and provided a time frame for resolving the deficiencies. Applications that did not pass the technical review were rejected. HUD provided a written notice to rejected applicants, which included the rationale for rejection and an opportunity for appeal. According to HUD headquarters officials, common reasons for rejection were noncompliance with environmental requirements and site control. Rejected applicants could file an appeal with HUD. Applications that passed the technical review proceeded to the rating process. During the rating process, the regional office evaluated each application in several categories using a point system. These categories were (1) capacity of the applicant and relevant organizational staff; (2) need, or the extent of the problem; (3) soundness of approach; (4) leveraging resources; and (5) achieving results and program evaluation. Each application was scored on a number of criteria within each of these categories, and applications were required to meet a minimum point threshold in order to be considered for funding. According to HUD, once scores were compiled, HUD awarded capital advances through a competitive process to applicants selected in each region with the greatest number of points in each regional office. Because the regional offices received separate funding allocations for metropolitan and nonmetropolitan areas for Section 202, they were required to first split the applications into metropolitan and nonmetropolitan developments and then rank each application within these areas. The funding levels provided did not allow them to fund all eligible applicants. Each regional office selected eligible applications from highest to lowest scores until no more funding from the metropolitan and nonmetropolitan allocations remained. If an applicant were next in rank order but needed more funds than remained, regional offices were not permitted to skip over that applicant in order to select another lower scoring applicant whose project required less funds. Instead, according to HUD headquarters officials, once each regional office had awarded all the funds it could based on the stated criteria in the Notice Of Funding Availability (NOFA), HUD headquarters combined any remaining metropolitan and nonmetropolitan funds to select the next highest ranked application from either a metropolitan or nonmetropolitan area. Once each regional office finished selecting applicants, any remaining funds were returned to HUD headquarters, where the remaining eligible applicants were entered into a nationwide competitive pool. Then HUD headquarters awarded the remaining capital advance funds starting with the highest rated application nationwide that had not already received funding. HUD headquarters first selected the next highest ranked nonmetropolitan applications in order to satisfy its statutory requirement of 15 percent of the dollars going to nonmetropolitan areas. Any remaining funds were then used to fund qualified metropolitan applications. The allocation process continued until HUD headquarters allocated all available funds to eligible applicants. During this process, HUD headquarters was allowed to skip over a higher-rated applicant if selecting a lower-rated applicant meant all the remaining funds would be exhausted. From fiscal years 2008 through 2011, most states had at least one Section 202 applicant that received capital advance award dollars. See appendix I for a full list of all Section 202 and Section 811 awards and award amounts from fiscal years 2008 through 2011. As shown in figure 2, for fiscal years 2008 through 2011, applicants in 9 states received 10 or more awards, 15 states received between 5 and 9 awards, 19 states received between 2 and 4 awards, and 5 states received 1 award. Total capital advance amounts awarded varied across states for the Section 202 program (see fig. 3). From fiscal years 2008 through 2011, three states received total capital advances of $75 million or more. All three of these states (California, Florida, and New York) have large metropolitan areas, and all three received 10 or more awards during the period under review. Eight states received between $50 million and $74,999,999, while 6 states received between $25 million and $49,999,999. Thirty-one states received between $1,085,400 and $24,999,999. Four states had no Section 202 awards during this period: the District of Columbia, New Mexico, South Dakota, and West Virginia. As shown in table 2, HUD’s regional offices received applications from sponsors to develop properties in all four of these states in at least one of the funding years. Since applications were only maintained for 3 years, HUD officials were not able to tell us why a specific application did not receive funding, but they identified possible reasons why applicants may not have received funding during this period. Specifically, HUD officials noted that applications that were submitted may have been ineligible; applications may have failed to meet the minimum point threshold for selection; or higher-scoring applications from other states may have been selected instead. Similarly, from fiscal years 2008 through 2011, Section 811 applicants in most states received funding for Section 811 projects. As shown in figure 4, applicants in 8 states received 10 or more awards, 12 states received between 5 and 9 awards, 19 states received between 2 and 4 awards, and 5 states received 1 award. Total amount of capital advances awarded varied across states for the Section 811 program (see fig. 5). From fiscal years 2008 through 2011, 6 states received capital advances of $15 million or more. Five of these were states that received 10 or more capital advances during the period under review, while the sixth state, California, received 7 during this period. Six states received between $10 million and $14,999,999, while 11 states received between $5 million and $9,999,999. Twenty-one states received between $652,100 and $4,999,999. Eight states did not have any Section 811 awards during this period: the District of Columbia, Montana, New Hampshire, New Mexico, Puerto Rico, Utah, Vermont, and Wyoming. As shown in table 3, HUD’s regional offices received applications to develop Section 811 properties in six of these states in at least 1 of the 3 funding years. Sponsors did not submit applications to develop properties in the District of Columbia and Wyoming in any of these years. HUD officials said that sponsors in these states did not receive capital advances for reasons similar to those for the Section 202 program. We provided a copy of this report to HUD for its review. HUD provided us technical comments which we incorporated where appropriate. We are sending copies of this report to the Secretary of Housing and Urban Development and interested congressional committees. 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) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs are listed on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. Tables 4 through 7 show the number of Section 202 and Section 811 capital advance awards and the total dollar amounts by state (including the District of Columbia and Puerto Rico) from fiscal years 2008 through 2011. Tables 5 and 7 also include the percentage of the total appropriated capital advance amount that each state received as well as the total percentage for fiscal years 2008 through 2011. As noted in the report, capital advance award decisions were made at the Housing and Urban Development (HUD) regional office and were not made by state, but rather across all states within a region. The fair share factor that HUD applied to the appropriated amount each year to determine the funding available to each region accounted for the number of elderly (or disabled for Section 811) renter households in each metropolitan and nonmetropolitan portion of the United States. That number was then adjusted to reflect the relative cost of providing housing in each HUD region and then multiplied by the respective total remaining capital advance funds nationwide to ensure that each HUD region received its fair share of the funding. The amount of funding and awards across individual states within each region could vary from year to year. In addition to the contact named above, Paul Schmidt, Assistant Director; Rachel Siegel, Analyst-in-Charge; John McGrail; Ruben Montes de Oca; Jennifer Schwartz; Jena Sinkfield; and Nina Thomas-Diggs made key contributions to this report. | Over 151,000 very low-income elderly and disabled households rely on the Section 202 and the Section 811 programs to provide affordable rents and housing with supportive services. Before fiscal year 2012, nonprofit organizations interested in developing units for these populations could apply to HUD for grants known as capital advances, which did not have to be repaid as long as the property continued to serve these populations for 40 years. Since fiscal year 2012, Congress has not appropriated any funding for capital advances for either program, although it has continued to fund rental assistance for existing developments. The House report accompanying the Consolidated and Further Continuing Appropriations Act of 2015 contained a provision for GAO to provide information on HUD capital advances for the Section 202 and Section 811 programs from 2008–2013. This report examines (1) how HUD determined the capital advance amounts awarded to sponsors for Section 202 and Section 811 and (2) the number of capital advance awards and amounts by state from fiscal years 2008–2011 and any changes in the distribution of capital advances over that period. GAO reviewed budget documents and funding announcements and interviewed agency officials. GAO makes no recommendations in this report. GAO provided a draft to HUD for its review and received technical comments, which were incorporated as appropriate. Until program funding for new development ceased in fiscal year 2012, the Department of Housing and Urban Development (HUD) used a two-phase process to allocate and award capital advances for Section 202 Supportive Housing for the Elderly (Section 202) and Section 811 Supportive Housing for Persons with Disabilities (Section 811). First, HUD headquarters allocated the amount of appropriated funds for capital advances to each of the 18 regional offices using a funding formula, which accounted for regional housing needs and cost characteristics. Funding was further divided among 52 local offices using a set-aside formula and was also split between metropolitan and nonmetropolitan areas for Section 202. In 2010, HUD eliminated the set-aside which had guaranteed a minimum amount of funding for each local field office. The process for making capital advance awards did not change, but HUD was better able fund properties at a higher level. Second, applicants submitted applications to the applicable HUD regional office, and staff from these offices evaluated and scored applications based on various criteria, including capacity to provide housing and ability to secure funding from other sources. Applicants in each regional office were ranked highest to lowest and funded in that order. Any residual funds that were not sufficient to fund the next project in rank order were pooled nationwide and HUD headquarters used a national ranking to fund additional projects. Most but not all states (including the District of Columbia and Puerto Rico) had applicants that received capital advances for Section 202 and Section 811 in fiscal years 2008 through 2011. GAO found that some states had applicants that received capital advances in each of the years reviewed, while other states did not. In the period reviewed, four states had no applicants that received Section 202 capital advance awards, and eight states had no applicants that received Section 811 capital advance awards. HUD officials cited several reasons applicants from some states may not have received funding during this period, including applications that were submitted may have been ineligible or higher-scoring applications from other states may have been selected instead. The capital advance amounts varied. For Section 202, total capital advance amounts for fiscal years 2008-2011 for states that received at least one award ranged from less than $24 million to more than $75 million. For Section 811, total capital advance amounts for fiscal years 2008-2011 for states that received at least one capital advance award ranged from less than $4 million to more than $15 million. |
Directly or indirectly, HUD affects millions of Americans as it carries out the federal government’s missions, policies, and programs for housing and community development. These missions range from making housing affordable by insuring loans for multifamily rental housing properties and providing rental assistance for about 4.5 million low-income residents, to helping revitalize over 4,000 localities through community development programs, to encouraging homeownership by providing mortgage insurance to about 7 million homeowners who might not have been able to qualify for nonfederally supported loans. HUD is also one of the nation’s largest financial institutions, with significant commitments, obligations, and exposure. As of September 30, 1997, HUD was responsible for managing about $454 billion in insured mortgages and $531 billion in guarantees of mortgage-backed securities. For fiscal year 1999, it has $24.3 billion in budget authority. HUD initiated a number of reforms and downsizing efforts in the 1990s. In February 1993, then Secretary Cisneros initiated a “reinvention” process under which task forces were established to review and refocus HUD’s mission and identify improvements in the delivery of program services. HUD also took measures in response to the National Performance Review’s September 1993 report, which recommended that HUD eliminate its regional offices, realign and consolidate its field office structure, and reduce its field workforce. Following a July 1994 report by the National Academy of Public Administration that criticized HUD’s performance and capabilities, Secretary Cisneros issued a reinvention proposal in December 1994 that called for major reforms, including a consolidation and streamlining of HUD’s programs coupled with a reduction in staff. Building upon the earlier reinvention efforts, Secretary Cuomo initiated the 2020 planning process in early 1997 to address, among other things, HUD’s downsizing goals and management deficiencies. HUD has taken important steps to strengthen its internal controls and financial reporting, improve its information and financial management systems, consolidate its operations, and appropriately deploy and train its staff. Guiding many of these efforts has been its 2020 Management Reform Plan, introduced in June 1997. While it is still too soon to evaluate the effectiveness of some of these efforts, we believe that the Department has made credible progress in correcting many of the management deficiencies that we and others have identified. HUD has improved its financial reporting and has strengthened its internal controls by conducting risk assessments for some of its programs . HUD’s fiscal year 1996 and 1997 financial statements were audited by HUD’s Inspector General and HUD’s Federal Housing Administration’s (FHA) fiscal year 1997 and 1998 financial statements were audited by KPMG Peat Marwick LLP, a public accounting firm. For fiscal years 1996 and 1997, HUD’s Inspector General was able to provide qualified opinions on HUD’s financial statements, compared with no opinion on the reliability of its financial statements for fiscal year 1995. In addition, as the public accounting firm KPMG Peat Marwick LLP reported this month, FHA presented its fiscal year 1998 financial statements in accordance with federal accounting standards and received an unqualified opinion on those statements. In 1998, HUD’s Office of Chief Financial Officer (CFO) established a risk management division, which has continued efforts initiated by the CFO to work with the Department’s program offices and new nationwide centers to identify risks and develop action plans to reduce them. As of September 30, 1998, the risk assessment division had completed risk management training for over 1,100 headquarters and field managers. Efforts to integrate and replace HUD’s information systems, begun in 1991, received support and higher priority under HUD’s 2020 plan. As of December 1998, HUD reported, it had developed and deployed 11 new financial management systems or components of these systems. For example, in March 1998, the Office of Housing deployed the first phase of the real estate management system, a new system being developed to implement 2020 reforms. In addition, the Office of the CFO developed and deployed a consolidated general ledger for fiscal year 1999 that will include summary transactions for the entire Department. The Office of the CFO is also developing a risk evaluation database that will be used to identify programs needing special risk reviews. The database will include information on the programs’ funding, as well as findings reported by us, HUD’s Inspector General, and internal reviews. Further agencywide improvements include cleaning up certain data elements in the Department’s information systems and verifying the reliability of these and other data. Finally, HUD recently reported that it had completed all of its year 2000 renovations for both mission-critical and non-mission-critical systems and had finished certifying 100 percent of these systems and implementing 97 percent of them. Under its 2020 plan, HUD has significantly revised its organization and redeployed its staff in an effort to operate more efficiently and provide better service to its customers. Specifically, it has consolidated programs and centralized processes and functions within and across program areas, transferring much of its workload from its 81 field offices to several specialized national centers. As it completes these workload transfers, it is reassigning staff and retraining them to perform their new functions. HUD has also strengthened its management reform efforts by linking them to the strategic and annual plans it has developed under the Government Performance and Results Act of 1993. In 1994, we designated HUD programs as a high-risk area because of serious, long-standing departmentwide deficiencies in four management areas. These deficiencies, taken together, placed the integrity and accountability of HUD’s programs at high risk. First, internal control weaknesses, such as a lack of necessary data and management processes, were a major factor leading to the scandals. Second, poorly integrated, ineffective, and generally unreliable information and financial management systems did not meet the needs of program managers and weakened their ability to provide management control over housing and community development programs. Third, HUD had organizational problems, such as overlapping and ill-defined responsibilities and authorities between its headquarters and field organizations and a fundamental lack of management accountability and responsibility. Finally, an insufficient mix of staff with the proper skills hampered the effective monitoring and oversight of HUD’s programs and the timely updating of procedures. Our recent work indicates that these management deficiencies continue to exist or it is too soon to tell whether HUD’s reforms will resolve them. While HUD has initiated actions that should help to address its internal control weaknesses, material internal control weaknesses persist in its management of the Section 8 subsidy payment process, which provides $18 billion in rental assistance; control and management of staff resources; management of losses resulting from defaults in the single-family and multifamily insurance programs; implementation of automated systems to provide needed management information or reliable data; and monitoring of multifamily properties and of the single-family and multifamily notes inventories. In addition, we have reported recently that HUD has not adequately monitored, among other things, contractors’ management of the Department’s real estate assets; appraisals of properties purchased with FHA-insured loans; and its process for deobligating funds no longer needed for Section 8 project-based rental assistance contracts. The most recently issued financial statement audits, performed by HUD’s Inspector General and KPMG Peat Marwick, found continued material internal control weaknesses in both HUD and FHA’s programs. The Inspector General’s fiscal year 1997 financial statement audit continued to find material weaknesses in HUD’s internal controls, and the Inspector General reported that HUD continues to face major challenges in its efforts to correct long-standing material internal control weaknesses. For example, HUD reported that it spent about $18 billion to provide rent and operating subsidies through a variety of programs. On the basis of data for calendar year 1996, HUD estimated that it had provided over $900 million in overpayments. This high level of improper payments exists because HUD does not have adequate internal controls over the process of verifying tenants’ self-reported income—the primary factor in determining the amount of assistance HUD pays. In fiscal year 1998, HUD unveiled a multifaceted plan to identify households’ unreported and/or underreported income. In our January 1999 report, we pointed out that KPMG Peat Marwick’s audit of FHA’s financial statements for fiscal year 1997 continued to find material weaknesses in FHA’s internal controls. These weaknesses included insufficient staff and administrative resources for such tasks as performing loss mitigation functions, managing troubled assets, and implementing new automated systems; inadequate emphasis on providing early warning of, and preventing losses due to defaults on insured mortgages; and resolving remaining problems with accounting and financial management systems. The report added that because of the issues’ complexity, implementing sufficient changes to mitigate these internal control weaknesses will take several years. After we issued our January 1999 report, KPMG Peat Marwick LLP issued, on March 5, 1999, its unqualified opinion on FHA’s federal accounting-based financial statements for fiscal year 1998. However, the auditors did report a new material internal control weakness in addition to those described above related to the need for FHA to improve its process for preparing federal accounting-based financial statements. In addition to the issues disclosed by the audits of HUD’s and FHA’s financial statements, we and HUD’s Inspector General have identified weaknesses related to HUD’s contract management, including problems with the Department’s automated procurement systems, assessment and planning for contract needs, and oversight of contractors’ performance. Following the Inspector General’s 1997 review of HUD’s contracting practices, contracting departmentwide was added as a material internal control weakness in HUD’s Federal Managers’ Financial Integrity Act (FMFIA) assessment for fiscal year 1997. HUD is implementing reforms to address these weaknesses, including appointing a chief procurement officer, redesigning the contract procurement process, and establishing standard training requirements for staff responsible for monitoring contractors’ progress and performance. Some of the other material internal control weaknesses reported as open under the FMFIA assessment for fiscal year 1997 pertained to HUD’s (1) monitoring of insured mortgages and multifamily projects, (2) Secretary-held multifamily and single-family mortgage notes inventories, and (3) income verification process. HUD has reduced its material weaknesses from 51 in fiscal year 1991 to the 9 remaining open as of fiscal year 1997. Some of these remaining weaknesses are long-standing—one dates back to 1983, while four others date back to 1993—and some, such as those relating to the $18 billion rental assistance program, involve billions of dollars. Despite its importance as a management control tool, monitoring continues to be problematic for HUD in many program areas. Since the Department announced its 2020 Management Reform Plan in June 1997, we have issued reports pointing out problems with HUD’s (1) oversight of real estate asset management contractors, (2) monitoring of the performance of appraisers of selected properties for home buyers seeking FHA single-family loans in two field offices, (3) procedures for identifying and deobligating funds that are no longer needed, (4) ability to ensure that its housing preservation program is being managed effectively and efficiently, and (5) oversight of lenders’ compliance with requirements of the home improvement loan insurance program. While efforts to integrate HUD’s information and financial management systems are well under way, the Department will continue to be adversely affected by inadequate systems and information until it has completed these efforts. We reported in December 1998 that HUD has not finalized detailed project plans or cost and schedule estimates for its financial systems integration effort. We concluded that without such plans the Department is likely to continue to spend millions of dollars, miss milestones, and still not fully meet its objective of developing and fully deploying an integrated financial management system. We also reported that HUD has not yet established an effective process for managing its information technology investments. As a result, it cannot effectively monitor its progress in implementing the new systems and cannot be sure that it is selecting the right projects. In addition, the fiscal year 1997 audit of HUD’s consolidated financial statements continued to report material internal control weaknesses in financial systems that were departmentwide or FHA-wide. HUD agreed with our overall recommendations to prepare complete and reliable estimates of the life-cycle costs and benefits of the 1997 systems integration strategy. HUD also agreed that the management and oversight of its systems integration effort could be improved by fully implementing and institutionalizing the provisions of the Clinger-Cohen Act and the Paperwork Reduction Act, including our recommendations to implement defined processes for managing information technology investments and for estimating costs. Other problems with information and financial management systems were identified by us, the Inspector General, or HUD. These problems included (1) the effectiveness of HUD’s processes for taking unexpended balances into account when determining funding needs as part of its budget process; (2) a February 1998 determination by HUD that 38 of its 92 systems did not conform to the requirements of FMFIA and of the Office of Management and Budget Circular A-127; and (3) a March 1998 report by the Inspector General which continued to report material internal control weaknesses in financial management systems including insufficient information on the credit quality of individual multifamily loans and insufficient information on FHA’s operations by program, geographical area, or other relevant components. During 1998, HUD implemented the organizational changes set forth in its 2020 Management Reform Plan. All of HUD’s various offices, hubs, program centers, and specialized and nationwide centers became operational. However, the real estate assessment, enforcement, and financial management centers will not be performing all of their centralized functions until 1999 and 2000. While the managers and staff we interviewed regarded these organizational changes as beneficial overall, it is still too soon to evaluate the effectiveness of HUD’s reorganization. HUD’s new real estate assessment center has issued regulations on the physical and financial assessments of multifamily properties and public housing authorities. However, the center will not begin financial assessments of multifamily properties until around April 1999, when audited financial statements on the properties are submitted to HUD. Although physical inspections of public housing authorities will start in 1999, financial assessments will not begin until 2000. The additional year is needed to give housing authorities time to convert their annual financial statements from HUD’s accounting guidance to generally accepted accounting principles in accordance with the uniform financial standards for HUD’s housing programs. The center began physically inspecting multifamily properties in October 1998 and, according to HUD, had inspected over 4,200 properties as of late December 1998. HUD’s new enforcement center will investigate and take enforcement actions against troubled multifamily and public housing authority properties that do not comply with HUD’s regulations. Although the enforcement center began operations on September 1, 1998, it is not scheduled to perform all of its centralized functions until around April 1999, when it is to begin receiving referrals of troubled multifamily properties from the real estate assessment center. However, as of December 1998, the enforcement center was working on 200 multifamily property cases referred to it by housing staff, according to HUD. Also, according to HUD, debarments of landlords of multifamily properties totaled about 100 in 1997, more than three times the 1996 total. HUD’s new financial management center is assuming responsibility for the Department’s Section 8 financial management processing workload. The transfer of much of this workload from HUD’s public housing field offices was expected to be completed in January 1999. However, the transfer of the Section 8 financial management workload relating to 4,600 annual contribution contracts from the Office of Housing’s field offices was not expected to begin until February 1999 and is not scheduled to be completed until mid- to late summer 1999. In addition, the schedule for transferring the financial management workload for approximately 21,000 housing assistance contracts from the Office of Housing’s field offices will depend on when contract administrators are selected and deployed. According to the director of the financial management center, the transfer may not take place until late 1999 or early 2000. There has not yet been a significant shift of functions and responsibilities from the field offices to the centers except at homeownership centers, according to the field office managers and staff we interviewed between July and October 1998. Office managers also indicated that the transfer of community service and outreach functions and responsibilities from the field offices to the community builders was in a transitional phase. A recent survey by the National Partnership for Reinventing Government showed that 70 percent of HUD’s workforce identified the agency’s reinvention efforts as a top priority. All of the managers and staff we interviewed said that the organizational changes under the 2020 Management Reform Plan were beneficial overall. For example, some managers and staff stated that their responsibilities and lines of authority and accountability for programs were more clearly defined. In addition, some managers and staff pointed out that obtaining clearance on routine issues took less time because program managers in the field had greater authority to make decisions. Managers and staff also stated that once the various centers and community builders assume all of their functions, the field offices will have more time to carry out their public trust responsibilities—namely, compliance and monitoring. However, most managers and staff we interviewed said the transfer of functions was in transition, and they generally did not know when it would be complete. Because staffing reforms and workload transfers from the field offices to the centers are still occurring, the effectiveness of HUD’s changes in correcting staffing deficiencies cannot be determined. Staff who were reassigned during the reorganization were receiving training in their new functions and both staff and managers were positive about the amount and quality of the training. Most of the field offices we visited initially lost staff following the 2020 staffing changes. However, some of these staff losses were recovered after HUD decided in May 1998 to assign unplaced staff to permanent positions. According to HUD, most of the formerly unplaced staff had been assigned positions as of September 1998, and most were in place. At a few locations, some of the formerly unplaced staff will not be reporting to their new positions until 1999. While most of the offices we visited reported being fully staffed, three of the centers were understaffed. The enforcement center had 62 percent of its authorized staff level, the real estate assessment center 40 percent, and the Memphis troubled agency recovery center 86 percent. HUD managers said the vacant positions in these centers will be advertised sometime in 1999. Once workload transfers are completed, managers at the field offices we visited expect their workload to decrease, although these manager did not know how much of a reduction would occur. There has not been a significant shift in workload from the field offices to the centers, according to the staff and managers we interviewed from July through October 1998. These managers and staff said the transfer of work to the centers and the assumption by community builders of their responsibilities was in transition. Efforts to match workforce to workload at HUD’s homeownership centers have presented difficulties. According to the Inspector General’s December 1998 semiannual report, HUD’s single-family homeownership centers cannot handle the workload currently associated with HUD’s inventory of Secretary-held mortgages or inventory of single-family properties, which HUD receives through foreclosures. This situation has developed because HUD’s plans to sell the properties before they enter its inventory have not evolved, and its plans to sell the existing notes inventory have been postponed. HUD is currently hiring contractors to assist in managing and disposing of its single-family properties. In its annual performance plan for fiscal year 1999, submitted to the Congress in March 1998, HUD noted that it lacks a single integrated system to support resource allocation and no longer has departmental systems for measuring work and reporting time. However, HUD’s 2020 Management Reform Plan calls for HUD to implement a proposed resource estimation and allocation process. In addition, HUD reported that it intends to work with the National Academy of Public Administration to develop a methodology or approach for resource management that will allow the Department to identify and justify its resource requirements for effective and efficient program administration and management. According to the Academy, the resource estimation elements will include workload factors and analysis based on quantifiable estimates of work requirements for planning, developing, and operating current and proposed programs, priority initiatives, and functions. The methodology will also enable HUD to estimate resources for its budget formulation and execution and to link resources to performance measures. Currently, work has been completed on the resource management methodology and was being tested at one office. The 2020 Management Reform Plan stated that HUD would retrain the majority of its staff. The field office managers and staff we interviewed during our 1998 field office visits reported that their training increased significantly with the plan’s implementation. The managers and staff were generally positive about the amount of training available to them and the quality of the training. Training varied from that provided at universities, to external professional certification training, to videotaped programs and substantial on-the-job training needed because of staff reassignments. For example, staff at the Memphis troubled agency recovery center reported spending most of their first 3 months on the job in locally developed training programs and in on-the-job-training with more experienced public housing staff. Staff and managers reported a need for continuing program area and specialized computer training. In addition, managers reported during our 1998 field office visits that the skills of their staff varied from adequate to excellent and were sufficient for the staff to do their jobs, except in the case of some of the recently assigned, formerly unplaced staff. The managers told us that while the formerly unplaced staff may lack specific program knowledge, they have the ability to do the work. While HUD has initiated actions under the 2020 Management Reform Plan that could help to address its management deficiencies, the reforms are not fully implemented or it is too soon to assess their effectiveness. HUD faces significant material internal control weaknesses, including weaknesses in the control structure intended to help ensure that rental assistance payments of $18 billion are based on accurate reports of tenants’ incomes. As reform efforts are fully implemented, HUD needs to ensure that the actions being taken under the 2020 reform plan and related efforts will address the remaining material internal control weaknesses. HUD will continue to be adversely affected by inadequate systems and information until its systems integration efforts are successfully completed. In the meantime, we believe HUD needs to strengthen its management and oversight of efforts to integrate its financial systems and the management of its information technology investments. In addition, HUD needs to continue its efforts to bring nonconforming systems into conformance with FMFIA requirements. As part of this process, HUD needs to ensure that its assessments of systems to determine conformance are well documented and verified. Finally, HUD needs to eliminate the material internal control weaknesses related to systems. In accordance with the Results Act, HUD needs to (1) monitor the performance of the centers as they assume their functions, as well as track the other organizational changes, to determine whether the 2020 reform plan’s goals are being achieved and (2) closely monitor the implementation of its staffing reform efforts to ensure that the field offices and staff have the resources and skills to carry out the work assigned, including the monitoring of programs and activities and the assessment of outcomes. In addition, HUD needs to complete its efforts to develop a process for identifying and justifying its staff resource requirements. In closing, Mr. Chairman, given the severity of the management deficiencies that we and others have observed, it would not be realistic to expect that HUD would have substantially implemented its reform efforts and demonstrated success in resolving its management deficiencies in the 2 years since we issued our last report. Nevertheless, with close oversight by the Congress, HUD is making significant changes and has made credible progress since 1997 in laying the framework for improving its management. HUD’s Secretary and leadership team have given top priority to addressing the Department’s management deficiencies. This top management attention is critical and must be sustained in order to achieve real and lasting change. Importantly, given the nature and extent of the challenges facing the Department, it will take time to implement and assess the impact of any related reforms. While major reforms are under way, several are in the early stages of implementation, and it is too soon to tell whether they will resolve the major deficiencies that we and others have identified. Therefore, in our opinion, the integrity and accountability of HUD’s programs remain at high risk. Mr. Chairman, this concludes my statement. We would be pleased to respond to any questions that you or Members of the Subcommittee may have. HUD Information Systems: Improved Management Practices Needed to Control Integration Cost and Schedule (GAO/AIMD-99-25, Dec. 18, 1998). Section 8 Project-Based Rental Assistance: HUD’s Processes for Evaluating and Using Unexpended Balances Are Ineffective (GAO/RCED-98-202, July 22, 1998). Home Improvement: Weaknesses in HUD’s Management and Oversight of the Title I Program (GAO/RCED-98-216, July 16, 1998). Appraisals for FHA Single-Family Loans: Information on Selected Properties in New Jersey and Ohio (GAO/RCED-98-145R, May 6, 1998). Housing Finance: FHA’s Risk-Sharing Programs Offer Alternatives for Financing Affordable Multifamily Housing (GAO/RCED-98-117, Apr. 23, 1998). Single-Family Housing: Improvements Needed in HUD’s Oversight of Property Management Contractors (GAO/RCED-98-65, Mar. 27, 1998). Year 2000 Computing Crisis: Strong Leadership Needed to Avoid Disruption of Essential Services (GAO/T-AMID-98-117, Mar. 24, 1998). HUD Management: Information on HUD’s 2020 Management Reform Plan (GAO/RCED-98-86, Mar. 20, 1998). Section 8 Tenant-Based Housing Assistance: Opportunities to Improve HUD’s Financial Management (GAO/RCED-98-47, Feb. 20, 1998). Housing Preservation: Policies and Administrative Problems Increase Costs and Hinder Program Operations (GAO/RCED-97-169, July 18, 1997). High-Risk Series: Department of Housing and Urban Development (GAO/HR-97-12, Feb. 1997). HUD: Field Directors’ Views on Recent Management Initiatives (GAO/RCED-97-34, Feb. 12, 1997). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO discussed its January 1999 report on the Department of Housing and Urban Development's (HUD) major management challenges and program risks, focusing on: (1) corrective actions that HUD has taken or initiated on its major management challenges; (2) major management challenges that remain and limit HUD's effectiveness in carrying out its mission; and (3) further actions that are needed to resolve these challenges. GAO noted that: (1) HUD is making significant changes and has made credible progress in overhauling its operations to correct its management deficiencies; (2) among other things, it has improved its financial reporting and development risk assessments for its programs, developed and deployed components for its information and financial management systems, consolidated and centralized many of its operations, and reassigned and begun to retrain many of its staff; (3) a major contributor to this progress is HUD's June 1997 2020 Management Reform Plan, a set of proposals intended to, among other things, correct the management deficiencies that GAO and others identified; (4) however, it should be recognized that HUD's problems were years in the making and will take time and much effort to correct; (5) HUD management has placed high priority on removing HUD programs from the high-risk designation, but it will take continued and sustained efforts before meaningful and lasting results can be achieved; (6) while major reforms are under way, GAO's recent work indicates that internal control weaknesses and problems with information and financial management systems persist; (7) recently, GAO reported that HUD is likely to continue to spend millions of dollars, miss milestones, and still not meet its objective of developing and fully deploying an integrated financial management system because it has not yet finalized detailed project plans or cost and schedule estimates for this effort; (8) furthermore, recent reforms to address HUD's organizational and staffing problems are in the early stages of implementation, and it is too soon to tell whether the reforms will resolve the major deficiencies that GAO and others have identified; (9) therefore, pending the achievement of substantial results, the integrity and accountability of HUD's programs remain at high risk in GAO's opinion; and (10) GAO reached this conclusion using the same methodologies and criteria as it used for its 1995 and 1997 reports. |
From 1944 through 1988, the production of plutonium at Hanford generated about 525 million gallons of radioactive and hazardous waste. Some of the waste was dumped directly into the soil, some was encased in drums or other containers and buried, and some was stored on-site, underground in 149 SSTs and 28 DSTs. This section describes the history of the Hanford tanks, the contents of the tanks, and tank regulations and oversight. The first underground storage tanks at Hanford were SSTs and were built from the 1940s through the mid-1960s. The SSTs consist of an outer concrete wall lined with one layer of carbon steel and were built with a design life of approximately 25 years. While a tank’s design life is not a firm deadline beyond which a tank is no longer viable, site engineers at the time considered design life a reasonable estimate of how long a tank could be expected to effectively contain radioactive and hazardous waste. In the 1940s and 1950s, site contractors did not regard the tanks as a permanent solution to the waste produced at Hanford and viewed tank failures as inevitable. It was assumed that as the tanks failed, new tanks would be constructed to store the waste until a more permanent disposal solution could be developed. Beginning in the 1960s, DOE began reporting that some of the SSTs were leaking waste, and DOE estimates that as many as 61 SSTs may have leaked a total of over 1 million gallons of waste into the ground. After DOE discovered leaks in some of the SSTs, a new tank design using two carbon-steel shells (referred to as DSTs) was adopted. From 1968 through 1986, DOE built 28 DSTs, each with a storage capacity of 1 million gallons or more and each with a design life ranging from 20 to 50 years. (See apps. I - III for design life data for each tank.) The primary design difference between Hanford’s single- and double-shell underground waste storage tanks—a second carbon-steel lining, or shell, within the outer concrete housing to provide secondary containment of the waste—improved DOE’s ability to monitor and assess the tanks’ integrity and contents. As shown in figure 1, the two shells in the DSTs are separated by about 3 feet of space, or annulus, which enables workers to use remote leak detection sensors and remotely operated cameras to see between the inner and outer shells, thereby making it possible to find signs of corrosion or leaks before waste breaches the outer shell and leaches outside the tank structure. Beginning in the 1970s, to minimize the risks of leaking tanks, DOE began transferring much of the liquid waste from the SSTs to the DSTs. This process consisted of removing (1) the liquid (more mobile) waste first and then (2) the rest of the waste from the SSTs, thereby effectively emptying the SSTs. The first part of this process—removing liquid waste from the SSTs and transferring it to DSTs—is referred to as interim stabilization and was largely completed by 2005. The interim stabilization for each tank was considered complete, and DOE could stop pumping liquid waste, when DOE and Ecology agreed that the following criteria were metless than 5,000 gallons of free standing liquid waste remained, less than 50,000 gallons of drainable liquid waste (liquid waste interspersed within the solid waste) remained, and pumping was no longer effective. The second part of the process—removing the remaining waste from the SSTs and transferring it to DSTs—began in 2003 and is still under way. This work is governed by two main compliance agreements: (1) the 1989 Hanford Federal Facility Agreement and Consent Order, or Tri-Party Agreement (TPA), an agreement between DOE, Ecology, and the Environmental Protection Agency and (2) a 2010 consent decree. Under the consent decree, DOE is required to retrieve waste from 19 tanks (transferring the waste to DSTs) and begin operating the WTP and treating waste by 2022. The TPA requires DOE to retrieve the waste from all of the SSTs by no later than 2040 and to have all waste retrieved from all DSTs and treated by 2047. As of July 2014, DOE had completed the retrieval and transfer of waste from 12 of the SSTs into DSTs. In addition to concerns about tank leaks, DOE is also monitoring tanks for water intrusion from rain and melting snow that can enter the underground tanks through the piping connected to them. Water intrusions can increase the consequences of waste leaks and also mask tank leaks, as waste levels in the tanks could remain the same even as waste was leaking into the ground. According to DOE documented reviews of the tanks, DOE has been aware of water intrusions in some SSTs since the 1980s and has detected intrusions into the annulus of some DSTs since the 1990s. The waste stored in the tanks at Hanford generally sits in layers and comes in a variety of forms, depending on its physical and chemical properties. The waste in the tanks takes the following three main forms, which are illustrated in figure 2: Supernate. Above or between the denser layers may be liquids composed of water and dissolved salts that are called supernate. Supernate comprises 21.4 million gallons of the waste in the Hanford tanks and about 24 percent of the radioactivity. Saltcake. Above the sludge may be water-soluble components, such as sodium salts, that crystallize or solidify out of the waste solution to form a moist sandlike material called saltcake. Saltcake comprises 24 million gallons of the waste in the Hanford tanks and about 20 percent of the radioactivity. Sludge. The denser, water-insoluble components of the waste generally settle to the bottom of the tank to form a thick layer known as sludge, which has the consistency of peanut butter. Although sludge makes up the smallest portion of waste in the Hanford tanks (10.7 million gallons), it comprises over half (56 percent) of the total radioactivity in the tank waste. The tanks contain a complex mix of radioactive and hazardous waste in both liquid and solid form. About 46 different radioactive elements—by- products of chemically separating plutonium from uranium for use in nuclear weapons—represent the majority of the radioactivity currently in the tanks. Some of these elements lose most of their radioactivity in a relatively short time, while others will remain radioactive for millions of years. The rate of radioactive decay is measured in half-lives, that is, the time required for half the unstable atoms in a radioactive substance to disintegrate, or decay, and release their radiation. The half-lives of radioactive tank constituents differ widely. The vast majority (98 percent) of the radioactivity of the tank waste comes from two elements, strontium- 90 and cesium-137, which have half-lives of about 29 and 30 years, respectively. The remaining radioactive elements, which account for about 2 percent of the waste’s total radioactivity, have much longer half- lives. For example, the half-life of technetium-99 is 213,000 years, and that of iodine-129 is 15.7 million years. The hazardous wastes in the tanks include various metal hydroxides, oxides, and carbonates. Some of the chemicals—including acids, caustic sodas, solvents, and toxic heavy metals, such as chromium—came from chemically reprocessing spent nuclear fuel to extract weapons-grade plutonium. Altogether, about 240,000 tons of chemicals were added to the tanks from the 1940s to the mid-1980s. A majority of the chemicals were added to neutralize acids in the waste. Other chemicals, such as solvents and several organic compounds, were added during various waste extraction operations to help recover selected radioactive elements (uranium, cesium, and strontium) for reuse. These hazardous chemicals are dangerous to human health, and they can remain dangerous for thousands of years. DOE’s storage of waste at Hanford is governed by federal and Washington State laws and regulations. DOE’s tank waste cleanup program at Hanford is governed by, among other things, the Resource Conservation and Recovery Act of 1976, as amended (RCRA), as implemented by Washington under its Hazardous Waste Management Act, and the Atomic Energy Act of 1954. RCRA governs the treatment, storage, and disposal of hazardous waste and the non-radioactive hazardous waste component of mixed waste. The tank waste at Hanford is considered mixed waste because it contains both chemically hazardous For the chemically hazardous waste in and certain radioactive materials.the tanks, as shown in figure 3, RCRA establishes the following three key requirements (subject to certain limited exceptions): Tank integrity. Under RCRA, tanks must have secondary containment—that is, a second shell—and an integrity assessment must be conducted by a qualified professional engineer to assess whether the tanks are fit for use. Leak detection. RCRA requires a leak detection system to be in place for each tank that will detect the failure of either the primary and secondary containment structure or any release of hazardous waste in the secondary containment system within 24 hours, or at the earliest practicable time. Data gathered from monitoring and leak detection equipment must be inspected at least once each operating day to ensure that the tank system is being operated according to its design. Leak response. Within 24 hours after detection of a leak or, if the owner or operator demonstrates that that is not possible, at the earliest practicable time, RCRA requires the tank owner, among other things, to remove as much of the hazardous waste or accumulated liquid as is necessary to prevent further release of hazardous waste to the environment and allow inspection and repair or closure of the tank system to be performed. If the release was to a secondary containment system, all released materials must be removed within 24 hours or in as timely a manner as is possible to prevent harm to human health and the environment. To address these RCRA requirements, DOE conducts a variety of assessments and monitoring activities. Regarding tank integrity, DOE conducted integrity assessments for the SSTs in 2002 and the DSTs in 2006. To address the leak detection monitoring requirement, for the DSTs, DOE has one waste level monitor installed inside the primary tank space and three waste level monitors in the annulus. These monitors collect waste level data on a daily basis. For the SSTs, because they were built decades before the enactment of RCRA, they do not have secondary containment. As such, DOE has determined that the SSTs cannot readily be made compliant with current regulations and these tanks were determined to be “unfit for use.” Under RCRA, unfit for use tanks are no longer allowed to store waste and must generally be closed. DOE plans to ultimately close the tank farms in accordance with tank farm closure permits to be issued by Ecology. In the meantime, DOE monitors the SSTs under modified operating procedures, including modified leak Under detection and monitoring requirements as agreed with Ecology.these modified procedures and additional DOE operating specifications, the majority of the SSTs are required to be monitored weekly, quarterly, or annually for leaks and intrusions depending on DOE’s knowledge of the condition of the tanks and the type and amount of waste inside them. In 2009, DOE developed an emergency pumping guide outlining procedures for responding to leaks in DSTs, to implement the RCRA requirement that the tank system owner/operator must within 24 hours after detection of the leak or, at the earliest practicable time, remove as much waste as necessary to prevent further releases. DOE’s recent assessments of the SSTs and DSTs determined that they are in worse condition than DOE had assumed when developing its 2011 System Plan schedule for emptying the tanks.series of assessments in 2013 and 2014, DOE concluded that water is intruding into at least 14 SSTs and that at least 1, T-111, is actively leaking. For DSTs, DOE concluded in 2012 that waste was leaking from the primary shell in tank AY-102 and subsequently found that 12 other DSTs have construction flaws similar to those that contributed to the leak in AY-102. According to recent DOE reviews of the tank, water has intruded into the space between the inner and outer shells of tank AY-102 and another tank nearby. In 2013 and 2014, DOE completed assessments of the SSTs and found that they are in worse condition than had been previously believed. As of 2005, DOE and Ecology agreed that the interim stabilization process had reduced the risk of leaks in SSTs, which led DOE, with concurrence from Ecology, to reduce the required frequency of monitoring from daily to quarterly or annually depending on the condition of the tank and the amount of liquid waste inside. However, concerns about historical water intrusions led DOE to reexamine all 149 SSTs in 2011 to determine the extent of the intrusions. This reexamination, which concluded in 2014, confirmed that water was intruding into at least 14 tanks and that the intrusions were adding from less than 10 to more than 2,000 gallons of water annually to each tank. According to a DOE report on intrusions, water intrusion creates additional liquid waste in the tanks as the new water becomes contaminated by the waste in the tanks. Furthermore, water intrusions can affect the level of tank waste, making it difficult to ensure that a tank is not leaking. Officials on an expert panel, convened by DOE in 2009 to assess the condition of the SSTs, concluded in August 2014 that significant amounts of drainable liquid still remain in the SSTs and removing that liquid and preventing future water intrusions should be a high priority. In addition to increasing waste levels in several tanks, DOE found in 2013 that waste levels appeared to be decreasing in several tanks and subsequently confirmed that at least one SST, tank T-111, was actively DOE’s report on the tank leak indicates leaking waste into the ground.that the leak likely began in 2010. According to DOE officials, waste is leaking at a rate of approximately 640 gallons annually, and DOE continues to monitor the leak in tank T-111. DOE has also confirmed that T-111 is one of the SSTs experiencing intrusions. Though the tank is leaking, according to DOE officials, DOE is not required by regulation to remove the liquid waste from T-111 because the amount of liquid waste in the tank does not exceed the interim stabilization criteria and because there are no current requirements to reestablish compliance with interim stabilization criteria if conditions in a tank change. Regarding DSTs, prior to the discovery of the leak in AY-102 in 2012, DOE had assumed that all DSTs were sound for storing waste. In 2006, all 28 DSTs were examined by a qualified professional engineer, as required under RCRA, and deemed fit for use. In a 2010 report on the integrity of the DSTs, DOE reaffirmed their fitness for continuing to store waste. However, after the 2012 leak was discovered, in March 2014, DOE reported the discovery of a second accumulation of waste in a different location in the annulus of tank AY-102. As of August 2014, DOE reported that more than 35 gallons of waste had leaked from the primary shell of AY-102 into the annulus at a rate of about 3 gallons per month. To date, no waste has been detected outside of the secondary tank shell, according to DOE officials. DOE is still investigating the factors that caused the AY-102 leak and the extent to which other DSTs may be susceptible to the same factors. DOE reported in October 2012 that tank construction flaws and corrosion in the bottom of the tank stemming from the type of waste and the sequence in which it was loaded into the tank AY-102 were the likely causes for the According to a 2014 expert panel reviewing the leak, leak in AY-102.corrosion was among the likely causes of the leak. The panelists concluded that the corrosion likely occurred as a result of water collecting under the tank before it was fully enclosed and during a 6-year outage of the ventilation system in the annulus from 1991-1997, rather than as a result of the waste loading sequence. Beginning in 2013, DOE examined the other 27 DSTs to determine the extent to which they had construction flaws similar to AY-102. In a series of reports issued between July 2013 and February 2014, DOE reported that at least 12 of the other 27 DSTs have similar construction flaws. However, DOE has not yet assessed the extent to which the factors that led to corrosion that may have caused the leak in AY-102 are also present in the remaining 27 DSTs. DOE also determined in 2012 that water was likely intruding into the annulus of at least 2 DSTs, including the leaking tank AY-102. This is not the first time DOE has detected intrusions in the DSTs. In 1991, DOE first reported unexplained moisture in DSTs AY-101 and AY-102, the oldest DSTs on the site. Since then, DOE has periodically monitored and reviewed the status of this moisture, concluding in 2001 that water intrusions through corroded tank equipment were the likely cause. After removing some of the suspected connections and further inspecting the two tanks with video cameras, DOE concluded in 2009 that the water intrusions had stopped. However, routine inspections of the tanks in 2012 revealed that water may still be seeping into the annulus of both tanks. According to DOE officials, an investigation into this issue is ongoing. In the 2011 System Plan, DOE stated that the DSTs play an integral role in the tank waste cleanup effort. Following the discovery of the leaks in tanks T-111 and AY-102, and water intrusions in some SSTs, DOE has undertaken or planned several actions. For the SSTs, DOE has, among other things, performed additional inspections and temporarily increased the frequency of monitoring the tank waste levels from annually or quarterly to monthly. For the DSTs, DOE has conducted additional inspections, modified its inspection procedures, convened an expert panel to examine its DST leak detection process, and developed a pumping plan for AY-102. In response to the leak in tank T-111 and intrusions in other SSTs, DOE has taken several actions, including the following: Increased monitoring and conducted additional inspections. In 2012, when the leak was initially discovered in T-111, DOE increased the leak detection monitoring for the tank from annually to weekly. In addition, for 19 other SSTs that were under review for decreasing liquid levels, DOE increased the leak monitoring frequency from annually or quarterly (depending on the tank) to monthly. DOE maintained weekly leak detection monitoring for T-111, but in April 2014 went to monthly monitoring. According to a DOE official, the monthly monitoring was deemed sufficient to understand the relationship between the intrusion and the leak and the monitors are always in place and data are collected more frequently than the monthly requirement. Additionally, monitoring procedures for the other SSTs have since returned to their normal frequency of annual monitoring for intrusions only. For the 14 SSTs with confirmed intrusions and the 5 that do not meet interim stabilization criteria, DOE has placed them on a quarterly monitoring regime. DOE also performed additional inspections of the tanks with decreasing liquid levels but, after further analysis, concluded that none of those tanks were likely leaking. Modified waste analysis procedures. As noted above, as part of its reexamination of SST waste levels, DOE discovered flaws in its methods for reviewing data on SST tank waste levels that it uses to monitor the tanks for leaks and intrusions. DOE officials determined that their method for reviewing tank waste data was flawed and masked increases and decreases in the waste levels in the SSTs that may have been due to water intrusions and leaks. In response, DOE modified its waste level monitoring methodology and procedures for analyzing waste data. For example, in 2013, DOE established a systems engineering group responsible for monitoring waste levels in all tanks. DOE is also developing training based on the modified waste level monitoring methodology, including guidance on tank waste data interpretation, trend analysis, documentation requirements, and review and approval procedures for changes in waste levels. Following the discovery of the leak in AY-102, DOE has taken or planned several actions including the following: Conducted additional inspections and modified inspection procedures. Following the discovery of the leak in AY-102, DOE performed video inspections of the annulus of 6 of the 12 DSTs with construction histories similar to AY-102. The video inspections, which according to a DOE official in the past only examined a portion of the annulus, examined between 95 and 100 percent of the annulus in each of the tanks.continue these full video inspections for the remaining 21 DSTs over the next several years. In addition, in April 2014, DOE formally modified its inspection procedures by shortening the time between inspections from every 5 to 7 years to every 3 years. In addition, in June 2014, DOE began soliciting proposals to award a contract for another independent assessment of the integrity of the DSTs to be completed in 2016. According to DOE officials, DOE plans to Convened expert panel. DOE convened an expert panel to review its DST leak detection procedures and make recommendations for improvement. This panel met three times and developed preliminary findings and suggested program improvements. One of the preliminary findings was that additional DST leaks cannot be ruled out given current DST integrity program limitations and the extended schedule for the construction and operation of the WTP. During the panel’s most recent meeting in August 2014, members of the panel said that more analysis needs to be done to understand the factors that led to the leak in AY-102 and the extent to which the other DSTs are susceptible to similar factors. Developed AY-102 pumping plan. If a leak is detected, RCRA requirements call for the hazardous waste or accumulated liquid to be retrieved from the tank to the extent necessary to prevent further releases within 24 hours or as soon as practicable and to allow inspection and repair. In addition, DOE’s emergency pumping guide outlines steps to “immediately” remove waste from a leaking DST. DOE officials stated that this guide did not anticipate a leak from the bottom of the primary shell of a tank such as the one occurring in AY- 102. Instead, DOE proposed that the waste not be retrieved until at least 2016, maintaining that that was as soon as it could practicably retrieve the waste due to concerns that doing so would cause the temperature of the tank to rise to dangerous levels without liquid waste to act as a cooling agent. In addition, DOE noted in its plan that it needed to procure and install additional equipment in order to pump waste out of the tank. In response to DOE’s submitted plan, Ecology issued an administrative order to compel DOE to begin pumping waste out of AY-102 by September 1, 2014, and retrieve enough waste to allow for an inspection to determine the cause of the leaks no later than December 1, 2016. The two sides reached a settlement agreement in September 2014, under which DOE is to begin pumping the waste out of AY-102 no later than March 2016 and to have the waste removed by March 2017—over 5 years after the leak was first discovered. DOE’s current schedule for retrieving the waste from the tanks (developed in 2011), which includes transferring waste from SSTs to DSTs and treating the waste in the DSTs, does not take into account the worsening conditions of the tanks or the delays in the construction of the WTP. The leak in AY-102 combined with planned waste transfers has reduced the available DST space, and DOE’s plans to create additional space remain uncertain. Future leaks and intrusions, which become more likely as the tanks’ conditions worsen, would place additional demands on the limited available DST space, and it is unclear how DOE would respond. According to DOE, recent efforts to evaporate some of the water from the waste have already freed up 750,000 gallons of DST space. In addition, in March 2014, DOE announced that it plans to indefinitely delay construction of the key WTP facilities needed to retrieve and treat tank waste for disposal until technical issues are resolved. As a result, it is unclear how long waste will remain in the tanks. However, without an analysis of the extent to which the factors which may have led to the leak in AY-102 are present in the other DSTs, DOE cannot be sure how long its DSTs will be able to safely store the waste. The free space available in the DSTs is currently limited, and operational requirements and planned transfers from the SSTs constrain DOE’s ability to respond to future emergencies, such as leaks. As shown in figure 4, SSTs hold a total of about 29 million gallons of waste and, as noted above, have been deemed “unfit for use” under RCRA and therefore cannot be used for storing additional waste. The DSTs currently hold a total of about 27 million gallons of waste, leaving about 5.3 million gallons of available space for waste to be transferred from other tanks. However, DOE policy and planned waste transfers further reduce the amount of space available. As shown in figure 5, about 2.5 million gallons of the 5.3 million gallons of empty space is reserved by DOE for safety purposes, for emergency space if necessary, and to enable DOE to more easily transfer waste among tanks. In addition, planned waste transfers from SSTs (about 1.8 million gallons) and AY-102 (about 800,000 gallons) will further reduce available DST space (see fig. 5). Specifically, DOE plans to first empty an additional 15 SSTs, containing a total of approximately 1.8 million gallons of waste, into DSTs by 2022. Second, DOE plans to pump all of the approximately 800,000 gallons of waste in AY-102 into other DSTs no early than 2016. As a result of these planned transfers and operational requirements, about 200,000 gallons of storage space is actually available in the DSTs. DOE officials said that they plan to restart an evaporator facility at Hanford that could reduce the overall amount of waste in the tanks and result in 3 million gallons of additional DST space. This facility, which began operating in 1973 and was designed to operate for 25 years, has not operated since 2010 and was only recently restarted by DOE. According to DOE officials, since restarting the evaporator in September 2014, DOE has reduced the waste volume by over 750,000 gallons. In addition to these scheduled waste transfers, future leaks and intrusions, which become more likely as the tanks’ condition worsens, would require DOE to pump more waste and place additional demands on the limited remaining DST space. Both DOE and Ecology have reported that leaving waste in the tanks past their design life increases the risk of leaks over time. Similarly, the panel of experts that DOE convened to review the AY-102 leak concluded in May 2014 that, given the extended time frames for the cleanup mission and the growing concerns about the integrity of the tanks, additional leaks cannot be ruled out. Such leaks and intrusions could place further demands on the available space in the DSTs because when leaks occur, DOE is required by RCRA and associated tank monitoring and pumping requirements, as described below, to pump hazardous waste from these tanks into the already limited space available in the nonleaking DSTs. For example, if a leak is detected in a SST that exceeds interim stabilization criteria (i.e., it has more than 5,000 gallons of freestanding liquid or 50,000 gallons of drainable liquid waste), DOE is then required by modified leak detection and monitoring requirements as agreed with Ecology to install emergency pumping equipment and begin pumping the liquid waste out of the tank as soon as practicable. At least five SSTs currently fall into this category because they have exceeded the amount of liquid waste allowed under interim stabilization (likely as a result of water intrusion, according to DOE officials). Similarly, if another DST begins to leak, DOE is required by RCRA to remove the hazardous waste or accumulated liquid from the tank to the extent necessary to prevent further releases within 24 hours or as soon as practicable. The only RCRA compliant alternative currently available for storing this retrieved waste is into the limited space available in the nonleaking DSTs. According to the DOE official responsible for managing Hanford’s tank operations, given the current constraints on available DST space, if another DST was to fail before additional DST space is available, DOE would have nowhere to move the waste. However, according to DOE officials, DOE currently has no plans to build new tanks and estimates that it would take about 8 years before the new tanks would be available to receive waste. In March 2014, DOE reported that unresolved technical issues could prevent the WTP from operating safely as currently designed. Under the existing TPA and consent decree, DOE is required to begin operating the WTP and treating waste in 2022, to have retrieved all waste from the SSTs by 2040, and to have all waste retrieved from all DSTs and treated by 2047. DOE reported in March 2014 that, until the technical uncertainties are resolved, it is not possible to predict when the WTP will be completed. In addition, DOE has proposed building at least two new waste processing facilities to allow waste treatment to begin while it is resolving the WTP’s technical uncertainties. One of the two facilities would, if constructed, treat some of the low-activity waste in the tanks. According to DOE officials, this facility would be operational no later than December 2022 and would make available about 1.3 million gallons of DST space after the first 3 years of operation. DOE has not estimated the impact of the WTP delay on its tank management plans, but delays in the schedule to retrieve waste from the SSTs are already occurring. Before its decision to delay the WTP, in a series of letters to Ecology from November 2011 to September 2014, DOE stated that it would likely miss the scheduled milestones in the consent decree, including milestones for completing the WTP and emptying waste from the SSTs. DOE further reported in March 2014 that delays in the WTP will affect the schedule for retrieving waste from the tanks but that, until the technology it is developing to treat the tank waste in the WTP can be demonstrated to work as intended, it is impossible to estimate what the impact will be on the retrieval of waste from the tanks. DOE cannot reliably update its scheduled deadlines for retrieving waste from tanks without considering the impact of the WTP delay. The technical challenges at WTP and the continued uncertainty about the schedule for retrieving and treating the waste mean that the overall cleanup mission will continue to depend on the integrity of the DSTs. However, the extent to which the DSTs can continue to safely store waste is unknown. In the 2011 System Plan, DOE stated that the DSTs play an integral role in the tank waste cleanup effort. members of DOE’s 2014 expert panel, convened to examine the integrity of the DSTs, have stated that corrosion is a threat to DST integrity, and the expert panel also highlighted deficiencies in DOE’s understanding of corrosion in all of the DSTs. The panel officials concluded in August 2014 that more work needs to be done to better understand the factors that led to the corrosion in AY-102. However, as noted previously, DOE has not examined the other DSTs for the same corrosion factors that may have lead to corrosion in AY-102 and therefore lacks information about the extent to which the other 27 DSTs may also be susceptible to similar corrosion. As a result, DOE lacks assurance that these tanks will be available for use through the end of the cleanup mission, as DOE’s 2011 System Plan contemplates, and cannot reliably update its schedule for emptying the SSTs. In 2001, DOE established a DST Integrity Program to implement controls and inspections to ensure that the DSTs will be available for use through the end of the cleanup mission. All of the SSTs and DSTs will be well beyond their design life before they are emptied. Of the 137 SSTs that are still storing waste, all are currently decades beyond their design life, and all but 13 of them would be at least 40 years beyond their design life before being emptied under DOE’s existing schedule for emptying the tanks. While the design life of the DSTs varies, 4 of the 28 DSTs are already past their design life, and under the current TPA milestones, all DSTs are expected to be well beyond their design life by the time they are scheduled to be emptied. (See app. I and III for design life data for each SST and app. II for design life data for each DST. Figure 6, an interactive figure in appendix I, shows a timeline of all Hanford SSTs. Appendix III, table 1, is the noninteractive, printable version of figure 6.) DOE does not have plans to construct additional storage to address its long-term storage needs and the risks presented by the aging tanks. DOE has looked at options for building new tanks to address the constraints on DST space if the cleanup mission were to take significantly longer than currently planned. DOE has developed a rough estimate of the time and cost that would be required to build additional tanks. Specifically, in 2011, Ecology asked DOE to include the option of building new tanks in an update to its System Plan. In response, DOE developed a rough estimate for how much it would cost to build 8 additional storage tanks, if necessary. DOE estimated that doing so would cost about $800 million and would take about 8 years to complete. According to the System Plan, this was a rough order of magnitude estimate and a more detailed estimate would be required before a decision to build new tanks could be considered. In 2012, DOE issued its final EIS for Hanford, which included discussion of several tank waste cleanup alternatives that would have involved building additional DSTs as part of the response to delayed cleanup schedules. DOE has recently taken and has plans for taking additional steps to improve its tank monitoring and inspection procedures at Hanford and is in the process of reassessing the integrity of the DSTs at the site. However, these steps do not address the longer-term concerns about leaving waste in the aging tanks indefinitely. Specifically, DOE lacks specific information about the condition of the DSTs, including whether the factors that may have led to corrosion contributed to the leak in AY- 102 may affect other tanks which are already many years beyond their design life. Given the current condition of the tanks, it is unclear how long they can safely store the waste. Moreover, following the leak in AY-102, available DST space—which is essential to DOE’s tank management plans—is increasingly limited, constraining DOE’s ability to respond to potential future leaks and protect human health and the environment. It is unclear, however, whether DOE has enough DST space available to address current and future waste transfers. As we mentioned earlier, DOE officials responsible for managing Hanford’s tank operations said that given the current constraints on available DST space, if another DST was to fail, DOE may have nowhere to move the waste. Additional space, either from treating waste or building new tanks, is still at least 8 years away assuming DOE’s schedule estimates for these projects are accurate, although DOE has begun recently to free up some DST space by restarting its evaporator facility. Notably, responding to tank leaks can take many years even when there is available DST space, as the leak in AY-102 illustrates. By developing a more a detailed and up-to-date schedule estimate for emptying the tanks, DOE will be in a better position to consider its waste storage needs and need for new tanks. As the tanks age, there will be a continued and increasing risk of tank failure that can only be permanently addressed by emptying the existing SSTs and DSTs. Given the long-standing technical problems facing the WTP, it is highly uncertain when waste treatment operations could begin to create significant available space in the DSTs. However, creating capacity to move some of this waste to RCRA-compliant tanks would allow DOE to respond to future leaks and ensure it has sufficient space for treatment operations once WTP is completed. To ensure that DOE’s long-term plans for storing waste in the existing SSTs and DSTs at Hanford consider the condition of the tanks and the WTP construction delay, we recommend that the Secretary of Energy take the following three actions: Assess the extent to which the factors that may have led to corrosion in AY-102 are present in any of the other 27 DSTs. Update the schedule for retrieving waste from the tanks, taking into the impact of the delays in the WTP, the risks associated with continuing to store waste in aging tanks, and an analysis of available DST space. Assess the alternatives for creating new RCRA-compliant tank space for the waste from the SSTs, including building new DSTs. We provided DOE with a draft of this report for its review and comment. In its written comments, reproduced in appendix IV, DOE agreed with the report and its recommendations. DOE also provided technical comments that were 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 Secretary of Energy; 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. GAO staff who made major contributions to this report are listed in appendix V. Online, roll your mouse over each year in the figure for additional information. For a printable version, see appendix III, page 30. Figure 7 shows design life data for double-shell tanks. Appendix III: Age and Retrieval Schedule for Hanford Single-Shell Tanks (Corresponds to Fig. 6) Table 1 lists information contained in interactive figure 6. In addition to the individual named above, Dan Feehan, Assistant Director; Mark Braza; John Delicath; Scott Fletcher; Rich Johnson; Jeff Larson; Armetha Liles; and Kyle Stetler made key contributions to this report. | DOE recently reported that nuclear waste is leaking from two of its underground storage tanks (T-111 and AY-102) at Hanford and that water was intruding into AY-102 and other tanks. Also, DOE has been experiencing delays in the construction of the WTP, a collection of facilities that are to treat the tank waste for disposal. These recently reported leaks and intrusions, combined with construction delays, have raised questions among regulators, the public, and Congress about the risks posed by continuing to store waste in the aging tanks. GAO was asked to report on the tank waste cleanup program. This report examines: (1) the condition of the tanks, (2) actions DOE has taken or planned to respond to the recent tank leaks and water intrusions, and (3) the extent to which DOE's tank management plans consider the condition of the tanks and the delays in completing construction of the WTP. GAO obtained and reviewed relevant reports concerning the leaks, the status of the tanks, and the volumes of waste and available space in the tanks. GAO toured the site and interviewed DOE officials and responsible contractors. From 2012 to 2014, the Department of Energy (DOE) assessed the physical condition of the 177 storage tanks at its Hanford, Washington, site in which it stores about 56 million gallons of nuclear waste and found them to be in worse condition than it assumed in 2011 when developing its schedule for emptying the tanks. For the 149 single-shell tanks (SST), DOE previously pumped nearly all of the liquid waste out of the SSTs into the 28 newer double-shell tanks (DST) to reduce the likelihood of leaks. However, after detecting water intruding into several SSTs, DOE reexamined them all and found that water was intruding into at least 14 SSTs and that 1 of them (T-111) had been actively leaking into the ground since about 2010 at a rate of about 640 gallons annually. Regarding the DSTs, in 2012, DOE discovered a leak from the primary shell in tank AY-102. DOE determined that the leak was likely caused by construction flaws and corrosion in the bottom of the tank. DOE found that 12 DSTs have similar construction flaws but has not determined the extent to which the other 27 DSTs are subject to the same corrosion that likely contributed to the leak in AY-102. In response to the waste leaks and water intrusion, DOE has taken or planned several actions. For SSTs, DOE conducted additional tank inspections and temporarily increased the frequency of monitoring the tank waste levels from annually or quarterly to monthly. In addition, after finding flaws in its methods to monitor for leaks and intrusions, DOE modified its methods, which it believes may lead to more effective monitoring. For DSTs, DOE increased the frequency (from every 5 to 7 years to every 3 years) and scope of its tank inspections and convened a panel of experts to evaluate existing tank monitoring and inspection procedures. DOE also plans an independent assessment of the integrity of the DSTs (scheduled to be completed no later than 2016). DOE's current schedule for managing the tank waste does not consider the worsening conditions of the tanks or the delays in the construction of the Waste Treatment and Immobilization Plant (WTP), a facility being constructed to treat the waste and prepare it for final, long-term disposal. First, the leak in AY-102 combined with planned waste transfers from SSTs has reduced the available DST tank storage capacity. Future leaks and intrusions, which become more likely as the tanks' condition worsens, would place additional demands on the already limited DST storage space, and it is unclear how DOE would respond. According to DOE, recent efforts to evaporate some of the water from the waste have already freed up 750,000 gallons of DST space. Second, in March 2014, DOE announced further delays in the construction of the WTP and that these delays will affect the schedule for removing waste from the tanks. However, DOE has not estimated the impact of the WTP delays on its schedule to remove the waste from the tanks. As a result, DOE cannot estimate how long the waste will remain in the aging tanks. Also, DOE officials and members of a 2014 expert panel convened to examine the integrity of the DSTs have said that corrosion is a threat to DST integrity, and, according to the panel, that there are deficiencies in DOE's understanding of corrosion in all of the DSTs. DOE lacks information about the extent to which the other 27 DSTs may also be susceptible to corrosion similar to AY-102. Without determining the extent to which the factors that contributed to the leak in AY-102 were similar to the other 27 DSTs, DOE cannot be sure how long its DSTs can safely store waste. GAO recommends that DOE assess the extent to which other DSTs have corrosion factors similar to AY-102, update its schedule for removing waste from the tanks, and assess the alternatives for creating additional DST space. DOE agreed with this report and its recommendations. |
Total Army Analysis is a biennial analytical process the Army uses to determine the numbers and types of support units it would need to support combat units in two simultaneous major theater wars and the infrastructure it would need to augment and support these units. The process also allocates the most recent authorized personnel level (end strength) among these requirements. The most recent iteration—Total Army Analysis 2007—was completed in late 1999. It showed the number and type of units required in the Army’s force structure in fiscal year 2007 and allocated the Army’s current authorized military end strength of 1,035,000 among these requirements. Total Army Analysis 2007 for the first time determined the numbers and types of units needed for contingency operations separately from its normal analysis of forces needed for two major theater wars. Starting with the Defense guidance, which identifies a number of typical contingency operations in which U.S. forces could be engaged, the Army identified seven operations that would require Army participation and that, according to the guidance, could occur simultaneously. On the basis of the missions to be accomplished, the Army then used expert panels of representatives from headquarters, major commands, and regional commanders in chief to determine the types and numbers of units required for engaging in these contingencies. It used the panels to arrive at these requirements because many of the factors the Army uses to model force requirements for war in Total Army Analysis do not apply to contingency operations. For example, contingencies related to peacekeeping or humanitarian tasks would not require facing a traditional “opposing force” threat. Accordingly, the panel identified the specific tasks to be accomplished and their associated workload, the unit types with the requisite skills to perform those tasks, and the numbers and types of support units needed to support the units carrying out the operation. The force structure requirements identified by this process were unconstrained. In other words, participants identified the logical Army unit types required to carry out the designated missions. This selection of force requirements was made irrespective of whether (1) the unit types currently existed within the Army force structure or (2) there were sufficient unit types to successfully carry out the Army’s designated mission. Contingency operations encompass a full range of joint military operations beyond peacetime engagement activities (short of theatre warfare) and include such operations as shows of force, interventions, limited strikes, noncombatant evacuation operations, peacekeeping, humanitarian assistance, and disaster relief. According to Army officials, all of these operations, except humanitarian assistance and noncombatant evacuations, could and in fact have lasted more than 6 months and have required force rotations. Throughout this report, we use the terms “unit” and “unit type.” Depending on its purpose and mission, a unit may vary significantly in size, from a 5-member linguistics team to a heavy armor or mechanized division of more than 16,000 personnel. Unit type refers to a specific type of team, company, battalion, or other organizational element comprised of one or more units. The Army has determined that 709 units of 248 different unit types, comprising about 76,000 troops, would be required to support seven simultaneous contingencies requiring Army participation. Our comparison of the Army’s planned force structure for fiscal year 2007 (based on the two-war scenario) with these contingency force requirements showed that the Army would have most of the unit types and units required to carry out these illustrative contingency operations simultaneously, provided that U.S. forces were not also engaged in a major theater war. Table 1 identifies the seven illustrative contingencies in which the Army would likely participate and the number of units and personnel required for each operation as determined by the Army’s panel of experts. Appendix I shows the types of forces that are most heavily used in such operations. Appendix II shows the total number of units and personnel needed to support the contingencies, by branch of service. To determine whether the Army’s planned force structure for two major theater wars would be sufficient to support these seven concurrent contingency operations, we compared the results of Total Army Analysis 2007 with the contingency operations requirements shown in table 1. Our initial comparison showed that, collectively, the active Army, the Army Reserve, and the National Guard would have sufficient unit types, as determined by Total Army Analysis 2007, to meet the requirements of all but 52 of the 248 required unit types. The Army would have insufficient numbers of units for 13 of the 52 unit types. Examples of these unit types include Special Operations Aviation battalions, Psychological Dissemination battalions, and Aerial Reconnaissance battalions. The remaining 39 specific unit types needed for contingencies would not exist in the Army’s planned force structure for fiscal year 2007. Examples of these unit types include Heavy Helicopter company, Animal Surgical detachment, Linguist team, Quartermaster Mortuary Affairs team, and Forward Support company. In total, the personnel end strength associated with the missing units would be about 23,000. Army officials pointed out that other existing units possess the same or similar capabilities as those identified as contingency requirements and could be used to cover some of these shortfalls. For example, the Army believes a Psychological Operations tactical company would be a suitable substitute for a Regional Support company. Both units provide support for operations such as the preparation and dissemination of leaflets and posters. Additionally, while the force structure will not contain the specific heavy helicopter company called for, it will contain other companies of a different unit type equipped with the same helicopter. At our request, the Army identified comparable units that could substitute for those experiencing shortfalls. In total, the Army identified substitutes for 5 of the 13 unit types with shortages and for 31 of the 39 unit types that are not planned for through 2007. We analyzed these substitutions and concluded that they were reasonable and would at least partially compensate for the shortfalls. As a result of these substitutions, the force structure deficiencies we initially identified were reduced to 61 units comprising 16 unit types and a total of about 2,500 personnel (about 3 percent of the total requirement). Army officials stated that these remaining shortfalls could be surmounted, since many of the skills required could be obtained in other ways. They pointed out, for example, that individuals in other units possessing the requisite skills could be detailed to meet contingency requirements. In the case of linguists, Army officials believe that they could meet these unfilled requirements through civilian contracts (see app. III for the specific shortfalls that would remain after the Army’s substitutions). Although the Army’s force structure could provide the 76,000 troops needed to support the seven illustrative contingencies, sustaining these operations beyond 6 months would pose greater challenges because force rotations would be needed. Under current policy, the Army limits unit deployments in contingency operations to no more than 6 months. If an operation lasts more than 6 months, new units and personnel are expected to rotate in as the deployed units return to their home station. This rotation policy applies to all three Army components—active duty, Army Reserve, and National Guard. According to Army officials, five of the seven illustrative contingency scenarios (all but humanitarian assistance and noncombatant evacuation operations), involving a total of about 61,000 troops, could last more than 6 months. Historical experiences related to counterdrug activities and various types of peacekeeping operations support this assertion. The Army contends that in order to adhere to its deployment policy, it needs to maintain a 3-to-1 pool of troops available for these missions. Should these five contingency operations occur simultaneously, 61,000 troops would be deployed, another 61,000 would be in training to prepare for deployment, and 61,000 recently deployed troops would be in the so-called “reconstitution” phase, retraining for their normal wartime mission. In effect, this policy requires the Army to maintain a ready pool of 183,000 troops to carry out the five contingency operations. Our analysis indicates that the Army’s planned force structure for 2007 does not have enough units to support the five illustrative contingency operations over an extended period. For example, only 99 (about 40 percent) of the Army’s active unit types have sufficient numbers of units to sustain 6-month force rotations. Collectively, the active Army, the National Guard, and the Army Reserve have enough units to support the rotational requirements of only 181 unit types, or about 73 percent of the 248 unit types required for the 5 operations. The shortfall of 67 unit types includes about 360 units with a total authorized strength of about 26,000. Military Intelligence would be the branch most affected, accounting for about half of the unit shortfall and about one-quarter of the personnel shortfall. The Psychological Operations, Medical, Signal, and Aviation branches would also be affected significantly (app. IV lists the branches that would be unable to sustain long-term rotations). The Army’s ability to adhere to its rotation policy in sustaining contingency operations depends heavily on National Guard and Army Reserve participation because most of the Army’s total force resides in those two components. For example, of the 6,892 units the Army planned in its latest force structure analysis, only 2,455 (about one-third) were active Army. As shown in figure 1, the National Guard and the Reserve each account for 32 percent of the total number of units. The percentage of units in the reserve components is important because the Army faces certain challenges in deploying these units during peacetime. As we reported in April 1998, peacetime restrictions on the use of reserve components affect the Army’s ability to deploy them to a contingency operation. Thus, even if the Army’s force structure collectively has sufficient required units, the Army may be restricted from deploying some of those units to a contingency. During recent contingencies, the Army has drawn heavily on volunteers to help reduce deployments of active units. However, if not enough reserve personnel volunteer for active duty, the Army cannot deploy reserve units unless the President exercises the Presidential Selected Reserve Call Up Authority and calls them to active duty. Further, reserve personnel cannot be required to serve on active duty for more than 270 days and may only be called up once for a given operation. Prior to our analysis, Army officials had not compared contingency requirements with the planned force structure for 2007 and thus were not aware of the shortfalls we identified. Therefore, they had neither assessed the criticality of such shortfalls nor developed mitigation plans. Such analysis and plans are important because critical shortages, if left unaddressed, could have adverse effects. Over the past several years, personnel in units that have been heavily demanded by contingencies but in short supply have had to deploy repeatedly and have exceeded Army standards for time spent away from home stations. Concerns that frequent and extensive deployments might adversely affect the services’ ability to recruit and retain personnel led the Army to establish a 6-month ceiling on the length of deployments. We believe that past experience supports the Army’s hypothetical scenario of five simultaneous contingencies, given the fact that counterdrug activities and various peace operations have in fact occurred simultaneously and have extended far beyond 6 months. Were the Army to decide that mitigating actions are needed, it could consider several alternatives. It could determine whether other type units have similar capabilities, contractors or host nation personnel could be employed, or auxiliary support could be obtained from other military services. Should these not be viable alternatives, the Army could also allocate end strength to new units in critical shortage areas. However, it is important to note that a decision to create new units would mean that other needs might go unaddressed, and that any decision to address these shortfalls would need to recognize the opportunity costs of not addressing others. For example, some currently existing units are not authorized all the personnel they require, while other units needed for the two-war scenario exist only on paper and are entirely without authorized personnel. Another concern Army officials raised about creating new units is whether current Defense guidance allows the Army to create new units if the units are not needed for the two-war scenario. Current guidance states that the services need to be prepared for a full spectrum of conflict, including both major theater wars and contingency operations. However, it does not explicitly say whether units needed exclusively for contingency operations but not major wars can be added and authorized personnel. Army force planning officials said that their interpretation of the guidance is that they can only authorize personnel for units needed for a two-war scenario and not units needed exclusively for contingencies. In support of their interpretation, the officials pointed out that the Office of the Secretary of Defense (OSD) had allowed the Army to authorize personnel for units needed exclusively for peace operations in only two cases. These involved 17,000 positions for units required for operations in the Sinai to satisfy the 1979 Middle East Peace Treaty and for a rapid reaction force for peacekeeping operations in Europe to satisfy Article 5 of the North Atlantic Treaty Organization Treaty. The rationale for these two exceptions is that these activities, which arise from treaty commitments, would need to continue even if a war arose and, as a result, units engaged in them could not be redeployed to a war effort. Notwithstanding the fact that OSD had permitted only these two exceptions to date, OSD officials said that guidance may be sufficiently broad to permit the Army to allocate personnel to other units needed for contingencies but not for major wars, if it chose to do so. Nevertheless, Army officials emphasized that they would need to have this issue clarified, were they to conclude that authorizing personnel for such units is the best option. In our opinion, the guidance is not explicit on this point, and a clarification may be in order. The Army’s force structure, which is based on a two-war scenario, generally provides the number and types of units required to simultaneously carry out seven illustrative contingency operations requiring Army participation. However, it does not contain the number and types of units needed to meet the needs of five simultaneous contingencies lasting more than 6 months and requiring force rotations. If Army forces continue to be called on to engage in such contingencies for extended periods of time, as has been the case in recent years, it would seem prudent to have a force structure that is able to meet such needs. Unless the shortfalls we have identified are dealt with, the Army may continue to have to call on some units repeatedly and to deploy others well beyond its 6-month standard. Assessing the criticality of the shortfalls we have identified is a logical first step for the Army to take. If it decides that certain mitigating actions are needed, the Army could pursue a variety of means to supplement its capability in critical shortage areas. However, if it becomes necessary to authorize personnel for units needed only for contingencies and not for the two-war scenario, a clarification or change in the Defense guidance may be needed to permit the Army clearer direction with respect to its authority to take such action. We recommend that the Secretary of the Army assess the criticality of the shortfalls we have identified with respect to the Army’s ability to carry out simultaneous contingency operations lasting more than 6 months. If it is determined that the risks associated with certain shortages require mitigating actions, we further recommend that the Secretary explore the range of options we have outlined. If the Secretary determines that the Army needs to authorize personnel for some units needed only for contingencies but not for the two-war scenario, we recommend that the Secretary of Defense either clarify whether authorizing personnel for such units is permitted under current Defense guidance or amend the guidance to permit this action. In written comments on a draft of this report, the Department of Defense concurred with our recommendations. It stated that the Army’s analysis of the criticality of contingency operations shortfalls will be based on information derived from upcoming war games, since that information will be more current than that used for Total Army Analysis 2007. Additionally, Defense said that future Defense guidance will allow the services to make certain contingency operations force requirements additive to the major theater war force requirements. However, it said that prioritization of available resources will determine whether particular force requirements will be funded. We believe these actions by Defense and the Army, once implemented, will allow the Army to include in its force structure those units that it believes are critical to sustaining deployments to contingency operations over an extended period of time. Defense’s comments are reprinted in appendix V. To determine whether the Army’s force structure would provide adequate forces to conduct seven illustrative contingency operations, we met with Defense and Army officials responsible for force planning and obtained pertinent documents concerning the Army’s force planning process and the numbers and types of units required to support the contingencies. We also obtained information concerning the Army’s planned force for 2007. To determine whether there would be any shortfalls, we then compared the types and numbers of units the Army stated would be required to support the seven contingencies with the types and numbers of units the Army plans to have in its force structure in 2007. We determined the number of personnel required and personnel shortfalls by applying the Army’s standard required strength for each unit type. After identifying the initial shortfalls, we asked the Army to review the list to determine whether there were other units in its force structure that were substantially capable of performing the required tasks. We compared the substitutions the Army provided and concluded that they were reasonable and would at least partially compensate for the shortfalls. We then incorporated those substitutions into our analysis. We performed a similar comparison to determine whether the force structure would be able to sustain longer-term deployments. We compared the needs of the five illustrative scenarios that Army officials believe could last more than 6 months with the planned force structure. We accepted the Army’s criterion that it needs to maintain a 3-to-1 pool of troops to adhere to its 6-month deployment ceiling. Our analysis, which was based on unit comparisons, included the substitutions the Army had previously identified for unit types experiencing shortfalls. We did not assess Defense’s selection of these contingencies or the likelihood that they may occur simultaneously. To identify various actions the Army might take to mitigate the shortages we identified, we gave Army force planning officials the results of our analysis and discussed possible mitigating actions. During these discussions, we became aware of varying interpretations of Defense guidance and whether it would permit the Army to authorize personnel for units needed exclusively for contingency operations. We discussed these varying interpretations with both Army and OSD officials. We also analyzed relevant Defense guidance provisions to understand the merits of individual interpretations. We conducted our review from March through November 2000 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Honorable Donald H. Rumsfeld, Secretary of Defense and the Secretary of the Army. We will also make copies available to others upon request. Please contact me at (202) 512-5140 if you or your staff have any questions concerning this report. GAO contacts and staff acknowledgments to this report are listed in appendix VI. The Army’s force structure requirements for the seven illustrative contingency operations include units from nearly all the Army’s 26 branches. However, support units are used more heavily in such operations than combat units. Table 2 shows the units and personnel most heavily used for each of the seven contingencies by Army branch. Table 3 shows the number of units and personnel needed to meet the requirements of the seven contingencies. The following table lists those unit types for which there will be insufficient units in the Army's force structure to meet the simultaneous demands of seven illustrative contingency scenarios in 2007. The shortages shown are those that would remain even after the Army substituted units with similar capabilities wherever possible. The following table lists Army branches with insufficient units to sustain deployments to illustrative contingencies lasting over 6 months. The analysis assumes concurrent operations related to counterdrug activities, maritime intercept operations, peace enforcement operations, and peacekeeping operations, each of which could be expected to continue more than 6 months. The analysis also assumes that humanitarian assistance and noncombatant evacuation operations would occur concurrently, though not for an extended period. In addition to those named above, James Mahaffey, Leo Jessup, Ron Leporati, and Tim Stone made key contributions to this report. The first copy of each GAO report is free. Additional copies of reports are $2 each. A check or money order should be made out to the Superintendent of Documents. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. Orders by mail: U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Orders by visiting: Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders by phone: (202) 512-6000 fax: (202) 512-6061 TDD (202) 512-2537 Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. Web site: http://www.gao.gov/fraudnet/fraudnet.htm e-mail: [email protected] 1-800-424-5454 (automated answering system) | The National Military Strategy calls for U.S. forces to fight and win two nearly simultaneous major theater wars. Accordingly, the Army calculates its force structure requirements on the basis of this scenario. The strategy also calls for the Army to support operations in a series of concurrent contingencies and assumes that forces thus engaged will be withdrawn and redeployed if war occurs. The Army's difficulty in supporting contingency operations without repeatedly calling on some types of units has raised questions about whether forces structured to meet the two-war scenario can also support multiple peacetime contingency operations. GAO reviewed the Army's force planning process, known as Total Army Analysis 2007, to determine whether the Army's planned force structure will meet its contingency requirements. GAO found that the Army's force structure generally provides the number and types of units required to simultaneously carry out seven illustrative contingency operations requiring Army participation. However, it does not contain the number and types of units needed to meet the needs of five simultaneous contingencies lasting for more than six months and requiring force rotations. If Army forces continue to be called on to engage in such contingencies for long periods of time, it would seem prudent to have a force structure that is able to meet such needs. |
The Section 521 Rental Assistance Program, started in 1978, is administered by RHS’s Multi-family Housing Portfolio Management Division. The program provides rental assistance for tenants living in properties financed by direct loans from RHS’s Multi-Family Housing Direct Loans and Farm Labor Housing Direct Loans and Grants programs. As discussed previously, eligible tenants pay no more than 30 percent of their income toward rent and RHS pays the balance to the property owner. Tenants must be low-income (with incomes 50-80 percent below area median income) or very-low-income (with incomes below 50 percent of area median income) to be eligible for rental assistance. As of the end of fiscal year 2016, the program had 14,308 properties and 282,806 units receiving rental assistance, according to RHS. RHS provides the rental subsidies through agreements with property owners for an amount estimated to last for 1 year as required under the program’s appropriations acts, which RHS interprets as 12 monthly rental assistance payments. RHS draws down on this amount for each rental assistance payment made for the property. The agreements with the owners expire when the original dollar amount obligated is fully expended, even if the period covered by the agreement is longer than the expected 1 year (that is, more than 12 payments are required to exhaust the obligated dollar amount), or is less than 1 year. The agreements specify that owners will receive payments on behalf of tenants in a designated number of units at the property. Each month, property owners or their management companies must certify the number of rental assistance units that are occupied and submit a request for payment of rental assistance to RHS. In addition, property owners must certify tenants’ incomes annually or when a tenant experiences a substantial change in income. RHS automatically renews expiring agreements if funding is available and the owner is in compliance with program requirements. For fiscal years 2013–2015, the vast majority of rental assistance agreements were renewals of prior agreements, as opposed to new agreements for properties entering the rental assistance program. An agreement can be renewed more than once in the same fiscal year if the obligated funds are fully expended within the fiscal year. RHS refers to the second agreement in the same fiscal year as a “second renewal.” RHS’s national office and Rural Development’s state and local offices manage the rental assistance program. The Portfolio Management Division within the national Multi-Family Housing office develops and implements program regulations, estimates program budgets, and tracks nationwide program statistics. It also has responsibility for executing the program’s budget, including allocating funds to properties for rental assistance agreements and tracking use of the appropriated funds. Rural Development state and local offices monitor the program and interact with property owners and property management companies. State office responsibilities include budget execution duties such as approving and obligating funds for rental assistance agreements with property owners and monitoring unused rental assistance units in the state. Local offices review and approve property budgets and rent increases and review owners’ compliance with program requirements. RHS uses the Multi-Family Housing Information System (MFIS) to allocate funds, calculate obligation amounts for rental assistance agreements, and maintain data on properties and tenants. Property owners or their management companies submit tenant information and monthly requests for payment through an online portal that uploads the information directly to MFIS. As noted above, properties must be financed by the Multi-Family Housing Direct Loans or Farm Labor Housing Direct Loans and Grants programs to receive rental assistance. Because each owner also must make a monthly mortgage loan payment to RHS for the property, MFIS calculates the net rental assistance payment due to the owners each month. That is, it calculates the amount of rental assistance due to the owner and subtracts the mortgage payment that the owner must pay to RHS, among other things. If the amount owed to the owner is greater, RHS makes a cash payment to the owner. If the amount owed to RHS is greater, the owner must still make a payment to RHS. An interplay of factors—primarily sequestration and rescissions, unreliable estimation methods, and limits on RHS’s ability to manage program funds differently—resulted in the program funding falling short of the amount needed to renew all eligible rental assistance agreements at the ends of fiscal years 2013, 2014, and 2015. In those years, RHS used all that remained of its appropriated funds for agreement renewals by July or August. According to our analysis of RHS data, the number of properties whose agreements ran out of funds but could not be renewed until the next fiscal year was 308 in fiscal year 2013, 401 in fiscal year 2014, and 943 in fiscal year 2015 (of about 15,000 properties). RHS officials estimated that the program would have needed about $97 million more in fiscal year 2015 to renew all eligible agreements on time. RHS did not calculate the amount of funds it would have needed to renew all expiring agreements in fiscal year 2013 because no funds were available to the program for renewals, according to RHS officials. The officials noted that RHS also did not calculate this number for fiscal year 2014 because it addressed the rental assistance needs of the affected properties by using previously obligated funds associated with properties that had exited the program, as discussed below. Sequestration and rescissions. In fiscal year 2013, sequestration and rescissions cut about $70 million of the rental assistance program’s approximately $907 million budget. These cuts also had implications for the rental assistance program in fiscal year 2014 because they pushed renewals that could not be funded at the end of 2013 into the subsequent year. Unreliable estimation methods. RHS’s methods for calculating the dollar amount for annual renewal agreements and budget requests had weaknesses. In fiscal years 2013–2015, RHS calculated the amount of renewal funding each property would receive by multiplying the number of rental assistance units by a state-wide, per-unit average cost. Because actual rental assistance costs at each property generally differed from the state-wide average, this method resulted in some properties receiving agreement renewals that provided less funds than needed for 1 year (resulting in the need for an additional renewal within the same 12-month period) and other properties receiving more funds than needed for 1 year (tying up funds that could have been obligated to other properties). In the aggregate, for agreements renewed in fiscal years 2013–2015, approximately 35 percent of the amounts were sufficient to make 11–13 rental assistance payments—that is, about 1 year (see fig. 1). In contrast, about 20 percent lasted for fewer than 11 payments, including 17 percent with funding that lasted for 8–10 payments and about 3 percent with funding that lasted for fewer than 8 payments. Further, about 44 percent of the agreements renewed during the 3-year period lasted for more than 13 payments, including about 26 percent with funding that lasted for 14–16 payments and about 18 percent with funding that lasted for more than 16 payments. In addition to the limitations in agreement estimates, RHS’s methods for estimating program costs for its budget requests had weaknesses. For example, RHS did not account for second renewals (which occur when the same property requires two renewals of its rental assistance agreement in the same fiscal year) for its fiscal year 2013 and 2014 budget requests. Some second renewals are to be expected because of the uncertainty involved in estimating rental assistance costs—vacancies at properties and tenant incomes can change from month to month. Our analysis of RHS data found that about 2 percent of properties received a second renewal in fiscal year 2013 and about 8 percent in fiscal year 2014. These percentages would have been higher if RHS had not run out of funds for renewals in these years. Limitations on RHS’s ability to manage funds differently. Program requirements limited the options available to RHS officials to manage rental assistance funds differently when faced with constrained budgets. RHS officials said they were aware in April 2013 that the program lacked sufficient funds to renew all agreements that would exhaust their funding before the end of fiscal year 2013 due to reductions in appropriations from sequestration and rescissions. However, they added that they were not able to adjust their renewal practices to address the funding gap because of program requirements. First, the appropriations acts that funded the program in fiscal years 2013–2015 stated that the agreements must be funded for a 1-year period, which RHS interpreted as 12 rental assistance payments. (As previously noted, RHS obligates the amount it estimates is needed for 12 payments, and the agreement expires when the funds are fully expended, even if the period covered by the agreement is longer than the expected 1 year.) Second, program regulations require each rental assistance agreement to be renewed when it exhausts its funding as long as the owner has complied with all program requirements. Third, RHS could not move funds from agreements with more funds than needed for a 12-month period to agreements with less funds than needed for a 12-month period because doing so might have breached the agreements, according to program officials. As previously stated, RHS’s rental assistance agreements specify a dollar amount of funding that will be available for rental assistance at the property until fully expended. RHS officials told us that it was their understanding that RHS did not have the authority to move funds from agreements for active properties. RHS requested certain legislative changes that RHS stated would have provided it more flexibility to manage constrained budgets. These proposals were generally not enacted. For example, the President’s budgets for fiscal years 2015 and 2016 requested authorization for RHS to enter into partial-year agreements so that RHS could renew agreements for smaller dollar amounts (that is, amounts estimated to cover fewer than 12 payments) during periods of funding uncertainty. To help manage constrained budgets, the President’s budgets also sought authority for RHS to prioritize agreement renewals based on factors other than the order in which agreements exhausted their funding. RHS explained that it had no ability to prioritize renewals for properties where the need might surpass that of other properties. If it had received the authority, examples of the criteria RHS said it would use to prioritize renewals included whether the rental assistance units were occupied over the prior 12 months and whether more than half of the units at a property had rental assistance. RHS used a variety of approaches in the years it faced funding gaps to try to minimize effects on property owners, with mixed results. Fiscal year 2013. RHS offered owners who did not receive rental assistance payments at the end of the fiscal year several options to lessen the financial effect. According to RHS, 308 of approximately 15,000 properties (about 2 percent) were affected by the funding gap that year. The options RHS offered included allowing owners to use money from the property’s capital reserve account for operating purposes, suspend payments to the capital reserve account, and defer payments on their RHS mortgages (loan deferral). However, according to RHS officials, some owners declined the options RHS offered and none of the owners were compensated for the rental assistance payments they did not receive that year. Fiscal year 2014. RHS used rental assistance previously obligated to properties that had exited the program due to foreclosure, mortgage prepayment, or mortgage maturity for properties with agreements needing renewal. In some cases, RHS funded 1-year renewals. According to RHS, the program used about $8.5 million in previously obligated but unexpended funds to renew agreements for properties currently in the program that had exhausted their funds in September and October 2014. In other cases, RHS provided enough funding to cover a property’s September 2014 rental assistance payment. RHS officials said they used about $315,000 in previously obligated but unexpended funds in this manner in fiscal year 2014. In these cases, RHS renewed the rental assistance agreements when the next fiscal year’s appropriation was available. According to RHS, agreements for 401 properties (about 3 percent) could not be renewed until the next fiscal year, but due to the use of previously obligated but unexpended funds, owners received all rental assistance payments they were due in fiscal year 2014. Fiscal year 2015. RHS used two main approaches to try to avoid or lessen the effect of funding gaps on owners of the 943 properties (about 6 percent) whose agreements RHS could not renew. RHS tried to decrease the likelihood of a funding gap by asking Congress to prohibit second renewals—meaning that, if legislation were enacted, any agreement that fully expended its funding in less than 12 months could not be renewed another time in the same fiscal year. Congress enacted legislation containing the prohibition on December 16, 2014 (about 2-1/2 months into fiscal year 2015), but any agreements entered into before that date were eligible for second renewals. According to RHS officials, this resulted in 573 second renewals in fiscal year 2015 that RHS had not anticipated. RHS ran out of funds to renew rental assistance agreements in July 2015. In December 2015, Congress authorized RHS to use funds obligated to properties that had since exited the program to compensate owners for rental assistance payments that RHS missed at the end of fiscal year 2015 due to the funding gap. Between December 2015 and early March 2016, RHS made such payments totaling about $5.4 million, according to RHS data. In each fiscal year, some or all of the agreements that could not be renewed on time due to funding gaps were renewed when the next fiscal year’s appropriation became available. As previously noted, hundreds of properties fell into this situation each year. Program officials told us that these renewals happened early in the next fiscal year. Consistent with this statement, our analysis found that the number of agreements renewed in October was substantially higher in fiscal years 2014–2016 than in prior years (see fig. 2). For example, 19 percent of agreements in fiscal year 2014 were renewed in October. Agreements renewed early in the fiscal year were more likely to need a second renewal later that year, further increasing the likelihood that RHS would run out of funds before the end of the year. However, some of the approaches RHS used to lessen the effects of the funding gaps at the end of each fiscal year had negative consequences, as described below: Loan deferrals. When some property owners chose to defer their mortgage payments at the end of fiscal year 2013, RHS’s automated accounting system incorrectly marked the owners as delinquent on their mortgages. According to RHS officials, this created problems in the system such as charging owners late fees and remitting rental assistance checks to local Rural Development offices instead of owners. In response, RHS waived the late fees and local office staff forwarded checks to owners. It took RHS longer than expected to change the accounting system to correct the delinquencies. Since February 2017, RHS staff have been able to create deferral transactions that do not mark the owners as delinquent on their mortgages. Use of unexpended funds from properties that exited the program. When RHS uses funds obligated to properties that exited the program (due to prepayment of, foreclosure on, or maturing of an RHS mortgage) to address funding needs at other properties, the rental assistance units associated with the funds from the exited properties permanently leave the program. RHS officials said that rental assistance units must have funds obligated to them in order for them to remain available to the program. RHS can preserve those rental assistance units only by assigning them to a second property in RHS’s portfolio before the funds on their current obligation are exhausted. The previously obligated but unexpended funds RHS used to mitigate the effects of the fiscal year 2014 and 2015 funding gaps—$8.5 million and $5.4 million, respectively—were available because RHS had not assigned the units associated with those funds to other properties. RHS officials told us they made a policy decision around the time of the 2013 sequestration to use the unexpended funds to help mitigate funding gaps rather than re-assign the units to maintain the number of units in the program. Therefore, a trade-off of RHS’s strategy is a shrinking portfolio of assisted rental units. Prohibition on second renewals. Due to the statutory prohibition on second renewals in fiscal year 2015, agreements for $4.5 million in rental assistance could not be renewed that year when they exhausted their funds. While RHS requested this legislative change to help prevent the program from running out of funds for standard renewals, it put owners whose agreement funding lasted less than 1 year in a financially difficult position. Additionally, tenants in affected properties faced the prospect of rent increases to compensate for the missed payments. In fiscal year 2016, RHS paid the owners the missed rental assistance—totaling about $191,000—using previously obligated but unexpended funds from properties that had exited the program due to foreclosure or mortgage prepayment. RHS also asked Congress to remove the prohibition on second renewals for fiscal year 2016, which Congress did as part of the Continuing Appropriations Act, 2016, and the Consolidated Appropriations Act, 2016. RHS officials said if they faced funding gaps in the future, they would implement the same mitigation measures they have in the past—which have included using unexpended funds from properties that exited the program and offering relief options to owners. However, RHS officials told us that as of the end of fiscal year 2016, RHS had only $5.3 million in previously obligated but unexpended funds remaining. Further, this method would reduce the number of assisted units that could be preserved. To improve its rental assistance estimates and streamline the obligation process, RHS in 2014 began developing a “rental assistance obligation tool” (obligation tool), a model that estimates rental assistance costs based on each property’s rental assistance payment requests over the prior 12 months. RHS began using the tool—which is integrated with MFIS, RHS’s management information system for the rental assistance program—to renew agreements in fiscal year 2016 and to estimate the program’s fiscal year 2017 budget request. To calculate the amount of funding for each agreement renewal, the obligation tool averages the property owner’s monthly requests for rental assistance over the past 12 months, but assigns increasingly higher weights to more recent requests. RHS officials said they chose this weighted average approach because it is more likely that future rental assistance costs at a property will be similar to the amount needed in the most recent month of the agreement than in the first month. The obligation tool also takes into account the effect of any recent or planned rent increases at the property on its future rental assistance costs. In addition to calculating renewal amounts, RHS staff use the obligation tool to allocate and obligate funds for agreement renewals. The tool tracks the use of rental assistance at every property and determines which agreements will be renewed next based on estimates that are updated daily for each property. In general, when the rental assistance program receives a funding apportionment from OMB, a program official enters the amount received into the obligation tool, and the tool allocates the funds to the agreements that will exhaust their funding next, according to RHS. USDA Rural Development staff in state offices then use the tool to obligate the funding amount the tool calculated. According to RHS, the obligation tool was developed partly to improve efficiency, and the tool has reduced the administrative burden on state office staff of renewing rental assistance agreements. When asked about the benefits and challenges of using the obligation tool, staff with whom we spoke from 12 of 15 randomly selected Rural Development state offices told us that it reduced the amount of time it took them to obligate funds for renewals. Our analysis of renewal amounts calculated by the obligation tool in fiscal year 2016 indicates that RHS’s estimation method generally results in agreements that last for about 12 payments (see fig. 3). For agreements that fully expended their funds within the fiscal year, 82 percent of the amounts were sufficient to make 11–13 rental assistance payments (compared with about 35 percent for agreements renewed in fiscal years 2013–2015). In contrast, about 9 percent lasted for fewer than 11 payments and about 10 percent lasted for more than 13 payments. For agreements that did not fully expend their funds during the fiscal year, we projected remaining payments based on the average of the prior 12 payments. We estimated that 77 percent of these agreements had funds to make 11–13 payments, while about 2 percent had funds for fewer than 11 payments and about 21 percent had funds for more than 13 payments. In addition to improving agreement renewal estimates, RHS took steps to improve its budget estimation procedures. Besides calculating renewal amounts for each agreement, the obligation tool estimates the cost of the rental assistance program in future years. Program officials have used the estimates to help develop the program’s annual budget request, beginning with the fiscal year 2017 budget. More specifically, the obligation tool calculates the forecasted cost of the program for the upcoming 12 months, and program officials may apply an inflation rate to that number. The forecasted cost is based on the rental assistance usage at each property and is updated generally on a daily basis by incorporating new data such as utilization of rental assistance, rent increases, and other information. This approach is an improvement over the prior budget estimation method because it is based on the actual usage of rental assistance at each property and the data are more up-to-date. Also, in developing requests for the fiscal year 2016 and 2017 budgets, RHS included the estimated cost of second renewals in those years. RHS officials told us the estimates were based on prior experience. While the new estimation methods for calculating agreement renewals and program budgets are an improvement over the prior methods, we identified some issues that suggest further enhancements are needed: Agreements with excess funds. While we found that the large majority of agreement renewal amounts calculated by the new obligation tool were sufficient to make about 12 rental assistance payments, we also estimated that a limited number of agreements— about 91 out of about 11,530 renewals (less than 1 percent) in fiscal year 2016—had funding sufficient for 20 or more rental assistance payments. As noted earlier, agreements with funding that lasts for more than 12 payments tie up program funds that could be obligated to other properties. According to an RHS official, an agreement may last substantially longer than 12 months for a number of reasons. For example, a property may use less rental assistance than the tool calculated if the owner leaves units vacant in order to rehabilitate them. However, these cases also could be the result of methodological problems. Seasonal farm labor housing properties. The obligation tool may not correctly estimate renewal amounts for rental agreements at farm labor housing properties with occupancy levels that vary seasonally (as demand fluctuates with crop activity). According to an RHS official, this issue is likely most pertinent to the approximately 12–15 properties that house migrant workers and that use rental assistance funds as operating assistance. A staff member at one Rural Development state office told us that she detected a misestimate for a farm labor housing property because of the way the obligation tool weights prior rental assistance usage. As previously noted, the tool puts the most weight on the most recent month’s rental assistance payment request. Consequently, at a high-occupancy time of year for a farm labor housing property, the tool would tend to overestimate the amount of funding needed for an agreement renewal. According to RHS data, utilization of rental assistance units at the property cited by the state office official ranged from 1 to 40 units during fiscal years 2015 and 2016, depending on the month. An RHS official said that they need to adjust the tool to correctly estimate agreement amounts for these properties and are currently calculating agreement amounts manually. Second renewal estimates. Our analysis of RHS data found that the number of second renewals RHS estimated for its fiscal year 2016 budget request was low. As previously noted, RHS included an estimate of the cost of second renewals in its fiscal year 2016 budget estimate (which was calculated before the obligation tool was put into use). According to program officials, RHS initially estimated that 8 percent of the units renewed in the year would need a second renewal, and the President’s budget ultimately included an estimate of 6 percent. However, our analysis of RHS data found more than 14 percent of units required a second renewal in fiscal year 2016. Limitations in Initial Testing and Monitoring and No Formalized Plan for Ongoing Evaluation RHS had an information technology (IT) contractor test the obligation tool during its development to help ensure that it performed computations as intended, but the contractor did not conduct other tests of conceptual soundness before the obligation tool was put into use in fiscal year 2016. For example, RHS did not use earlier years’ rental assistance data to assess whether the obligation tool would have accurately estimated the amount of funding a property needed in a subsequent year. RHS staff and IT contractors also did not test whether the assumptions in the tool were optimal, such as the way in which rental assistance payment requests from prior months were weighted in making estimates. RHS officials told us that the tool was a work in progress and that the first year of use (fiscal year 2016) would provide the best opportunity to evaluate its performance. They said that they intended to continuously monitor the obligation tool and make adjustments as needed. RHS has done some monitoring of the performance of its obligation tool, but these efforts had limitations. For example, RHS officials provided us with two analyses they conducted during fiscal year 2016 to estimate how long the obligations calculated by the tool would last. However, these analyses used the date of obligation as the starting point instead of the date on which the obligated funds were first used to make a rental assistance payment (which could be 1 or 2 months after obligation). An RHS official said that the date of first use is not in the information system from which the obligation tool pulled data. Federal internal control standards call for management to use quality information to achieve objectives, including relevant data that have a logical connection with the information requirements. By not using data on the date of first use, RHS’s analyses may have overstated the length of time the obligations could be expected to last. To monitor the tool’s performance, RHS officials also developed a report showing the obligation tool’s daily forecasts of total program costs. RHS officials said they check the daily forecasts to detect any unexpected variances and compare these amounts to amounts appropriated for the program. During the course of our review, RHS made several changes to how this forecast amount was calculated. One change in early fiscal year 2017 was prompted by our question to RHS about why the forecasted cost grew by about $94 million at the end of fiscal year 2016. RHS officials realized that the estimate in the report was based on rental assistance costs for 13 months instead of 12 months. RHS subsequently adjusted the tool to make forecasts based on costs for 12 months. Additionally, according to RHS officials, IT contractors conducted an analysis in early fiscal year 2017 of how long agreement amounts calculated by the tool in early fiscal year 2016 lasted. But, as of June 2017, RHS was not able to provide us with the analysis because officials said it was in the clearance process. One reason RHS has not developed plans for ongoing testing of the tool may be that RHS has been focused on initial testing of the tool’s performance during its first year. RHS’s obligation tool is the primary control to ensure that rental assistance allocations and obligations are calculated correctly and that program budget requests are reasonable. Federal internal control standards call for management to establish monitoring activities to monitor controls and evaluate results and for ongoing monitoring to be built into a program’s operations and be performed continually. Furthermore, useful practices for managing risks associated with models, such as the obligation tool, can include designing a program of ongoing testing and evaluation of model performance along with procedures for responding to any problems that appear. Without monitoring and testing activities called for by federal internal control standards and other guidance, RHS heightens the risk that any problems with the obligation tool will go undetected. No Automated Checks or Other Controls for Reasonableness of Rental Assistance Amounts While the obligation tool uses an improved method to estimate rental assistance costs, RHS does not have automated checks in the tool or other controls to catch unreasonable estimates (for example, excessive amounts) that may result from unforeseen circumstances or programming errors. Early in fiscal year 2016, the tool over-allocated about $4 million to properties that had recently been transferred from one owner to another because it did not correctly account for changes in rents at the properties. According to RHS officials, this error affected agreements for 43 properties. RHS did not catch the error through its own monitoring. Rather, a property manager alerted RHS that the agreement renewal for one of his properties provided significantly more funds than needed. Specifically, according to information provided by the property manager, the amount RHS provided was nearly twice the amount that should have been obligated (about $175,000 more than needed). RHS fixed the programming error that caused this particular miscalculation and de- obligated the excess funds. However, according to the IT contractor who developed the obligation tool, the tool does not have an automated check to detect such errors. As previously noted, RHS said that the first year of use would provide the best opportunity to evaluate the tool’s performance and an opportunity to identify any needed improvements. In addition, RHS guidance does not instruct either the RHS national office officials who use the obligation tool to allocate funds or the Rural Development state office staff who review and approve obligations to check the amount being allocated to each property for agreement renewals. Federal internal control standards call for management to design control activities for entities’ information systems to respond to risks. Without automated checks or other controls to catch programming errors or unforeseen circumstances that may result in incorrect or unreasonable agreement amounts, RHS lacks assurance that these mistakes will be caught prior to obligating funds. Since fiscal year 2010, RHS either has used no inflation rate or one that differed from the President’s economic assumptions when calculating budget request estimates for the rental assistance program (see table 1). RHS’s current budget estimation process involves applying an inflation rate to the obligation tool’s estimate of the cost of the program for the upcoming 12 months. RHS officials said that before they started using the obligation tool, they generally developed budget estimates by calculating the number of units expected to be renewed during the budget year, multiplying that number by the statewide average per-unit cost, and, in some years, applying an inflation rate. In our 2004 report on RHS’s budget estimation procedures, we recommended that RHS use the inflation rate from the President’s economic assumptions when estimating rental assistance budget costs. During our current review, RHS officials told us they used the rates provided by OMB (the President’s economic assumptions) for the fiscal year 2005–2009 estimates and after that used no inflation rate until the fiscal year 2015 budget request. However, officials could not explain why RHS stopped using the rate from the President’s economic assumptions for the fiscal year 2010 budget, other than that the RHS Administrator at the time directed the change. RHS officials also did not know the rationale for using no inflation rate in the budget requests for fiscal years 2010– 2014 and did not offer the reason for using 1.69 percent for fiscal year 2015. For fiscal years 2016 and 2017, RHS officials told us they used an inflation rate based on changes in housing costs, but the rates differed from the President’s economic assumptions. According to the Rural Development Budget Division, RHS used an inflation rate of zero for the fiscal year 2018 President’s budget. OMB Circular A-11, Preparation, Submission, and Execution of the Budget—which provides guidance to agency officials on preparing budget estimates—states that preparation of agency budgets must be consistent with the President’s economic assumptions provided by OMB. These assumptions are listed each year in the President’s budget. Consistency in budget assumptions across government programs helps clarify trade- offs among competing priorities. OMB staff told us that RHS should use the inflation rate in the President’s economic assumptions to develop its budget requests, as stated in the OMB circular. According to OMB staff, if the agency is preparing its budget prior to the issuance of the President’s economic assumptions for the forthcoming budget, the agency should use the prior year’s assumptions when developing its estimates. However, RHS also did not use the prior year’s assumptions (see table 1). USDA Office of Budget and Program Analysis officials said that they were not aware that RHS was not using the inflation rate from the President’s economic assumptions. Additionally, we could not identify a control procedure designed to ensure the use of the required inflation rate. Federal internal control standards state management should design control activities to achieve compliance objectives. If RHS had used the inflation rate from the President’s economic assumptions to estimate its rental assistance budget requests for fiscal years 2013–2015, the program may have faced somewhat smaller funding gaps those years. For example, according to RHS, in fiscal year 2015, the agency would have needed about $97 million more in funding to renew all eligible properties that requested a renewal that year. If RHS had used the inflation rate in the President’s economic assumptions, its budget request would have been about $5.5 million higher, although several factors outside of the program’s control affect the level of funding it ultimately receives. Without controls for ensuring the use of proper inflation rates, RHS may continue to be out of compliance with OMB requirements and use rates that differ from the President’s economic assumptions. Staff at 15 randomly selected Rural Development state offices with whom we spoke had different understandings of their roles and responsibilities for reviewing rental assistance renewal obligations. In addition, their understanding of their role frequently varied from the role that program officials in RHS’s national office said they had. Federal internal control standards state that management should implement control activities through the documentation of policies, including documenting responsibilities of different units for control activities. According to RHS national office officials, state office staff should review each obligation prior to approval to confirm that renewals of rental assistance agreements are warranted. More specifically, state office staff are to review the properties in their jurisdiction that the obligation tool has indicated are in need of renewal to determine if they are undergoing a servicing action, such as a prepayment or foreclosure. In these cases, state office staff are to use their judgment about whether providing a 1- year agreement renewal would be appropriate, according to RHS national office officials. For example, state office staff may know that a property owner is in the process of prepaying the RHS mortgage on the property or if the property has started the foreclosure process, in which case a new obligation for rental assistance might not be necessary. A program official in RHS’s national office stated that this review provides a check on the obligations. In contrast, state office staff with whom we spoke did not consistently perform, and in some cases were not aware of, these responsibilities. Of the 15 state offices that we interviewed, staff in 3 of the offices said that they check whether properties up for renewal are prepaying their mortgage or in the foreclosure process before approving renewal obligations. Staff at 2 of these offices told us that they have found properties that should not receive a 1-year renewal through this process. Additionally, staff in 10 offices told us that they did not believe it was their job to confirm that obligations should be provided to the properties before approving them; rather, they believed the national office was responsible for making renewal determinations. RHS has not clearly articulated and documented expectations for state office staff reviews, which has contributed to inconsistencies. RHS officials were not able to provide us with any written guidance on the roles and responsibilities of state office staff in reviewing obligations. Most of the state office staff with whom we spoke said they used briefing slides from the national office (intended as training on the new obligation tool) as guidance for obligating funds, but the slides do not mention a review by state staff. Rather, the slides focus on what buttons to click in the obligation tool to complete the obligation. Also, a national office official told us that the national office sends e-mails to state offices alerting them that funds are available to obligate and reminding them to review the properties. However, an example e-mail provided by the official did not directly ask for such a review or indicate what the review should consist of. Furthermore, a chapter in a program handbook that RHS officials said was the primary guidance for state office staff on the obligation process does not indicate that a review of the servicing status should be completed prior to approving obligations. By not documenting staff responsibilities for reviewing whether rental assistance obligations are warranted, RHS increases the risk that state offices may be approving obligations for properties that do not need a rental assistance agreement renewal—tying up funds that could be used by other properties and potentially contributing to program funding gaps. In recent years, RHS has experienced funding gaps in its rental assistance program that created challenges for the agency and some property owners. While the agency took some steps to mitigate effects on property owners and improve its budget estimates, weaknesses remain in some of RHS’s budget estimation and execution processes. First, RHS does not have a plan for ongoing monitoring (including testing and evaluation) of its new obligation tool and has not always used the most relevant data for monitoring, contrary to federal internal control standards calling for monitoring of control activities and use of quality information. Second, RHS does not have automated checks in the obligation tool or other controls to mitigate the risk of misestimates, as RHS experienced in fiscal year 2016. Federal internal control standards call for control activities that respond to risks. Third, RHS has not complied with OMB requirements to use inflation rates from the President’s economic assumptions in developing budget estimates. RHS’s lack of a related control procedure, as required by federal internal control standards, increases the risk that it will continue not to comply with the OMB requirement. Fourth, contrary to federal internal control standards on documentation of policies, RHS lacks written guidance on the responsibilities of Rural Development state offices for reviewing rental assistance agreement renewals before obligating funds. These weaknesses may exist partly because RHS continues to refine its estimation method, which has been in effect for about 2 years. By enhancing monitoring and internal controls, RHS could strengthen its budget estimation and execution processes to help ensure it manages the program as efficiently and effectively as possible, including during times of budgetary challenges. We are making the following four recommendations to RHS: The Administrator of RHS should develop and implement a plan for ongoing monitoring, including testing and evaluation, of the obligation tool using relevant data. (Recommendation 1) The Administrator of RHS should develop controls to check the reasonableness of rental assistance agreement amounts calculated by the obligation tool. (Recommendation 2) The Administrator of RHS should develop controls to ensure that RHS uses the inflation rates from the President’s economic assumptions in developing budget estimates. (Recommendation 3) The Administrator of RHS should provide guidance to Rural Development state offices that specifies that prior to obligating funds, staff are to review information related to a property’s mortgage servicing status. (Recommendation 4) We provided a draft of this report to OMB and RHS for their review and comment. OMB stated that it had no comments on the draft. RHS provided technical comments, which we incorporated into the report, but did not provide comments on our recommendations. We are sending copies of this report to the appropriate congressional committees, the Secretary of Agriculture, the Director of the Office of Management and Budget, 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) 512-8678 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 II. Our objectives were to examine (1) the reasons the Rural Housing Service (RHS) ran out of funds for renewing rental assistance agreements under the Section 521 program in fiscal years 2013–2015, and how it responded to the funding gaps in those years; and (2) what RHS has done to help prevent future funding gaps and the extent to which it addressed related budgetary issues. For both objectives, we analyzed data from RHS’s accounting system— the Automated Multi-Family Housing Accounting System (AMAS)—for fiscal years 2011–2016. We analyzed data on the dollar amount and date of obligations to renew rental assistance agreements and the rental assistance payments (expenditures) associated with those obligations. We excluded obligations that were canceled, for zero dollars, or had accounting codes generally associated with supplemental funding rather than renewal funding. As discussed in the body of this report, RHS extended the life of some rental assistance agreements by using funds from properties that had exited the program for properties that could not receive agreement renewals due to funding gaps. To assess the reliability of the AMAS data we used, we reviewed information about the system and the data. We interviewed agency officials and contractors knowledgeable about the data—including officials from RHS, Rural Development’s Office of Operations and Management, and the U.S. Department of Agriculture’s (USDA) National Financial and Accounting Operations Center—to discuss interpretations of data fields and patterns we observed in the data. We also conducted electronic testing, including checks for outliers, missing data, and erroneous values. Additionally, we compared the data with RHS summary statistics, where possible. We determined that the data were sufficiently reliable for the purposes of describing the number and timing of rental assistance agreement renewals and payments. To examine the reasons why RHS ran out of funds for renewing rental assistance agreements in fiscal years 2013–2015, we reviewed documentation from RHS that provided evidence of funding gaps, including a list of properties whose agreements were due for renewal but could not be renewed at the ends of the 3 fiscal years. We reviewed budget documents showing the amount of budget authority appropriated to the rental assistance program for the 3-year period and reductions to appropriations from sequestration and rescissions (cancelations of budgetary resources) in fiscal year 2013. We also examined the methods RHS used to estimate agreement renewal costs and budget requests for those years, as explained in greater detail below. Additionally, we reviewed legislative and regulatory requirements that affected how RHS managed the program in years with funding gaps, including requirements in the appropriations acts for fiscal years 2013–2015 and program regulations. To assess RHS’s calculations of agreement renewal amounts for fiscal years 2013–2015, we reviewed RHS documentation on the methodology behind the calculations and analyzed rental assistance payment data in AMAS. More specifically, we analyzed AMAS data to count how many full payments and partial payments RHS made from each of the agreements it renewed in fiscal years 2013–2015. Our counts also included agreements for properties that may have been transferred to a new owner while the agreement was in effect, which may have resulted in some understatement of the number of payments made. We used the results of this analysis to determine whether the obligation tool’s estimates resulted in agreement renewals that lasted about 12 payments (that is, close to the 1-year period they are intended to last) or for fewer or more payments. We sorted the agreements into five categories based on the number of payments they provided (fewer than 8, 8–10, 11–13, 14–16, and greater than 16) and calculated the percentage of agreements in each category by year and in the aggregate. To assess RHS’s methods for estimating its program budget requests for fiscal years 2013–2015, we reviewed key assumptions, including how RHS estimated the number of renewals and any second renewals (which occur when an agreement is renewed twice in the same fiscal year) expected in each year. We used AMAS data to identify the percentage of properties that had a second renewal in each year and compared the results to the percentage of second renewals RHS incorporated in its budget requests. To do this, we used a variable in AMAS that identifies second renewal obligations. To examine how RHS responded to the funding gaps in fiscal years 2013–2015, we reviewed RHS documentation on the options it offered to property owners who could not receive agreement renewals due to the funding gaps (for example, allowing owners to defer payments on their RHS mortgages). Additionally, we analyzed AMAS data to assess the extent to which RHS executed renewals it could not make at the ends of fiscal years 2013–2015 early in the next fiscal year when new appropriations became available. Specifically, we compared the number of renewals RHS made in October of fiscal years 2014–2016 (years following funding gaps) to the number of October renewals RHS made in the 3 prior fiscal years (2011–2013). We also reviewed RHS documentation on obligated but unexpended funds from properties that had exited the rental assistance program (due to foreclosure or mortgage prepayment), funding that was then available for use for agreements needing renewal. The documentation included information on the amount of funds available and the amount RHS used in fiscal years 2013–2015, as well as the amount remaining as of the end of fiscal year 2016. Additionally, we reviewed RHS fiscal year 2015 and 2016 budget justifications for the rental assistance program to understand legislative changes RHS sought to give it more flexibility in managing the program in times of funding uncertainty. Finally, we interviewed officials from the Office of the Under Secretary for Rural Development, RHS Multi-Family Housing (including the Portfolio Management Division), Rural Development Budget Division and Office of Operations and Management, and USDA National Financial Accounting and Operations Center and Office of Budget and Program Analysis. The interviews focused on the reasons for the fiscal year 2013–2015 funding gaps, including how RHS calculated agreement renewals and budget requests in those years; how RHS addressed the gaps, including processes for using previously obligated, unexpended funds; and the data systems RHS used to manage the rental assistance program, including AMAS. To examine what RHS has done to help prevent future rental assistance gaps and the extent to which it addressed related budgetary issues, we reviewed RHS tools, policies, and procedures for budget estimation and execution (such as allocating and obligating funds for rental assistance agreements), including changes made since the fiscal year 2013–2015 gaps. More specifically: We reviewed documentation on the rental assistance obligation tool RHS developed in 2015 to estimate rental assistance costs, including the tool’s methodology and controls and tests conducted on the tool during development and in its first year of use. We also examined the extent to which RHS had developed plans for future testing. We assessed RHS’s development and testing efforts using federal internal control standards for monitoring activities, use of quality information, and design of control activities. We also compared RHS efforts to useful practices found in federal banking regulator guidance for managing risks associated with models. We reviewed the inflation rates that RHS officials indicated were used in budget estimates for fiscal years 2010–2018 and compared them to applicable inflation rates in the President’s economic assumptions. We assessed the extent to which RHS’s practices were consistent with relevant parts of Office of Management and Budget (OMB) guidance on preparing agency budgets (Circular A-11, Preparation, Submission, and Execution of the Budget) and federal internal control standards for designing control activities. We randomly selected a nongeneralizable sample of 15 Rural Development state offices (out of 47) and conducted interviews with officials and staff about policies and practices for reviewing and approving rental assistance obligations for agreement renewals. We assessed the extent to which the stated practices of these offices aligned with expectations of RHS Multi-Family Housing officials and whether these expectations were documented, as called for by federal internal control standards for implementing control activities through policies. To supplement our review of the obligation tool, we used the AMAS data previously discussed to analyze how many full and partial rental assistance payments were made out of renewal agreements calculated by the tool in fiscal year 2016. This analysis was the same as the one we did for agreement renewals in fiscal years 2013–2015 with one exception. Specifically, we split the fiscal year 2016 agreements into two groups— those that fully expended their funds during fiscal year 2016 and those that did not—because the latter group did not yet have a full payment history as of the data’s end date (end of fiscal year 2016). For that group, we projected remaining payments based on the average of the prior 12 payments. We added this number to the number of payments that were made out of the agreement in fiscal year 2016. We also reviewed changes to RHS’s budget estimation procedures. Specifically, for fiscal year 2016, we used AMAS data to calculate the percentage of second renewals in that year and compared it to the amount of second renewals RHS included in its budget request. We also reviewed how RHS used the obligation tool to estimate its fiscal year 2017 and 2018 budget requests and compared this method to its budget estimation procedures for prior years. Finally, we interviewed RHS Multi-Family Housing officials and information technology contractors in Rural Development’s Office of Operations and Management about the development of and methodology used in the obligation tool. We interviewed USDA Office of Budget and Program Analysis, Rural Development Budget Division, and RHS Multi- Family Housing officials about the program’s budget estimation and execution policies and procedures. We also interviewed RHS Multi-Family Housing Portfolio Management Division officials about the roles and responsibilities of state office staff for obligating funds. Additionally, we interviewed OMB staff with responsibility for reviewing the rental assistance program’s budget estimates about the inflation rates RHS used in its budget requests. We conducted this performance audit from November 2015 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. In addition to the contact named above, Steve Westley (Assistant Director); Melissa Kornblau (Analyst in Charge); Hiwotte Amare; Josie Carver; Stephen Brown; William Chatlos; John McGrail; Barbara Roesmann; and Jena Sinkfield made key contributions to this report. | RHS provides about $1.4 billion annually in rental subsidies to owners of multifamily housing for more than 270,000 low-income rural households. RHS's agreements with property owners provide rental assistance payments estimated to last 1 year. In fiscal years 2013–2015, RHS was unable to renew all its agreements because it ran out of funds. For example, in fiscal year 2015, the funding gap was about $97 million. As a result, some property owners' rental assistance payments were delayed. GAO was asked to examine the reasons why RHS ran out of funds and how RHS plans to improve its budget requests. This report examines (1) reasons RHS ran out of funds for renewing rental assistance agreements in fiscal years 2013–2015 and how it responded, and (2) what RHS has done to help prevent future funding gaps and the extent to which it has addressed related budgetary issues. GAO analyzed RHS budget and rental assistance data for fiscal years 2011–2016, reviewed RHS policies and procedures, and interviewed RHS national office officials and staff from15 (of 47) randomly selected state offices. An interplay of three primary factors contributed to the funding gaps that the rental assistance program of the U.S. Department of Agriculture's Rural Housing Service (RHS) faced in fiscal years 2013–2015: Fiscal year 2013 sequestration and rescissions. An across-the-board cancelation of budgetary resources in March 2013 decreased the program's approximately $907 million budget by about $70 million. Unreliable methods for estimating rental assistance costs. RHS used a state-wide, per-unit average cost to calculate rental assistance agreement amounts. This resulted in some properties receiving more funds than needed, tying up funds that could have been used for other properties. Limited management flexibility. RHS had limited ability to adjust its program management to help prevent funding gaps. For example, RHS does not have authority to fund agreement renewals for less than 1 year. RHS took steps to mitigate the effects of the funding gaps on property owners, but some had negative consequences. For example, to cover fiscal year 2014–2015 gaps, RHS used unexpended rental assistance funds from properties that had exited the program. But, as a result, the program lost the associated rental assistance units and RHS could not re-assign the units to other properties. RHS has taken steps under its existing authorities to help prevent future funding gaps but lacks certain plans and controls to help ensure its estimates of rental assistance costs are reasonable. In fiscal year 2016, RHS began using a new cost model integrated with its program information system that more accurately estimates rental assistance agreement renewals. For instance, the model estimates renewal costs based on property-level data rather than state-wide averages. RHS also began including estimates of agreements that would need two renewals in the same fiscal year (a number of which are to be expected) in budget requests. But, GAO found weaknesses in aspects of RHS's budget estimation and execution of rental assistance. Specifically, RHS: does not have a plan for ongoing monitoring or testing of the new estimation method. Federal internal control standards call for management to establish monitoring activities and evaluate results. lacks controls to detect misestimates of rental assistance, a problem RHS experienced during early use of the model. Federal internal control standards call for control activities for information systems to respond to risks. has not used the appropriate inflation rates in its budget estimates since fiscal year 2009. Office of Management and Budget guidance states budgets should be consistent with the economic assumptions it provides. has not provided staff guidance on their responsibilities for determining whether properties' rental assistance should be renewed. Federal internal control standards call for documenting responsibilities through policies. The weaknesses may exist partly because RHS continues to refine its estimation method, which has been in effect for about 2 years. By addressing them, RHS would have greater assurance that it will develop the best possible estimates. GAO recommends that RHS develop plans for testing rental assistance estimation methods, develop estimation controls, create controls to ensure use of appropriate assumptions in budget requests, and provide guidance on reviews of rental assistance renewals. RHS did not comment on GAO's recommendations. |
Bus Rapid Transit involves coordinated improvements in a transit system’s infrastructure, equipment, operations, and technology that give preferential treatment to buses on urban roadways. Bus Rapid Transit is not a single type of transit system; rather it encompasses a variety of approaches, including buses using exclusive busways or HOV lanes with other vehicles, and improving bus service on city arterial streets. Busways--special roadways designed for the exclusive use of buses--can be totally separate roadways or operate within highway rights-of-way separated from other traffic by barriers. Busways currently exist in Pittsburgh, Miami, and Charlotte. Buses on HOV lanes operate on limited-access highways designed for long-distance commuters. Dallas, Denver, Houston, Los Angeles, and Seattle provide examples of extensive HOV lane use by buses. Bus Rapid Transit on busways or HOV lanes is sometimes characterized by the addition of extensive park and ride facilities along with entrance and exit access for these lanes. Bus Rapid Transit systems using arterial streets may include lanes reserved for the exclusive use of buses and street enhancements that speed buses and improve service. Los Angeles recently instituted a Bus Rapid Transit type of service on two bus arterial corridors. Bus Rapid Transit may also include any of the following features: Traffic signal priority. Buses receiving an early or extended green light at intersections reduce travel time--in Los Angeles, for example, by as much as 10 percent. Boarding and fare collection improvements. Convenient and rapid fare collection through prepaid or electronic passes and low-floor and/or wide-door boarding results in timesavings. Limited stops. Increasing distances between stations or shelters improves operating speeds. Improved stations and shelters. Bus terminals and unique stations or shelters differentiate Bus Rapid Transit service from standard bus service. (See fig. 2.) Intelligent Transportation System technologies. Advanced technology can maintain more consistent distances between buses and inform passengers when the next bus is arriving. Cleaner and quieter vehicles. Improved diesel buses and buses using alternative-fuels are cleaner than traditional diesel buses. Exclusive Lanes. Traffic lanes reserved for the exclusive use of buses help buses pass congested traffic. Light Rail transit is a metropolitan-electric railway system characterized by its ability to operate in a variety of environments such as streets, subways, or elevated structures. (See fig. 3 for an example of a Light Rail System.) Since Light Rail systems can operate on streets with other traffic, they typically use an overhead source for their electrical power and boardings take place from the street or platforms. According to a transportation consultant, because Light Rail systems operate in both exclusive and shared right-of-way environments, they have stricter limits on their length and the frequency of service than heavy rail systems. Light Rail systems gained popularity as a lower-cost option to heavy rail systems, and a number of cities have constructed Light Rail projects over the past 20 years. Since 1980, Light Rail systems have opened in 13 metropolitan areas: Baltimore, Buffalo, Dallas, Denver, Northern New Jersey (Hudson and Bergen counties), Los Angeles, Pittsburgh, Portland, Sacramento, San Diego, San Jose, St. Louis, and Salt Lake City. Several other cities, including Minneapolis and Seattle, are in the process of planning Light Rail systems. While there is no federal program specifically designed to fund Bus Rapid Transit, several FTA programs can be used to help fund these projects. FTA provides funding for new Bus Rapid Transit projects primarily through its New Starts Program but eligible projects face stiff competition from Light Rail, Heavy Rail, and Commuter Rail projects. Funding for additional New Starts projects of all types is constrained--FTA projects little remaining authority to make funding commitments to new projects and the Transportation Equity Act for the 21st Century (TEA-21) identified a large number of projects eligible for funding under the program. In addition to the New Starts Program, transit agencies may use other FTA funds, such as those from the Bus Capital Program and the Urbanized Area Formula Grant Program, to fund Bus Rapid Transit projects. However, the Bus Capital Program grants tend to be relatively small, thus limiting this program as a significant contributor to large projects. In addition, some Bus Rapid Transit projects may qualify for certain types of federal highway funding, notably Surface Transportation Program and Congestion Mitigation and Air Quality Improvement funds administered through the Federal Highway Administration. Since these funds are provided to state governments, local transit agencies must compete with many other state needs for these funds. In addition to providing capital funding, FTA began a demonstration program in 1999 to highlight the benefits of Bus Rapid Transit. Under this program, FTA awarded $50,000 grants to 10 transit agencies to share information and data on new Bus Rapid Transit projects. The program provides workshops and information-sharing opportunities for the transit agencies, but no capital funding. The grantees’ projects include a wide variety of busways, arterial bus lanes, and bus technologies. FTA’s New Starts Program is the primary federal program to support construction of new transit systems and extensions to existing systems. Projects for bus and rail systems that operate on exclusive rights-of-way compete for FTA grants of up to 80 percent of their costs. To obtain funds, a project must progress through a local or regional review of alternatives, develop preliminary engineering plans, and meet FTA approval of final design. FTA proposes New Starts projects to the Congress for funding on an annual basis based on an evaluation of their technical merits, including mobility improvements and cost effectiveness, and the stability of the local financial commitment. In making its funding proposal each year, FTA gives preference to projects with existing grant agreements. Following that, consideration is given to projects with overall ratings of “recommended” or “highly recommended” under the evaluation criteria. The Transportation Equity Act for the 21st Century authorized about $6 billion in “guaranteed” funding over 6 years for New Starts transit projects. Bus Rapid Transit projects compete with many other projects for New Starts funding, including Light Rail, Heavy Rail, and Commuter Railroads. In total there are over 200 projects in various stages of development. As shown in table 2, for the 26 projects with Full Funding Grant Agreements in fiscal year 2001, two projects with Bus Rapid Transit components have commitments of about $831 million in New Starts funds. The total New Starts commitment for these 26 projects is about $8.3 billion, which includes $4.67 billion for Light Rail, $2.69 billion for Heavy Rail, and $111 million for Commuter Rail projects. For a number of reasons, few Bus Rapid Transit projects are likely to be considered for New Starts funding in the final year of the period covered by TEA-21. First, few Bus Rapid Transit projects are ready for funding consideration. Only 1 of the 11 projects with pending grant agreements or in the final design stage is a Bus Rapid Transit project. Further, of the 31 projects in the preliminary engineering stage that have proposed about $8.3 billion in support from the New Starts program, only 6 Bus Rapid Transit projects proposing about $490 million are included. Reasons for the relatively few projects being ready for funding consideration include the newness of the Bus Rapid Transit concept and the decisions of local transit agencies, which are responsible for conducting analyses of various alternatives and proposing projects for funding. Second, FTA’s authority to make new funding commitments for projects of any type will be highly limited through 2003 if FTA makes the funding commitments proposed in its fiscal year 2002 New Starts report and funding request. It projects about $462 million in remaining commitment authority for the last year of the current program. Lastly, some Bus Rapid Transit projects are not eligible for New Starts funding because projects must operate on separate rights- of-way for the exclusive use of mass transit and high-occupancy vehicles. While some Bus Rapid Transit projects, such as busways, would fit this requirement, some would not. For example, the Wilshire-Whittier Bus Rapid Transit Service in Los Angeles operates on city streets in mixed traffic; it is not, therefore, on a separate right-of-way. Local transit agencies may use other types of federal funds, in addition to New Starts funds, to build Bus Rapid Transit and other systems. For example, transit agencies can apply funds obtained through FTA’s Urbanized Area Formula Grant program to Bus Rapid Transit and rail projects. This program provides capital and operating assistance to urbanized areas with populations of more than 50,000. However, areas with populations over 200,000 may only use the funds for capital improvements. For example, in fiscal year 2001, one Bus Rapid Transit project, Boston’s Silver Line project, planned to use $150 million from the formula grant program, about $331 million from the New Starts Program, and $120 million in Massachusetts state bond funds. In addition, one commuter rail, one heavy rail, and six Light Rail projects planned to use about $629 million in formula grant funds, in addition to New Starts funds, as part of their overall funding. An additional potential source for bus system improvements is the Bus Capital Program, which provides funds to states and local transit agencies for bus improvements. This program is characterized by a large number of relatively small grants. For example, for fiscal year 2001 the Congress appropriated about $574.1 million for 314 grants, ranging from $39,000 to $15.5 million; the largest amounts typically were provided for statewide bus grants. While these funds can be combined with funds from other programs, such as New Starts, they are generally not sufficient to fund a major Bus Rapid Transit project alone. Bus Rapid Transit and other transit projects can qualify for certain types of federal highway funds administered by the Federal Highway Administration. For example, transit agencies have used Surface Transportation Program and Congestion Mitigation and Air Quality Improvement funds to help pay for transit projects. Neither of the two Bus Rapid Transit projects with Full Funding Grant Agreements in fiscal year 2001 planned to use federal highway funds. Six of the Light Rail projects with Full Funding Grant Agreements plan to use about $171 million in federal highway funds. The South Miami-Dade Busway Extension project in Final Design plans to use about $39 million in these funds. From FTA’s perspective, Bus Rapid Transit is a step toward developing public transit systems that have the performance and appeal of Light Rail transit, but at a lower capital cost. FTA contends that using technological advancements will allow buses to operate with the speed, reliability, and efficiency of Light Rail. FTA promotes the Bus Rapid Transit concept with the slogan “think rail, use buses.” In 1999, the FTA initiated a demonstration program to generate familiarity and interest in Bus Rapid Transit. The goal of the program was to promote improved bus service similar to model systems in Curitiba, Brazil; Adelaide, Australia; and Ottawa, Canada, as an alternative to more capital-intensive rail projects. The program initially provided $50,000 to 10 transit agencies to share information and data on new Bus Rapid Transit projects. FTA wanted the Bus Rapid Transit program to show how using technological advancements and improving the image of buses would allow buses to increase ridership and operate with the speed, reliability, and efficiency of Light Rail. The grantees in the demonstration program may be eligible for federal capital funds such as New Starts, Bus Capital, and Urbanized Area Formula Grant funds. FTA has held workshops for consortium members focusing on developing Bus Rapid Transit's component features, such as vehicles, image, marketing, fare collection, and traffic operations. (See fig. 4.) Some locations participating in the demonstration program have more extensive elements of a Bus Rapid Transit system than others. For example, Miami and Charlotte have busways for the exclusive use of buses, while San Jose is implementing technological and service improvements such as signal prioritization on a high-ridership HOV lane arterial corridor. In Eugene, plans are to purchase buses that will have a train-like appearance and operate on special bus lanes (see fig. 5). In Cleveland, an extensive Bus Rapid Transit project is planned that involves the extensive reconstruction of Euclid Avenue, including signal prioritization, bus station structures, and reconstruction of the sidewalks along the corridor. Table 3 illustrates the variations in the Bus Rapid Transit concept among the 10 initial demonstration projects. FTA plans to conduct evaluations of each project participating in the demonstration program after the projects are implemented. FTA also plans to evaluate Pittsburgh’s Bus Rapid Transit project. Through these evaluations, FTA wants to determine the most effective Bus Rapid Transit elements so that other transit agencies can model similar systems. The Department of Transportation’s Volpe Center will conduct the first evaluation on Honolulu’s CityExpress! bus program. FTA does not plan to include all the consortium members' projects in the evaluation. Bus Rapid Transit capital costs were generally lower than Light Rail capital costs in the cities we reviewed, when compared on a cost-per-mile basis. We found mixed results when we compared the operating costs of Bus Rapid Transit and Light Rail systems. In examining performance characteristics, we found that the ridership and operating speeds of Bus Rapid Transit and Light Rail systems were similar in many respects. The Bus Rapid Transit projects that we reviewed cost less on average to build than the Light Rail projects, on a per-mile basis. As shown in figure 6, Bus Rapid Transit capital costs averaged about $13.5 million per mile for busways, $9.0 million per mile for buses on HOV lanes, and $680,000 per mile on city streets, when escalated to 2000 dollars. For 13 cities that built Light Rail lines, since 1980, capital costs averaged about $34.8 million per mile, ranging from $12.4 million to $118.8 million per mile, when escalated to 2000 dollars. On a capital cost per-mile basis, the three different types of Bus Rapid Transit systems have average capital cost that are 39 percent, 26 percent, and 2 percent of the average cost of Light Rail systems we reviewed. Bus Rapid Transit capital costs vary considerably, depending on the type of system built. Costs of Bus Rapid Transit projects include the cost of the roadway—busways or bus lanes, station structures, park-and-ride facilities, communications and improved traffic signal systems, and vehicles, if additional or special buses are needed for the project. Given the variety of ways in which Bus Rapid Transit may be designed, we classified the systems into three broad categories: busways, bus-HOV lanes, and Bus Rapid Transit on arterial streets. Appendixes III and IV provide information on the Bus Rapid Transit and Light Rail systems that we analyzed. Exclusive busways, which are essentially separate highways for buses, generally had the highest capital cost per mile for those systems we analyzed, averaging $13.5 million per mile in 2000 dollars. The capital costs of nine busways in four cities ranged from $7 million to $55 million per mile. The most expensive one was the Pittsburgh West Busway, which cost significantly more than other busways we analyzed. However, according to local transit agency officials, they needed to construct only 5 miles of busway to achieve their goal of rapid transit to the airport because the buses could exit the busway and use existing highways. They added that an alternative Light Rail system would have been longer, cost two to three times as much to construct and significantly more to operate and maintain, while attracting essentially no additional passengers. Other types of Bus Rapid Transit systems had lower capital costs. For HOV facilities where buses used HOV lanes in five cities we reviewed, capital costs ranged from $1.8 million to $37.6 million per mile. For bus-HOV facilities we considered the capital cost of HOV lanes, bus stations, park- and-ride facilities, and additional vehicles. See appendix I for additional details. Bus Rapid Transit improvements on arterial streets can have the lowest cost per mile. For example, Los Angeles completed the Wilshire Boulevard and Ventura lines at a cost of about $200,000 per mile. These two lines operate on major arterial streets, but without a dedicated right-of-way. The Bus Rapid Transit improvements included in this cost were signal prioritization, improved stations, and real-time information systems informing riders of bus arrival times. While this type of surface street treatment was the least expensive Bus Rapid Transit option in the cities we reviewed, Bus Rapid Transit lines on arterial streets can have higher costs if they involve more extensive construction, such as building special bus lanes. In Orlando Bus Rapid Transit on arterial streets included lane construction and vehicle costs, and averaged $9.6 million per mile. Light Rail systems we reviewed also vary considerably in their capital cost per mile. Included in capital costs are the stations, structures, signal systems, power systems, utility relocation, rights-of-way, maintenance facilities, transit vehicles, and project oversight. Again, we adjusted the historic capital cost of the projects to fiscal year 2000 dollars to provide a better basis of comparison. For the systems we reviewed the cost per mile for Light Rail averaged $34.8 million per mile, ranging from $12.4 million to $118.8 million per mile. The higher capital costs per mile for Light Rail systems compared with Bus Rapid Transit arise from several factors. First, Light Rail systems contain elements not required in Bus Rapid Transit systems. Light Rail systems typically require train signal, communications, and electrical power systems with overhead wires to deliver power to trains. A consultant study of eight Light Rail lines in five cities (Dallas, St. Louis, Denver, Salt Lake City, and Portland) found the average costs of these elements to be $2.8 million per mile. Light Rail systems also require additional materials needed for the guideway--rail, ties, and track ballast. In addition, if a Light Rail maintenance facility does not exist, one must be built and equipped. Finally, Light Rail vehicles, while having higher carrying capacity than most buses, also cost more--about $2.5 million each. In contrast, according to transit industry consultants, a typical 40-foot transit bus costs about $283,000 and an articulated, higher capacity bus costs about $420,000. However, buses that incorporate newer technologies for low emissions or that run on more than one fuel can cost more than $1 million each. For example, the Boston Silver Line low-floor, articulated, compressed natural gas-hybrid electric buses will cost $1.5 million each according to FTA officials. Another factor that can affect the cost of the systems is the amount and availability of required right-of-way. Right-of-way costs are affected by the design requirements of Bus Rapid Transit and Light Rail. Transit planners told us that a basic busway required a wider right-of-way than Light Rail. They estimated a two-lane busway required a right-of-way about 30 feet wide, compared with 24 feet wide for a double-track Light Rail system. Regardless of the transportation mode---bus or rail—the basic design has a major effect on the capital costs. Specifically, projects that use tunneling or elevated structures are more expensive than those with surface level construction. For example, the Boston South Piers Transitway, a 1-mile tunnel with three stations built adjacent to the Boston Central Artery/Tunnel project, has an estimated cost of $601 million. Tunneling can be three to six times more expensive than surface construction, regardless of the type of system—bus or rail. We found mixed results when we compared the operating costs for Bus Rapid Transit and Light Rail in each of the six cities that operated both types of systems. We used three measures to examine operating costs: cost per vehicle revenue hour, cost per vehicle revenue mile, and cost per passenger trip. We also compared these measures, correcting for vehicle capacity. Each measure resulted in somewhat different relative operating cost levels. Part of the reason for the variation in results is that the Bus Rapid Transit systems in our example cities operate in different ways. The systems ranged from arterial bus routes in Los Angeles to freeway express buses on barrier-separated HOV lanes in Denver, Dallas, and San Diego to exclusive busways in Pittsburgh. In addition, the Light Rail systems in these cities also serve different functions in different ways. The Light Rail systems range from local distributor systems sharing downtown city streets with cars and trucks, as in Dallas and Denver, to commuter-type service along tracks separated from all other traffic, such as the Los Angeles Green Line. The route, type of service, size of vehicles, and function of the systems— long haul commuter service or downtown circulator—each have an impact on the operating cost. Greater speed can also lower operating and capital costs by permitting a bus route or rail line to be serviced with fewer vehicles. Operating costs for Bus Rapid Transit systems included such costs as driver's salaries, fuel, vehicle maintenance, and maintenance of the busway or HOV lane. In Dallas it also includes the cost to move 5.2 miles of road barriers twice each day to change the direction of an HOV lane that the Bus Rapid Transit system and other HOVs use as well as the cost to provide daily enforcement of lane restrictions and motorist assistance. Light Rail operating costs include driver's salaries, electricity, and maintenance of the vehicles and track system. Light Rail systems require at least one repair facility and specialized maintenance staff, while Bus Rapid Transit vehicle maintenance is often done at existing maintenance facilities by current employees whose costs can be spread over the regular bus service. To determine operating cost per vehicle hour, the annual operating costs are divided by the number of hours the buses or trains operate in that year. This measure shows the average cost to operate a vehicle for 1 hour, regardless of the number of passengers carried. As shown in figure 7, using this measure, Bus Rapid Transit had lower costs in five cities and Light Rail in one. Operating cost per revenue mile is another way of measuring the cost of operating individual vehicles. Operating cost per revenue mile is a vehicle’s annual operating cost divided by the total annual number of miles traveled while actually in passenger service. It calculates the average cost of the vehicles to travel 1 mile. As shown in figure 8, all six cities' Light Rail systems showed higher costs per vehicle mile than Bus Rapid Transit routes. According to one transit expert, Bus Rapid Transit lines often run only during the busiest rush hour periods while Light Rail systems typically offer all-day service, which may in part explain this result. Transit operating costs can also be measured on a per passenger trip basis. Operating cost per passenger trip measures the total annual operating cost divided by the total annual passenger boardings, regardless of whether the passenger is transferring from a bus to a Light Rail vehicle, or vice versa. Thus, it shows how much it costs to carry a person on a trip, regardless of the length of that trip. Using this measure, four of six Bus Rapid Transit routes had lower operating costs per passenger trip than did Light Rail systems, as shown in figure 9. The wide disparities in operating costs and ridership levels are likely due to the variety of Bus Rapid Transit and Light Rail systems we reviewed. For example, our evaluation of Bus Rapid Transit service in Dallas included the costs to move 5.2 miles of barriers twice a day to allow Bus Rapid Transit and other HOVs to use the lanes, as well as enforcement and roadway assistance costs. In Los Angeles, the Bus Rapid Transit service on the Wilshire-Whittier line has very high ridership—about as high as the highest ridership levels achieved by Light Rail lines in the United States. High ridership generally reduces the cost per rider. In contrast, both San Diego and San Jose have lower Bus Rapid Transit ridership, which contributes to higher costs per rider. In addition, vehicle sizes and passenger capacity can vary greatly between Light Rail and bus vehicles, which can affect vehicle- based comparisons. The Light Rail systems also have varied functions that can affect operating costs. For example, Denver’s initial Light Rail system operated as a slower local circulator system on city streets shared with vehicular traffic, while San Diego’s system is used more for longer commuting trips. Two elements of transit system performance are ridership and system speed. We found that while ridership varied considerably, the largest ridership on Bus Rapid Transit and Light Rail systems were quite similar. We also found that speed varied but that Bus Rapid Transit projects in our review were generally faster. This was likely due to the nature of the Bus Rapid Transit systems that we visited; express bus operations or operations with longer stop spacing have higher speeds. We found that ridership on Bus Rapid Transit and Light Rail systems varies widely and depends, in part, on frequency of service, number of stops, hours of operation, and customer demand. For example, ridership on 4 busways ranged from 7,000 riders per day to about 30,000 per day and averaged about 15,600 riders per day. For 13 bus lines on HOV lanes, ridership ranged from 1,000 to about 25,000 riders per day, with an average ridership of about 8,100. In addition, the ridership on the two arterial street Bus Rapid Transit lines in Los Angeles was about 9,000 to 56,000 per day, with an average of 32,500 per day. The highest Bus Rapid Transit ridership was on Los Angeles’ Wilshire-Whitter line, which runs buses about every 5 minutes and operates all day. Light Rail system ridership also varies widely. For example, ridership on 18 Light Rail lines ranged from 7,000 riders to 57,000 daily riders and averaged about 29,000 per day. The largest Light Rail ridership was also found in Los Angeles on its Blue Line. According to a transportation consultant, system speeds generally depend on characteristics such as the distance between stops, fare-collection methods, and the degree to which the tracks or roadway are exclusive to transit vehicles or share right-of-way with cars and other vehicular traffic, as both buses and Light Rail lines typically do in downtown areas. In the cities with both Bus Rapid Transit and Light Rail, Bus Rapid Transit speeds were higher than Light Rail in five of six cities. The high-speed Bus Rapid Transit lines, as shown in figure 10, are generally commuter bus routes that run much or their entire route on highway HOV lanes. Bus Rapid Transit improvements to service such as exclusive bus lanes, skipped stops, dual bus lanes, and busways each may provide incremental improvements in vehicle speeds. Improvements such as bus traffic signal priority, level boarding onto low-floor buses, schedules based on time between buses rather than set schedules, fewer stops, and active management of bus spacing and traffic signal priority from a bus operations control center, can also each contribute to better service. For example, the Los Angeles Wilshire-Whitter Rapid Bus route made many of these improvements, resulting in a 29-percent improvement in average bus speeds. According to transit officials, one-third of the speed improvement along the Wilshire Avenue route was from the bus signal priority system and the rest from the other improvements. Besides cost and performance characteristics already discussed, Bus Rapid Transit and Light Rail each have a variety of advantages and disadvantages. Bus Rapid Transit generally has the advantage of (1) having more flexibility than Light Rail, (2) being able to phase in service rather than having to wait for an entire system to be built, and (3) being used as an interim system until Light Rail is built. Transit operators with experience in Bus Rapid Transit systems told us that one of the challenges faced by Bus Rapid Transit is the negative stigma potential riders attach to buses regarding their noise, pollution, and quality of ride. Light Rail has advantages, according to transit officials, associated with increased economic development and improved community image. On the negative side, building a Light Rail system can have a tendency to provide a bias toward building additional rail lines in the future. Bus Rapid Transit systems operate more flexibly than Light Rail systems. Bus Rapid Transit can respond to changes in employment, land-use, and community patterns by increasing or decreasing capacity. Bus Rapid Transit routes can also be adjusted and rerouted over time to serve new developments and dispersed employment centers that may have resulted from urban sprawl. For example, an official in San Jose noted that because of development outside the city center, there are now eight employment centers that need to be considered in its transit analysis. On the other hand, Light Rail lines are fixed and cannot easily change to adjust to new patterns of housing and employment. For example, the western portion of the Los Angeles Light Rail Green Line was built in part to provide mass transit service for workers in defense production facilities in Los Angeles. However, by the time the Green Line opened these facilities had been closed. As a result, projected ridership levels were not achieved. Although Bus Rapid Transit sometimes uses rail-style park-and-ride lots, Bus Rapid Transit routes can also collect riders in neighborhoods and then provide rapid long-distance service by entering a busway or HOV facility. Transit agencies have considerable flexibility to provide long distance service without requiring a transfer between vehicles. This is a significant benefit, because some research has shown that transit riders view transferring to be a significant disincentive to using mass transit. In contrast, Light Rail systems frequently require a transfer of some type— either from a bus or a private automobile. When Light Rail lines are introduced, transit agencies commonly reroute their bus systems to feed the rail line. This can have the effect of making overall bus operations less efficient when the highest-ridership bus route has been replaced by Light Rail; the short feeder bus routes can be relatively costly. Finally, bus-based systems’ ability to operate both on and off a busway or bus lane provides Bus Rapid Transit the flexibility to respond to operating problems. For example, buses can pass disabled vehicles, while Light Rail trains can be delayed behind a stalled train or other vehicle on the tracks. Thus, the impact of a breakdown of a Bus Rapid Transit vehicle is limited, while a disabled Light Rail train may disrupt portions of the system. Bus Rapid Transit systems differ from Light Rail systems in that they provide greater flexibility in how they can be implemented and operated. In constructing a Bus Rapid Transit system, it is not necessary to include all the final elements before beginning operations; it is possible to phase in improvements over time. Improvements such as signal prioritization and low-floor buses, which improve capacity and bus speed, can be added incrementally. These incremental changes can have significant effects. For example, one Los Angeles Bus Rapid Transit route increased its speed and cut 10 percent off its schedule time, by installing signal priority for buses to provide several additional seconds to allow buses to pass through intersections before the signal changed. Overall, the line was able to reduce travel time by 29 percent with all the improvements. In contrast, a transit expert noted that a Light Rail line segment must be fully completed and tested before starting operation and realizing benefits. Bus Rapid Transit also has the advantage of establishing a mass transit corridor and building ridership without precluding future changes. The development of a busway secures a transit right-of-way for the future. Some cities have identified Bus Rapid Transit as a means of building transit ridership in a travel corridor to the point where investment in a rail alternative becomes a cost-effective choice. For example, one of the projects in FTA’s demonstration program, the Dulles Corridor Bus Rapid Transit project in Virginia, hopes to build transit ridership in this fashion. However, converting a bus facility to Light Rail involves additional capital costs. The idea of converting a Pittsburgh busway to rail was studied by the Port Authority of Allegheny County, and the agency concluded that the $401 million capital cost of the conversion was too high. Officials we interviewed from FTA, transit agencies, academia, and private consulting stated that a negative image exists for bus service, particularly when compared to rail service. Communities may prefer Light Rail systems to Bus Rapid Transit in part because the public sees rail as faster, quieter, and less polluting than buses, even though Bus Rapid Transit is designed to overcome those problems. While transit officials noted a public bias toward Light Rail, research has found that riders have no preference for rail over bus when service characteristics are equal. While environmental benefits have helped justify Light Rail systems, the gap in environmental benefits between rail and buses may be narrowing. FTA and bus manufacturers have focused on improving the design of buses not just to increase their attractiveness, but also to reduce their noise levels and emissions. In December 1999, we reported that diesel buses are becoming much cleaner. We noted that according to the EPA, emissions from individual buses declined substantially between 1988 and 1999. Improvements in diesel technology have resulted in heavy-duty diesel engines that are more reliable and less polluting than their predecessors. In addition, we found that newer buses can use alternative fuels, such as liquefied natural gas, fuel cells, and hybrid technologies, which may have some beneficial effect on urban air quality as they are adopted into bus fleets. In commenting on a draft of this report, FTA officials said that the poor image of buses was probably a result of a history of slow bus service due to congested streets, slow boarding and fare collection, and traffic lights. Bus Rapid Transit is essentially designed to eliminate delays and provide faster service on better vehicles. FTA believes that the image of buses can be improved over time through bus service that incorporates Bus Rapid Transit features. This change could replicate the improved image that Light Rail systems experienced when modern Light Rail systems began to be built in the 1980’s. Transit agency officials told us that Light Rail provides the opportunity for improved economic development along the rail lines. Several city transit officials and transit consultants told us that communities see Light Rail as a mark that a city is "world-class," and could help a city improve its image and ability to attract economic development. According to transit agency officials, because Light Rail systems have permanent stations and routes, developers are more likely to locate new business, residential, or retail development along a Light Rail line than along a bus route. For example, Dallas transit officials cited $800 million in commercial development along its Light Rail line. The Light Rail line itself cost $860 million to build in 1994, so these officials saw the Light Rail line as an excellent investment. On the other hand, San Jose transit officials noted that while some residential development had occurred along its Light Rail line, the expectation is for changes in land use over a longer period of time, perhaps over 20 years, resulting in a more densely developed corridor. Transit officials we interviewed disagreed on the extent that Bus Rapid Transit could spur economic development. For example, officials in Dallas said they had not experienced development near their Bus-HOV stations that they could trace to the Bus Rapid Transit service. However, the Director of the Cleveland Bus Rapid Transit project cited development already occurring in the Euclid Avenue corridor in anticipation of the Bus Rapid Transit line. Here the Bus Rapid Transit line would operate much like a Light Rail system, with the same kind of fixed route on city streets and identifiable station structures that allow for transit-oriented development on Light Rail routes. In commenting on a draft of this report, FTA officials said that Light Rail’s economic development impact comes about, in part, because of the high capital investment that gives a sense of permanence. Rail’s economic development impact at stations also results from a pattern of rail service where there is excellent service to rail stations but much poorer service requiring a transfer beyond the stations. According to FTA officials, most development attributed to rail service occurs within walking distance of the rail station. In contrast, bus service that can leave the guideway and eliminate the need for a transfer places less emphasis on the stations as a focus for economic development. This may diffuse the economic development impact of Bus Rapid Transit guideways and stations. Most cities that built Light Rail systems did not end construction with the first rail line. Rather, the early Light Rail lines were often later extended or additional lines added. Of the 13 cities that built Light Rail systems since 1980, 5 cities already have more than one Light Rail line operating, 4 cities have already extended their initial Light Rail lines, 3 cities are doing initial expansions of earlier systems, and Buffalo is the only city of the 13 that has not expanded or is not expanding its initial Light Rail system. In addition, of the 13 cities, 9 cities have current Full Funding Grant Agreements amounting to over $2.6 billion and have construction under way on 10 projects to expand existing Light Rail systems. Overall, the cost estimates for these projects range from $19.5 million per mile to $238.3 million per mile with an average cost of about $54 million to construct a mile of Light Rail line. 10 cities have proposed 15 additional New Starts Light Rail projects that are in various levels of design or development. Two transportation experts told us that Light Rail systems, once installed, tend to expand because of the ease of making rail to rail connections, as opposed to bus to rail connections. In addition, they said that expansion also occurs because once a system has incurred the initial costs of building rail maintenance and repair facilities and training a new labor force of drivers and specialized maintenance workers, the initial costs can be spread over a larger system. A number of transit options are available to communities to help address growing traffic congestion. One such option is Bus Rapid Transit. Bus Rapid Transit is an emerging approach to using buses as an improved high- speed transit system. By employing innovative technologies such as signal prioritization, better stations or shelters, fewer stops, and faster service on more attractive vehicles, Bus Rapid Transit shows promise in meeting a variety of transit needs. In addition, in many communities Bus Rapid Transit systems can have lower capital costs than Light Rail systems yet can often provide similar performance. Further, Bus Rapid Transit’s flexibility may be a potentially valuable feature for many communities with sprawling patterns of development, where public transportation needs can be more complex and difficult to address than focusing on a single central business district. While Bus Rapid Transit shows promise, the primary federal program to support new and expanded transit systems, the New Starts Program, will provide little capital funding for Bus Rapid Transit over the next 2 years. First, the New Starts Program is stretched to its capacity to respond to the growing number of eligible projects and few projects of any kind will receive funding for the remainder of the current program. In addition, some of the Bus Rapid Transit projects do not fit the exclusive right-of-way requirements of the New Starts Program and thus would not be eligible for funding consideration. Further, since Bus Rapid Transit is a relatively new concept, some of the projects have not reached the point of being ready for funding consideration and there are many other rail projects further along in development with which they will ultimately have to compete. FTA is encouraging Bus Rapid Transit through a Demonstration Program. This program does not provide funding for construction but rather focuses on obtaining and sharing information on projects being pursued by local transit agencies. The evaluations of the Bus Rapid Transit projects, which are under way and planned, will hopefully provide additional needed information on the effectiveness of this transit option. The future of Bus Rapid Transit in the United States largely rests with the willingness of communities to consider it as they explore transit options to address their specific situations. Such decisions are difficult and made on a case-by-case basis considering a variety of factors including cost, ridership, environmental impacts, and community needs and attitudes. No one transit option is right for all situations. However, given the merits of Bus Rapid Transit and its potential cost advantages, we believe that it should be given serious consideration as options are explored and evaluated. We provided a draft of this report to the Department of Transportation for review and comment. Officials from the Department generally agreed with the report. Officials from FTA’s Office of Research, Demonstration, and Innovation; Office of Planning; and Office of the Chief Counsel provided observations on the public’s poor image of bus service and the economic development impact of rail and bus service, which we included in the report. These officials also provided technical comments, which we incorporated into the report as appropriate. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies of this report to the Secretary of Transportation and the Administrator of the Federal Transit Administration. We will also make copies available to others upon request. If you or your staff have questions about this report, please call me at (202) 512-2834 or write to [email protected]. Key contributors to this report were Samer Abbas, Robert Ciszewski, David Ehrlich, and Glen Trochelman. To identify the status of federal funding for Bus Rapid Transit and Light Rail systems, we reviewed FTA budget and program data, reports on New Starts projects, and prior GAO reports. To analyze support being provided to Bus Rapid Transit and Light Rail, we used the most recent report on the New Starts Program Annual Report on New Starts, Proposed Allocation of Funds for Fiscal Year 2002, Department of Transportation, Federal Transportation Administration, May 25, 2001. To describe FTA’s Bus Rapid Transit Demonstration Program, we interviewed officials from FTA, reviewed program documents, and contacted the demonstration project sponsors for additional information. To determine the capital costs of Bus Rapid Transit and Light Rail projects, we obtained cost data from FTA and transit agencies for selected cities. For Bus Rapid Transit systems, we initially selected the cities of Dallas, Denver, Los Angeles, Pittsburgh, San Diego, and San Jose because they had both Bus Rapid Transit and Light Rail systems. We added Houston and Seattle because they have extensive Bus Rapid Transit type systems and are in advanced stages of planning to build Light Rail systems. We also added Miami and Charlotte because they are operating dedicated busways. Lastly, we added Orlando because it is operating a Bus Rapid Transit type system on arterial streets. For Light Rail, we identified 13 cities that built systems between 1980 and 2000. We limited systems to this timeframe due to concerns about the availability of data from earlier dates. To obtain the capital costs for the Bus Rapid Transit systems, we used prior reports, if available, or contacted the local transit agency. For the Light Rail projects, FTA and transit agency officials provided total capital expenditures. We calculated capital costs based on the cost to complete the transit line, escalated to 2000 dollars. To escalate project costs, we used the Gross Domestic Product Implicit Price Deflator applied to the lump-sum capital cost at the year of completion. The only exception to this method was for the San Diego Light Rail system. Due to the way in which this system was built over time, escalating from the final lump-sum cost of the projects was not appropriate. However, the transit agency provided us annual capital expenditures, and we escalated each of these annual costs to 2000 dollars to determine the capital cost of this system. The capital cost analysis we conducted focused on capital cost per mile that was derived by dividing the total escalated costs by the number of miles of the various systems. We used cost per mile as our measure because it presents comparable information on a common basis. While other measures might have been attempted, such as annualized costs or cost per passenger, sufficient data were not available to do so. However, in our view, cost per mile presents a reasonable representation of the magnitude of the cost differences. In determining operating costs, we selected cites that had both significant Bus Rapid Transit and Light Rail systems—Dallas, Denver, Los Angeles, Pittsburgh, San Diego, and San Jose. We believed it important to use cities with both types of systems so that accounting of costs would be more consistent. Local transit agencies did not collect or maintain operating costs for Bus Rapid Transit systems or their individual lines. As a result, transit authorities had to calculate or estimate the operating costs associated with their operations. Because of the difficulty of this, we were able to analyze a limited number of Bus Rapid Transit lines in the cities. Based on discussions with the transit agencies, we judgmentally selected routes that had the most Bus Rapid Transit elements. The following identifies the Bus Rapid Transit type line in each city and the source of that data. For Light Rail operating costs, data were obtained from the 1999 National Transit Database. Dallas: We examined express bus routes on two Dallas area barrier- separated HOV lanes: I-35 East (Stemmons), and I-30 (Thornton). The Dallas Area Rapid Transit agency calculated the operating costs for buses using the HOV lanes. The reported operating costs are actual operating costs, not estimates, and are "fully loaded" to include direct, indirect, and general and administrative allocations. This includes the cost to move 5.2 miles of barriers twice a day to provide an extra HOV lane during rush hours. Denver: At the suggestion of local transit officials, we used the 120X Express Bus Route as an example of Bus Rapid Transit in Denver, since it includes all-day service and a substantial portion of the route runs on a freeway HOV lane. Operating costs were estimated according to average operating cost per vehicle hour for regular bus service. A Regional Transportation District official told us that he believed that the operating costs for the 120X route would be similar to regular bus operating costs, and that the same buses and drivers are used for both the 120X and regular buses. Los Angeles: We examined two Bus Rapid Transit routes: one runs along Wilshire-Whittier Boulevard and the other along Ventura Boulevard. Los Angeles officials provided an estimate of the operating costs for these lines. These lines operate all-day on routes that run concurrently with local buses, but with fewer stops and higher ridership. The buses travel on streets with other traffic and do not run on HOV lanes or bus lanes. Pittsburgh: Two Bus Rapid Transit busways were examined in Pittsburgh: the East Busway and the South Busway. The West Busway was not included because it was not open in 1999. Pittsburgh officials provided actual ridership figures and estimated the operating costs, vehicle hours, and vehicle miles for all routes using each busway from the outer end of the busway and including the downtown loop circulator portion where buses pick up and drop off passengers. Operating costs included all busway expenses for the two busways, including salaries and wages for operators, maintenance, and administration; diesel fuel; maintenance of facilities; materials and supplies; utilities; and purchased services. San Diego: We examined several express commuter bus routes in San Diego: the 810, 820, 850, 860, and 870. All travel at least part of their route on barrier-separated HOV lanes. San Diego officials provided estimates for the operating cost for these lines. San Jose: On the recommendation of local transit officials, we examined one Bus Rapid Transit route of the Santa Clara Valley Transit Authority, Route 102, from South San Jose to Stanford Research Park. Route 102 is a 32-mile long express commuter bus route that is 70 percent on HOV lanes--the highest HOV level of any Valley Transit bus route. Operating costs were estimated according to average operating cost per vehicle hour for regular bus service. In analyzing operating cost we used three measures: cost per vehicle revenue hour, cost per vehicle revenue mile, and cost per passenger trip. These are commonly used comparisons in this industry. To arrive at the results, the operating cost for 1999 was divided by the number of hours the vehicles operated in service that year, the number of miles the vehicles traveled when in service that year, or the number of passenger trips on each route that year. We also tried to calculate cost per passenger mile, but sufficient information was not widely available on where and how many passengers were getting on and off vehicles along their routes. To obtain information on the ridership and performance of Bus Rapid Transit and Light Rail systems, we relied on information obtained from transit agencies, supplemented with information from the National Transit Database, and interviewed FTA and transit agency officials, academic researchers, and private consultants. To determine other advantages and disadvantages of Bus Rapid Transit and Light Rail systems, we reviewed FTA documents, academic and private consultants’ reports, and interviewed FTA officials and study authors. We also interviewed transit agency officials to determine what additional factors they considered when they made choices to develop bus or rail systems, and what they had observed in the actual construction and operation of the systems. Certain limitations apply to the data presented in this report. First, the report primarily focuses on the cost of transit projects; we have not attempted to quantify all the possible benefits of these projects. Therefore, our review is not a comprehensive cost-benefit analysis. Second, because of differences among transit agencies in how they report operational information, analyses in this report generally are restricted to operating cost comparisons between bus and Light Rail within a given transit agency. Conclusions on the relative operating efficiency of one transit agency versus another should not be drawn from this report. In addition, not all the transit agencies we reviewed were able to totally segregate Bus Rapid Transit costs from their overall bus operating costs, which limited our analysis to overall operating cost rather than the various elements that contribute to it. Finally, transit agencies collect ridership information in a variety of ways, ranging from actual farebox counts to periodic ridership surveys. Because transit agencies are the only available source for such information, we relied on ridership data they provided. In addition, for some of the Light Rail analyses in this report we relied on information contained in FTA’s 1999 National Transit Database, the most recent at the time of our analysis. While we did not perform a comprehensive data reliability assessment of this information, we did determine that FTA has procedures in place to monitor data quality. We performed our review from July 2000 through August 2001 in accordance with generally accepted government auditing standards. The Massachusetts Bay Transportation Authority is constructing a two- phased Silver Line project, which will run from Dudley Square to Logan Airport, via downtown and the South Boston Waterfront. As of January 2001, funding has been secured for one of the project’s two phases. The project calls for the buses to operate on exclusive lanes on surface streets and in an exclusive busway-tunnel. Vehicles are expected to feature low- floors and real-time information. Some buses will use alternative-fuels to reduce emissions. When it begins operations, the Silver Line is expected to make 17 trips per hour with a round-trip running time of 48 minutes. Once completed, the Silver Line expects to serve 60,000 riders daily. According to a Massachusetts Bay Transportation Authority official, the estimated cost for developing the two phases of the Silver Line is $1.34 billion, of which $641 million has been secured. The Authority is seeking an additional $700 million from federal, state, and local sources. The Massachusetts Bay Transportation Authority estimates a 3 to 5 minute time savings from Washington Street to downtown. Time savings for the completed Silver Line and the service from South Station to the Piers area and Logan Airport are not possible to calculate because this is a new service. The Massachusetts Bay Transportation Authority decided that Bus Rapid Transit could attract similar ridership as a Light Rail system. In addition, according to the Project Manager, the Bus Rapid Transit project could be built at a much lower cost than Light Rail. Further, a busway would create fewer disturbances to Boston’s infrastructure than Light Rail. However, the construction of the Bus Rapid Transit system allows for possible construction of a future Light Rail system. According to the Project Manager, as of January 2001, the project was 35 percent to 40 percent complete. The Massachusetts Bay Transportation Authority plans to provide a fully integrated Silver Line service by 2008. Charlotte’s project involves extending the existing busway on Independence Boulevard, adding intelligent transportation systems on its buses, and adding new stations. In 1998, the Charlotte Area Transit System opened a 2.6-mile two-way express busway (without stations) in an unused HOV lane that, according to the Project Manager, cannot open to carpools until 2006, when the next phase of the Independence freeway project is completed. The project allows buses to bypass congestion. Under the current Bus Express Lane system, the Charlotte Area Transit System estimates that the monthly total ridership for January 2000 on the busway was about 15,700 —an increase of 55 percent from the previous year. The express bus routes make 32 trips during the morning period and 29 trips during the afternoon. The plan consists of retrofitting 3.6 miles of Independence Boulevard into a busway facility with five new stations and adding intelligent transportation systems technology such as automated vehicle locators and automatic passenger counters. The long-range goal is to extend the busway 13.5 miles, according to the Project Manager. The Metropolitan Transit Commission began a Major Investment Study that will cover the entire corridor and involve an evaluation of various forms of transit, including Bus Rapid Transit, Light Rail, and Commuter Rail. The Commission expects to complete the study in late 2001. According to the Project Manger, the Major Investment Study will determine the cost of the next phase. Federal, state, and local funding is planned for the project with the local share coming from a sales tax approved in a countywide referendum in 1998. The Charlotte Area Transit System plans to dedicate this revenue source to public transportation expenditures. The Charlotte Area Transit System estimated that the sales tax would generate over $50 million annually for transit in the Charlotte area. The Charlotte Area Transit System estimates that the current Bus Rapid Transit system saves 10 to 15 minutes in the afternoon rush hour trips and 2 to 4 minutes in the morning. According to the Project Manager, the Major Investment Study will estimate time savings for the next phase. The Major Investment Study will compare various forms of transit, including Bus Rapid Transit, Light Rail, and Commuter Railroad, according to the Project Manager. The 2.6-mile express busway has been in use since 1998. In January 2000, it carried over 15,000 passengers. The Major Investment Study is under way to analyze the remaining phase of this project. It is expected to be complete in late 2001. The Euclid Corridor Transportation Project, located in the cities of Cleveland and East Cleveland, will connect the region’s two largest employment centers—downtown/central business district and University Circle. The project calls for bus stations to be located over 7 miles on a landscaped center median, on the city’s major arterial street. The exclusive bus lane would be located along the median, with the curb lane available for other vehicle traffic. The last 2.5 miles of the route will have buses operating at the curb lane in mixed traffic. According to the Project Director, the vehicles are expected to be 60 foot, articulated, low-floor, diesel/electric buses. The system features an exclusive busway, intelligent transportation systems technologies, traffic signal preemption, and faster boarding and alighting due to off-board fare collection. The Euclid Corridor Transportation Project estimates the capital cost for the program at $220 million. The Greater Cleveland Regional Transit Authority estimates a travel time reduction of 30 to 40 minutes along the route. In December 1995, Greater Cleveland Regional Transit Authority’s management planning organization, the Northeast Ohio Area Wide Coordinating Agency, selected the Bus Rapid Transit project. Prior to this selection, rail options were evaluated against the Bus Rapid Transit approach. The Authority’s decision was heavily influenced by the costs as compared with the expected benefits of the options. The Authority selected the Bus Rapid Transit option because it was estimated to cost about one-half of the best rail option, yet would achieve many of the transit benefits. The FTA New Starts Program has given the project a “recommended” rating. Greater Cleveland Regional Transit Authority is currently working on design completion. It expects to begin limited service by 2005 and complete service in 2007, according to the Project Director. The Dulles Corridor Bus Rapid Transit project is part of a multiyear, four- phased effort to bring rail service to the rapidly growing Dulles Corridor in the Washington, D.C., metropolitan area. The Virginia Department of Rail and Public Transportation’s goal is to build a 23.5-mile rail transit system in the area that will serve as an extension to the 103-mile Metrorail service. The Bus Rapid Transit segment of the project is to serve as an interim step to rail. The plan calls for vehicles in the Bus Rapid Transit project to operate between an existing Metrorail stop and Dulles International Airport and beyond to Loudon County. Most of the route to the airport would be on the existing limited access road. A total of four stations would be constructed. Consideration is being given to buses that would feature intelligent transportation systems technology such as real-time and parking information and automated vehicle location. The plan calls for buses to run every 10 to 20 minutes in peak hours and every 20 to 60 minutes during the off-peak and weekend hours. The Virginia Department of Rail and Public Transportation estimates an average weekday ridership of 23,000 for the fully operating Bus Rapid Transit system. It plans to start operations in 2003 and begin conversion to rail by 2006. The Virginia Department of Rail and Public Transportation plans full implementation of rail by 2010. The Virginia Department of Rail and Public Transportation estimates a total cost of $287.3 million for the Bus Rapid Transit portion of the project and $2.2 billion for the entire project including rail service. The Virginia Department of Rail and Public Transportation Project Manager estimates that for the Bus Rapid Transit portion of the project, average rush hour time savings will be about 18 minutes. In 1997, a Major Investment Study on the Dulles Corridor recommended a “seamless” extension of the Metrorail system. The Virginia Department of Rail and Public Transportation evaluated Light Rail as an alternative, but it did not offer any cost savings or operational advantages. A 1999 supplement to the Major Investment Study concluded that Bus Rapid Transit could provide interim mobility improvements in the corridor but, due to operating constraints in the Tysons Corner area and projected future demand, a rail line was the most appropriate long-term solution. Current analysis will determine the most effective alignment for the future Metrorail extension. According to the Project Manger, in 2000, FTA approved advancing the Bus Rapid Transit portion of the project into preliminary engineering, and the entire Bus Rapid Transit-to-rail project into the National Environmental Policy Act process. The Bus Rapid Transit portion of the project received a “recommended” rating from FTA. Eugene’s Lane Transit District is directing a two-phased, 10-mile Pilot East- West Corridor Bus Rapid Transit project that will connect east Springfield to west Eugene. The Lane Transit District’s goal is to provide fast “rail-like” transit service along major corridors with smaller buses providing access from neighborhoods to the Bus Rapid Transit Lines, nearby shopping, and employment. The project calls for the system to use exclusive busways, traffic signal priority, prepaid fares, real-time information, and fewer stops. At implementation, the pilot corridor will operate at 10-minute intervals during weekdays and 20-minute intervals during evenings and weekends. The Lane Transit District estimates a total cost of $44 million to construct the project. The Lane Transit District estimates that the Bus Rapid Transit system would decrease travel time by 20 percent compared to regular bus service in the year it begins operation. It also estimates that this may grow to 40 percent by 2015. According to the Project Manager, the Lane Transit District conducted a Major Investment Study that determined that Bus Rapid Transit is the preferred approach to Eugene’s transportation needs. The evaluation concluded that Eugene currently does not have the population density to support a rail system. The Bus Rapid Transit project is in preliminary engineering and environmental assessment. According to the Project Manager, the Lane Transit District developed a public input process to educate residents and business owners about the Bus Rapid Transit project and to gather input on corridor issues such as engineering solutions and system image and character. The Project Manager stated that the goal is to complete Phase I by 2003 and Phase II by 2005. Once Phase I is completed, 4 miles of the project would be operational. The completion of Phase II would complete the 10-mile project and allow for full Bus Rapid Transit operation. The Hartford-New Britain Busway project consists of a two-way, 9-mile exclusive busway linking downtown New Britain with Hartford’s Union Station. The plan calls for buses to use intelligent transportation systems technologies, possibly including signal priority, automatic vehicle location, real-time information, and a smart signal system for grade crossing control. The Connecticut Department of Transportation estimates that daily ridership will increase by almost 11,500 new riders to 28,500 riders in the selected busway system, according to the Planning Manager. The Connecticut Department of Transportation estimates a total project cost of $100 million, according to the Planning Manager. The Connecticut Department of Transportation estimates a 40.5 percent time savings using the busway from Hartford to New Britain. The Connecticut Department of Transportation recommended the busway project after considering six alternatives. The agency selected the busway project as the preferred option based on transit-related, highway, and arterial-roadway performance measures and cost. FTA approved the project into preliminary engineering with a “recommended” New Starts project rating. The Connecticut Department of Transportation expects to begin design in 2001. The plan calls for the Bus Rapid Transit system to begin operating in 2003. The City and County of Honolulu plans to expand its current bus system and implement Bus Rapid Transit in the primary urban corridor. Honolulu began a limited-stop express bus service in 1999 in the corridor as a precursor to Bus Rapid Transit. Known as “CityExpress!” the system operates between Kalihi Transit Center and the University of Hawaii. During the first 6 months of operation, CityExpress! experienced a 50- percent increase in ridership. Honolulu plans to implement the Bus Rapid Transit system in the same corridor by providing exclusive lanes where heavy traffic congestion impedes the transit operation. According to the Public Transit Chief, the plan calls for Bus Rapid Transit to include transit centers, signal prioritization, and traveler information systems. A fully constructed Bus Rapid Transit system would produce an estimated 46,000 additional daily riders on mass transit in 2025. Total capital cost is estimated at $1.06 billion over 25 years. Bus Rapid Transit would result in estimated time savings of approximately 35 percent. The Major Investment Study/Draft Environmental Impact Statement recommended Bus Rapid Transit over Light Rail. Furthermore, it stated that the Bus Rapid Transit alternative forecasts the highest level of transit usage compared with other alternatives. The study deleted the rail option through a collaborative process after the analyses indicated that Bus Rapid Transit would provide an equal level of service and performance with less cost and impacts. The Honolulu City Council selected Bus Rapid Transit as the Locally Preferred Alternative in November 2000. According to the Public Transit Chief, it expects to complete the Final Environmental Impact Study in 2001. Upon competition of the study, the Chief said that Honolulu plans on seeking New Starts funding assistance from FTA. The South Miami-Dade Busway project is an 11.5-mile expansion of the existing busway south to the cities of Homestead and Florida City. In 1997, the Miami-Dade Transit Agency implemented the original 8.5-mile busway. According to a transit agency official, this was to facilitate increased economic development to the region in the aftermath of Hurricane Andrew. The system features exclusive lanes, signal priority, low-floor buses, and automated vehicle location and real-time announcements. The original busways resulted in significant growth in transit use, with ridership rising by 40 percent, according to the Management Chief. The Miami-Dade Transit Agency states that the total estimated cost for the extension is $85.5 million, according to the Management Chief. Currently, the Miami-Dade Transit Agency states that the scheduled time savings is less than 10 percent. The agency states that the time savings is minimal because buses operate at-grade and are interrupted at intersections located at half-mile intervals. Thus, service is not much faster than when the buses operate on U.S. Highway 1. The Management Chief stated that the Miami-Dade Transit Agency evaluated various modes of transit before building the South Miami-Dade Busway. It found other options too expensive: Heavy Rail would have cost 10 times as much to build, while Light Rail would cost 4 times as much in comparison with a busway. In addition to the cost disparities, the agency concluded that Light Rail would be too disruptive to existing surface traffic. Construction is scheduled to begin in November or December 2001, with completion of the extension by 2003. The U.S. Department of Transportation is working with the Miami-Dade Transit Agency to coordinate the construction of the extension with its repair project of U.S. Highway 1 to reduce disruptions, according to the Management Chief. The Santa Clara Valley Transportation Authority plans to expand the “backbone” of its bus system—the 27-mile Line 22 corridor--into a Bus Rapid Transit project. The plan calls for enhanced station areas, fare prepayment, low-floor buses, and intelligent transportation systems technology such as automatic vehicle location and signal prioritization. Line 22 runs every 10 minutes during peak hours and operates near capacity with 28,000 average daily riders (18 percent of total system ridership). Based on projections for one segment of the project, the Santa Clara Valley Transportation Authority estimates that ridership could increase by over 9 percent. Consultants for the Santa Clara Valley Transportation Authority estimated a total cost of $38 million. After developing Line 22 into a Bus Rapid Transit line, the Santa Clara Valley Transportation Authority expects to experience time savings in the range of 25 percent to 40 percent over current travel times. According to a Santa Clara Valley Transportation Authority official, Line 22’s proximity to Caltrain—the Bay Area’s commuter railroad—served as a disincentive in considering a Light Rail transit project for this corridor. The Santa Clara Valley Transportation Authority has begun the preliminary engineering needed to complete elements of the line. The agency expects a fully operational Bus Rapid Transit system by late summer or fall 2002 using federal highway and FTA Bus Capital funds, in addition to state and local funds. The Rio Hondo Connector Bus Rapid Transit project is to provide high- speed bus shuttle service between the Tren Urbano rapid transit line now under construction and intermodal transfer facilities. The plan calls for the the construction of a plaza and park-and-ride lot at the end of the connector, and a 2.5-mile length of limited-access HOV lanes in each direction. The project will feature intelligent transportation system technology, including automated vehicle location, computer-aided dispatching systems, traffic signal priority, and vehicle monitoring systems. The Puerto Rico Highway and Transportation Authority estimates a total cost of approximately $66 million for the entire project, including construction of HOV lanes and stations. The agency estimates $7 million to $8 million for the Bus Rapid Transit portion of the project. The Puerto Rico Highway and Transportation Authority expects a 10- minute travel time savings on the Bus Rapid Transit route. The Puerto Rico Highway and Transportation Authority did not conduct an alternative analysis for this project. The Puerto Rico Highway and Transportation Authority is advancing its work on the highway element and expects to implement its Bus Rapid Transit system by 2003. Total cost (year of expenditure) Escalated total cost (year 2000 dollars) System length (miles) Total cost (year of expenditure) Escalated total cost (year 2000 dollars) System length (miles) | To make buses a more reliable and effective high-speed transit alternative, a new concept-- Bus Rapid Transit--proposes (1) running buses on highways exclusively for them or on HOV lanes or (2) improving service on busier routes on city streets. Federal support for Bus Rapid Transit projects may come from several different sources, including the Federal Transit Administration's New Starts, Bus Capital, and Urbanized Area Formula Grants programs, but its use is constrained. Two Bus Rapid Transit projects have received about $831 million in funding commitments from the current New Starts Program. Few additional Bus Rapid Transit projects will likely receive funding commitments under the current New Starts Program, which expires in 2003, because few Bus Rapid Transit projects are ready to compete for funding; many projects are eligible to compete for the $462 million that is projected to remain available for fiscal year 2003; and some types of Bus Rapid Transit projects are ineligible for New Starts funding because projects are required to operate on separate right-of-ways for the exclusive use of mass transit and high-occupancy vehicles. The Bus Rapid Transit systems generally had lower capital costs per mile than did the Light Rail systems in the cities GAO reviewed, although neither system had a clear advantage in operating costs. Precise operating cost comparisons for Bus Rapid Transit and Light Rail systems within and between cities are difficult because of differences among transit agencies, transit systems, and how they account for costs. The performance characteristics also varied widely, with the largest Bus Rapid Transit system ridership about equal to the largest Light Rail ridership. Each program offers various advantages and disadvantages. Bus Rapid Transit provides a more flexible approach than light rail because buses can be routed to eliminate transfers; buses can operate on busways, HOV lanes, and city arterial streets; and the Bus Rapid Transit concept can be implemented in stages. However, transit officials repeatedly said that buses have a poor public image. |
Compared to the U.S. employed civilian labor force, the federal government’s workforce is made up of fewer millennials. In 2014, people 39 years old and younger represented 44.8 percent of the U.S. employed civilian labor force and 29.6 percent of the total civilian federal government workforce (see figure 1). The differences were greatest for the youngest portion of millennials. The increase of the number of millennials of working age has coincided with several events in the federal government—such as hiring freezes, sequestration, furloughs and a 3-year freeze on statutory annual pay adjustments from 2011 to 2013—that OPM and others contend negatively affected federal employee morale and limited opportunities for new employees to join the federal government. According to results from OPM’s Federal Employee Viewpoint Survey (FEVS), government-wide levels of employee engagement declined from an estimated 67 percent in 2011, to an estimated 63 percent in 2014, and increased to 64 percent in 2015, as measured by a score OPM derived from the FEVS beginning in 2010—the Employee Engagement Index (EEI). OPM has conducted the FEVS—a survey that measures employees’ perceptions of whether, and to what extent, conditions characterizing successful organizations are present in their agencies—every year since 2010. The EEI is composed of 15 FEVS questions covering the following areas: Leaders lead, which surveys employees’ perceptions of the integrity of leadership, as well as employees’ perception of leadership behaviors such as communication and workforce motivation. Supervisors, which surveys employees’ perceptions of the interpersonal relationship between worker and supervisor, including trust, respect, and support. Intrinsic work experience, which surveys employees’ feelings of motivation and competency relating to their role in the workplace. According to OPM, the EEI does not directly measure employee engagement. Instead it covers the conditions that lead to employee engagement. Specifically, OPM noted that organizational conditions lead to feelings of engagement, which in turn lead to engagement behaviors, such as discretionary effort, and then to optimum organizational performance. Engaged employees are more than simply satisfied with their jobs. According to employee engagement literature, engaged employees take pride in their work, are passionate about and energized by what they do, are committed to the organization, the mission, and their job, and are more likely to put forth extra effort to get the job done. In 2014, we reported that in the face of limited budgets, some agencies had reduced hiring. The Budget Control Act of 2011 established a 10- year cap on discretionary spending through 2021, but many agencies had experienced flat or declining budgets for several years prior. During that time, employment data show the following trends: From fiscal years 2008 to 2014, the total number of new federal employees hired decreased by 33 percent, from approximately 164,000 to 110,000 employees per fiscal year. Employees 25 years old and younger have experienced the largest decrease with 58 percent fewer hired in 2014 than in 2008 (see figure 2). For the entire millennial cohort (39 years old and younger), the decrease in hiring is similar to that of the non-millennial cohort (decreases of 34 and 32 percent, respectively). Compared to non-millennials, a greater percentage of millennials have non-permanent positions in the federal government than non- millennials. Examples of non-permanent positions include appointments that are term-limited or temporary such as park rangers or interns. In fiscal year 2014, 42 percent of employees 25 years old and younger and 15 percent of employees 26 to 29 years old held non-permanent positions. Across all age groups, 7 percent of employees in the federal government were in non-permanent positions. Attrition rates for all age groups were much higher in the early 2000s than they were in fiscal year 2014. For example, in fiscal year 2000, when millennials were just entering the workforce, 19 percent of permanent career employees 25 years and younger with 5 years or less of federal service resigned or separated, compared to 9.3 percent in fiscal year 2014 (see figure 3). Two economic recessions have occurred since 2000 (in 2001 and from 2007 to 2009) and may have contributed to declining attrition rates. In the federal government millennial attrition rates are slightly higher than other age groups, even when controlling for tenure. In fiscal year 2014, 9.3 percent of millennials 25 years old and younger who held permanent career positions for 5 years or less resigned or separated from the federal government. Fewer millennials 26 to 29 years old and 30 to 39 years old with 5 years or less of federal service left the government, with 7.0 percent and 6.3 percent, respectively, resigning or separating in fiscal year 2014. Non-millennial permanent career employees (age 40 and older) with 5 years or less of federal service had an attrition rate of 5.1 percent in fiscal year 2014, not including retirements. While many factors affect when a person actually retires, in 2015, we reported that across the government, 31 percent of the career permanent career employees on board as of September 2014 would be eligible to retire by September 2019. About 23 percent of Department of Homeland Security staff on board as of September 2014 will be eligible to retire in 2019, while more than 43 percent will be eligible to retire at both the Department of Housing and Urban Development and the Small Business Administration (see figure 4). Certain occupations—such as air traffic controllers, customs and border protection agents, and those involved in implementing government programs—will also have particularly high retirement-eligibility rates by 2019. As retirements of federal employees continue, some agencies with few millennials may face future gaps in leadership, expertise, and critical skills because millennials represent the next generation of workers. As with retirement eligibility, the percent of millennials in the workforce varies by agency. Millennials (39 years old and younger) make up more than 30 percent of the workforce at 8 of the 24 CFO Act agencies but less than a quarter at 7 agencies (see figure 4 above). Agencies that have high rates of retirement eligibility, such as the Environmental Protection Agency, also tend to have low percentages of millennials in the workforce. Actual retirement rates began to decline at the end of 2007 with the recession to 3.3 percent in 2008, 2.5 percent in 2009, and 2.7 percent in 2010, before increasing again to 3.5 percent in 2014. The large percentage of federal employees eligible for retirement creates both an opportunity and a challenge for federal agencies. On the one hand, as shown in our prior work, if accompanied with appropriate strategic and workforce planning, it allows agencies to realign their workforce with needed skills and leadership levels to better meet their existing and any newly emerging mission requirements. On the other hand, it means that agencies will need succession planning efforts as well as effective sources and methods for recruiting and retaining candidates in order to avoid a brain-drain and mission-critical skills gaps. We have found that leading organizations go beyond a succession planning approach that focuses on simply replacing individuals. Instead, leading organizations engage in broad, integrated succession planning and management efforts that focus on strengthening both current and future organizational capacity. To do this, it will be important for agencies to use workforce analytics to drive their decisions, as well as use available flexibilities from Congress and OPM to acquire, develop, motivate, and retain talent as needed. Mission-critical skills gaps within specific federal agencies as well as across the federal workforce pose a high risk to the nation because they impede the government from cost-effectively serving the public and achieving results. OPM and the Chief Human Capital Officer (CHCO) Council established an interagency working group and identified skills gaps in six government-wide, mission-critical areas: information technology/cybersecurity specialist, contract specialist/acquisition, economist, human resource specialist, auditor, and specialists in the science, technology, engineering, and mathematics (STEM) functional community. With one exception, millennials 39 years old and younger represent a greater percentage of employees in selected job series associated with these mission-critical occupations compared to their proportion in the workforce as a whole. Millennials represent 29.6 percent of the federal government workforce across all occupations in fiscal year 2014 (see table 1). Millennials’ percentages in the economist, auditor, and contract specialist job series are all greater than the government-wide average for all occupations, by as much as almost 10 percentage points. However, for human resources specialists, only 24.7 percent of the occupation is made up of millennials. Today’s federal jobs require more advanced skills, often at higher grade levels than federal jobs 30 years ago. In 2014, we found that employees working in professional (e.g., doctors and scientists) or administrative positions (e.g., financial and program managers), which often require specialized knowledge and advanced skills and degrees grew from 56 percent of the federal civilian workforce in 2004 to 62 percent in 2012. Also, from 2004 to 2012, permanent career employees with a master’s or professional degree saw a 55.7 percent increase. A lower percentage of millennial employees 29 years old and younger in the federal government have advanced degrees than older millennials (30 to 39 years old) or non-millennials. In fiscal year 2014, 2.1 percent of permanent career millennials 25 years old and younger had advanced degrees, compared to 12.3 percent of 26 to 29 year olds and 21.8 percent of 30 to 39 year olds. One reason for these differences could be that younger millennials have not had the time to obtain a more advanced degree. Non-millennial permanent career employees were similar to older millennial employees in that 21.9 percent had advanced degrees. Government-wide the estimated engagement level across all age groups was 64 percent and engagement levels were similar between millennials and other age groups. Millennial EEI scores were 0.4 percentage points lower than non-millennials in 2015, at 63.8 and 64.2 respectively. Key findings from our analysis include the following: Millennials 25 years old and younger had the highest estimated EEI score across all age groups and were 7.6 percentage points higher than the age group with the lowest score, the 30 to 39 age group. However, employees age 25 and younger are a relatively small portion of the federal workforce, comprising only 1.8 percent in fiscal year 2014. In comparison, employees 30 to 39 years old comprised 21.4 percent of the federal workforce in fiscal year 2014 (see figure 5). Engagement scores of millennials vary across agency but were statistically higher than engagement scores of non-millennials at 14 of 24 CFO Act agencies in 2015. Engagement scores for millennials were statistically lower than those of non-millennials at 3 agencies, the U.S. Agency for International Development, Department of Defense, and Department of Homeland Security (DHS). There was no statistically significant difference between the engagement scores of millennials and non-millennials at the 7 remaining agencies (Department of Agriculture, Department of Housing and Urban Development, Department of Justice, Department of State, Department of Treasury, the National Science Foundation, and the Small Business Administration) (see figure 6). The difference between EEI scores for millennials and non-millennials was highest at the Department of Commerce, where millennial EEI scores were approximately 5 percentage points higher than engagement scores for non-millennials. The range between the agencies with the highest and lowest engagement scores was approximately 29 percentage points for millennials and approximately 23 percentage points for non- millennials. The National Aeronautics and Space Administration had the highest EEI scores, with millennials scoring approximately 16 percentage points higher than the government-wide average and non- millennials scoring approximately 14 percentage points higher. DHS had the lowest engagement scores for both age groups— millennials scored approximately 13 percentage points lower than the government-wide average and non-millennials scored approximately 10 percentage points lower. Despite low EEI scores for millennials, as shown above in figure 4, DHS has the highest percentage (39.2 percent) of employees 39 years old and younger in their workforce, compared to other CFO Act agencies. Among all employees, millennials had similar perceptions of leaders as non-millennials, but, as shown in table 2, employees’ perceptions of leaders consistently received the lowest score of the three components that comprise the EEI. Millennials had better perceptions of their supervisors than non-millennials and the supervisors component saw the highest scores in the EEI across all age groups in 2015. For the intrinsic work experience component, however, non-millennials had higher scores than millennials by more than three percentage points. As we have shown in the analysis above, the employee-supervisor relationship is an important aspect of employee engagement. FEVS questions on the supervisors component focus on the interpersonal relationship between worker and supervisor and concern supervisors’ support for employee development, employees’ respect, trust, and confidence in their supervisor, and employee perceptions of an immediate supervisor’s performance. This is consistent with U.S. Merit Systems Protection Board (MSPB) research, which suggests that first-line supervisors are key to employee engagement and organizational performance. Questions on intrinsic work experience reflect employees’ feelings of motivation and competency related to their role in the workplace, such as their sense of accomplishment and their perception of utilization of their skills. Overall we found that the drivers of engagement were similar for millennials and non-millennials. What matters most in improving engagement levels across all age groups is valuing employees—that is, an authentic focus on their performance, career development, and inclusion and involvement in decisions affecting their work. The key is identifying what practices to implement and how to implement them, which can and should come from multiple sources—FEVS and other data sources, other agencies, and OPM. Of the various topics covered by the FEVS that we analyzed, we identified six that had the strongest association with higher EEI levels compared to others for both millennials and non-millennials, as described in figure 7. We used regression analysis to test which selected FEVS questions best predicted levels of employee engagement as measured by the GAO-calculated EEI, after controlling for other factors such as employee characteristics and agency. Constructive performance conversations. We found that having constructive performance conversations was the strongest driver of the EEI government-wide. For the question “My supervisor provides me with constructive suggestions to improve my job performance,” we found that, controlling for other factors, someone who answered “strongly agree” on that FEVS question would have on average an engagement score that was more than 20 percentage points higher, compared to someone who answered “strongly disagree” on the 5-point response scale. As we found in our March 2003 report on performance management, candid and constructive feedback helps individuals maximize their contribution and potential for realizing the goals and objectives of an organization. At the Department of Education (Education), one case study agency from our 2015 report on employee engagement, the Office of the Chief Information Officer (OCIO) implemented a process to help ensure that constructive performance conversations regularly occur. In addition to department-wide requirements for supervisors to hold two performance conversations a year, OCIO officials said that they require all supervisors to offer OCIO employees optional quarterly conversations. These quarterly performance conversations are guided by a set of specific topics that supervisors and employees developed together to ensure that employees receive consistent and regular constructive feedback and coaching. Career development and training. Our analysis found that career development and training was the second strongest driver government- wide. For the question, “I am given a real opportunity to improve my skills in my organization,” we found that, controlling for other factors, someone who answered “strongly agree” to that question would have on average an engagement score that was approximately 15 percentage points higher than someone who answered “strongly disagree.” As we found in 2004, the essential aim of training and development programs is to assist an agency in achieving its mission and goals by improving individual and, ultimately, organizational performance. At the National Credit Union Administration (NCUA), another case study agency from our 2015 report on employee engagement, officials said the agency focused on providing training for employees throughout their careers. For example, NCUA requires each employee to develop an individual development plan. For employees new to credit union examining—a majority of employees—NCUA has a standardized 18-month training program that combines classroom and practical work. New examiners must complete a core set of courses and may also choose additional elective courses. NCUA officials said that they are constantly assessing formal and informal training for entry-level employees to identify areas to improve the curriculum and instruction. For more experienced examiners, NCUA provides continuing training and development, according to these officials. Remaining drivers. For the remaining 4 drivers, we found that government-wide, controlling for other factors, someone who answered “strongly agree” to those questions would have on average an engagement score that was between 10 and 14 percentage points higher than someone who answered “strongly disagree.” Those four drivers are work-life balance (“My supervisor supports my need to balance work and other life issues”), inclusive work environment (“Supervisors work well with employees of different backgrounds”), employee involvement (“How satisfied are you with your involvement in decisions that affect your work”), and communication from management (“How satisfied are you with the information you receive from management on what’s going on in your organization”). Examples of how the three case study agencies from our 2015 report implemented practices consistent with these drivers include the following: Work-life balance. Federal Trade Commission (FTC) officials implemented an outreach strategy to inform staff about child and elder care resources after learning that employees were not aware of the services or did not know that they qualified for these services. Officials said employee knowledge of and agency commitment to these kinds of programs enhances supervisor support for work-life balance. Similarly, to support work-life balance, as part of its engagED initiative, Education revised telework policies, provided training for managers and employees on the new polices and on working in a telework environment, and improved infrastructure to make telework as effective as time spent in the office, according to Education officials. Inclusive work environment. The FTC established an agency-wide Diversity Council to develop comprehensive strategies to promote understanding and opportunity throughout FTC. FTC officials said that employees of all levels were interested in forming such a council. This included employees who experienced diversity issues firsthand as well as managers who could address those issues. The goal of FTC’s Diversity Council—composed of representatives from each bureau and office—is to engage employees and supervisors across the agency, make recommendations for improving diversity, and foster the professional development of all agency employees, according to these officials. Employee involvement. Education’s Office of General Counsel (OGC) has a permanent employee-driven Workforce Improvement Team (WIT) that grew out of an office-wide meeting with employees at all levels to involve employees in the discussions about the FEVS results. As a result of this group’s work, Education’s OGC management introduced additional training and professional development opportunities and improved employee on-boarding through a new handbook and mentoring program. Education’s OGC officials said that the staff-driven WIT has created feelings of stronger ownership, engagement, and influence in office decision making. Education’s OGC officials said that OGC’s management seeks feedback from staff, including from the WIT, to evaluate the effectiveness of improvement efforts. These officials said that this strengthens two-way communication, which improves employee engagement and organizational performance. Communication from management. NCUA officials told us that the head of the agency and its senior leaders communicate with line employees (who are mostly in the field) through quarterly webinar meetings. The meetings are scheduled to accommodate the field employees’ frequent travel schedule and generally start with any “hot topics” and continue with discussion of agency efforts to meet mission goals. The agency head takes questions in advance and during the webinar and, when needed, participants research and share responses with agency employees. According to NCUA officials, these regular, substantive conversations demonstrate top leadership’s commitment and respect for all employees as valued business partners. These key drivers can help agencies develop a culture of engagement as agencies embed them into the fabric of everyday management practices, rather than simply reacting to the results of the most recent FEVS. Importantly, these six practices were generally the consistent drivers of higher EEI levels when we analyzed them government-wide and by age groups, and were the same drivers of engagement identified in our prior analysis of the 2014 EEI. Because these six practices are the strongest drivers of the EEI, this suggests they could be the starting points for all agencies seeking to improve engagement. In our 2015 report we identified three key lessons for improving employee engagement, each of which is described in greater detail below. Our three case study agencies in our 2015 report on employee engagement attributed their high or increasing levels of engagement to overall effective management practices more so than to efforts specifically aimed at improving engagement levels. Officials at these agencies said they pay attention to employee engagement scores, but also focus on overall positive organizational health and culture and on how their agency implements change efforts. Some of the practices agencies cited parallel those we identified in 2003 as key to successful organizational transformation, including top leadership involvement, consistency, creating a line of sight linking individual results to organizational performance, and employee outreach. Top leadership involvement. Officials from all three of our case study agencies said that top agency leaders were directly involved in organizational improvement efforts. We have previously reported top leadership that is clearly and personally leading the change presents stability and provides an identifiable source for employees to rally around and helps the process/efforts stay the course. For example, Education officials said Education’s Chief Information Officer is directly involved in efforts to address FEVS scores—including being directly involved in the data analysis, reviewing Education’s Office of the Chief Information Officer (OCIO) action plans developed by each of his subordinate directors, overseeing implementation of strategies, and assessing their effectiveness. Consistency. Officials at Education’s OCIO said it is important to ensure that policies are applied consistently, which is the goal of that office’s Speaking with One Voice initiative. The biweekly management meetings to discuss and clarify the implementation of department policies (e.g., telework, resources, and employee bonuses) were instituted after conversations with employees revealed that policies were inconsistently applied. As a result of the initiative, Education’s OCIO officials said employees know that senior leaders are paying attention to how policies affect employees and are accountable for ensuring appropriate implementation. Line of sight. FTC officials emphasized the importance of creating a line of sight between the agency’s mission and the work of each employee. As we have previously reported, successful organizations create a “line of sight” showing how team, unit, and individual performance can contribute to overall organizational results. FTC officials said that the agency lists every employee that contributed to a case in the pleadings, from the attorneys and paralegals to the information technology specialists who provided computer support. Importantly, FTC officials said they recognize how mission support functions, such as excellent human resources customer service contribute to the agency mission. Employee outreach. According to officials at all three case study agencies, they all reach out to employees and their labor union representatives, if applicable, to obtain insight into their FEVS scores or to inform other improvement efforts. Our 2003 report found that employee involvement strengthens the improvement process by including frontline perspectives and experiences. By participating in improvement task teams, employees have additional opportunities to share their experiences and shape policies and procedures as they are being developed and implemented. For example, in 2012, while NCUA’s EEI score was above the government-wide level, FEVS questions about awards, performance appraisals, and merit-based promotions were its lowest scoring categories. NCUA officials said they contracted with an external facilitator to conduct workshops and webinar-based feedback sessions with employees to gain insight into their FEVS results and identify root causes influencing the survey scores. These officials said that using external facilitators offered employees confidentiality and created an environment that encouraged open conversations. Based on these feedback sessions, NCUA created an internal employee-driven committee to inform revisions to the awards, performance appraisals, and merit-based promotion process, and developed recommendations for NCUA’s management to implement these changes. Most of the committee’s recommendations were implemented. According to officials at our case study agencies in our 2015 report on employee engagement, while the EEI provides a useful barometer for engagement, other indicators can provide officials with further insight into reasons for engagement levels and areas for improvement. Other data such as turnover rates and equal employment opportunity (EEO) complaints—which are likely already collected by federal agencies—can provide additional insight and strategies for improving employee engagement. Notably, MSPB found that there is a statistically significant correlation between higher levels of employee engagement and fewer EEO complaints. Officials in the three case study agencies said that they pay attention to their FEVS scores, but other sources of data can provide explanatory or agency-specific information valuable to developing improvement strategies. Officials at case study agencies for our 2015 report on employee engagement told us that they take a multi-year, multi-prong approach to improving engagement and do not base engagement efforts solely on the survey cycle or focus their attention on year to year changes in the EEI. Some case study agency officials said a single survey cycle does not provide enough time to implement changes and see results because real change usually takes more than 1 year. The FEVS cycle begins around May and agencies receive results in September or October. It may be late-winter or early-spring before an agency will have designed an action plan. By the time the next survey cycle begins, agencies may still be interpreting results and developing and implementing their action plans. Moreover, according to case study agency and other officials we interviewed for the 2015 report, the annual survey cycle does not allow enough time for employees’ perceptions to change before the next cycle begins. For example, an Education official said that it took a few years to see the effects of engagement-related actions. Members of the Chief Human Capital Officers Council and National Council on Federal Labor- Management Relations joint working group on employee engagement said that the effects of initiatives implemented to improve engagement, will not be reflected in the EEI scores for at least a couple of years, which makes evaluating their effectiveness challenging. Instead of focusing exclusively on FEVS and EEI scores, the case study agencies we examined took a longer term approach to their engagement efforts. For example, according to officials, Education established engagED, a long-term cultural change initiative aimed at building a more innovative, collaborative and results-oriented agency, and creating a more engaged workforce. Key components included quarterly all-staff meetings with the Secretary to discuss various topics; a “lunches with leaders” program that allowed agency employees to discuss key topics with senior agency leaders; and periodic leadership summits where agency leaders participate in developmental activities identified by staff and focused on teams, individual leadership, and problem resolution. In conclusion, more than simply a goal in its own right, higher levels of engagement can enhance an agency’s “brand” to job seekers, reduce turnover, and most importantly, improve organizational performance. Moreover, while our analysis and the experience of our case study agencies suggests that developing a culture of engagement does not necessarily require expensive programs or technology, it does necessitate effective management strategies such as leadership involvement, strong interpersonal skills on the part of supervisors, and thoughtful use of data. The starting point is valuing employees, focusing on their performance and career development, and ensuring their inclusion in decisions affecting their work. These engagement efforts, combined with other components of a robust talent management strategy covering the full life-cycle of federal employment, provide an ample tool kit that should position agencies to be competitive in the labor market for top talent. This completes my prepared remarks. I would be happy to answer any questions the Subcommittee may have. For further information regarding this statement, please contact Robert Goldenkoff, Director, Strategic Issues, at (202) 512-2757, or [email protected]. Individuals making key contributions to this statement include Chelsa Gurkin, Assistant Director; Shelby Kain, Analyst-in-Charge; Giny Cheong, Sara Daleski, John F. Hussey III, Donna Miller, Anna Maria Ortiz, Ulyana Panchishin, and LaSonya Roberts. 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. | GAO's prior work found that skills gaps in government-wide fields such as cybersecurity are threatening the ability of agencies to carry out their missions. At the same time, government-wide trends in federal workforce retirement threaten to aggravate the problem. To help ensure agencies have the capacity to address complex national challenges, agencies need to be competitive for top talent, including those in the millennial generation. This testimony examines (1) recent employment trends of millennials in the federal workforce and how they compare to other employee cohorts; (2) trends in engagement levels of millennials versus other employee groups; and (3) the drivers of federal employee engagement and the key lessons learned for building a culture of engagement. This statement is based on GAO's 2015 review of the trends and drivers of government-wide employee engagement and our larger body of work on federal human capital, issued primarily between January 2014 and September 2016, and is updated with more recent information. Millennials are commonly considered as those born between the early 1980s and 2000. However, for the purposes of this statement GAO is including all employees 39 years old and younger as millennials in order to provide a consistent definition across datasets. GAO is not making any new recommendations in this testimony. We have previously made recommendations to the Office of Personnel Management (OPM) to improve engagement government-wide, which OPM has implemented. Employees 39 years of age and younger represented approximately 45 percent of the United States employed civilian labor force and about 30 percent of the civilian federal workforce in fiscal year 2014. This group includes the millennial generation. The percent of millennials within the federal workforce varies by agency and agencies that have high rates of retirement eligibility also tend to have low percentages of millennials in the workforce. In 2015, millennial employees in the federal government had an estimated Employee Engagement Index (EEI) score of 63.8 – as derived from the Office of Personnel Management's Federal Employee Viewpoint Survey – which is less than one percentage point lower than non-millennials. Engagement is usually defined as the sense of purpose and commitment employees feel towards their employer and its mission. As shown in the figure below, millennial subgroups had both the highest and lowest EEI scores among all age groups in 2015—employees 25 and younger had the highest EEI score (70.8), while employees 30 to 39 years old had the lowest EEI score (63.3). Key drivers of engagement can help agencies develop a culture of engagement. GAO's regression analysis identified six practices as key drivers of the EEI, which were similar for both millennials and non-millennials: (1) constructive performance conversations, (2) career development and training, (3) work-life balance, (4) inclusive work environment, (5) employee involvement, and (6) communication from management. As GAO found in a 2015 report on employee engagement, building a culture of engagement involves effective management strategies such as leadership involvement, strong interpersonal skills of supervisors, and thoughtful use of data. |
CDHPs are relatively new health care benefits plan designs that are offered in various forms, including that of an HDHP coupled with an HSA. The FEHBP began to offer CDHPs in 2003 and first offered HDHPs coupled with HSAs in January 2005. While insurers and employers offer several variants of CDHPs, these plans generally include three basic precepts—an insurance plan with a high deductible, a savings account to pay for services under the deductible, and enrollee decision support tools. An insurance plan with a high deductible. CDHP deductibles are about $1,900 on average nationwide for individual coverage and about $3,900 for family coverage, compared to about $320 and $680, respectively, on average, for a traditional PPO plan. A savings account to pay for services under the deductible. These savings accounts encompass different models, the most prominent being health reimbursement arrangements (HRA) and HSAs. Both HRAs and HSAs are tax advantaged, and funds from these accounts may be spent on qualified medical expenses—such as the plan deductible and payments for covered and noncovered services. Funds that are used for qualified medical expenses that are not covered by the health plan do not count toward meeting the plan’s deductible or out-of-pocket spending limits. Important distinctions exist between HRAs and HSAs. HRAs are funded solely by the employer and are generally not portable once the employee leaves. These funds may accumulate up to any employer-specified maximums and may only be spent on qualified medical expenses. Although HRAs are generally coupled with health plans that include a high deductible, this is not a requirement for favorable tax treatment. An HSA is a new type of tax-advantaged savings account that, unlike HRAs, must be coupled with an HDHP that meets statutorily defined minimum deductibles and limits on out-of-pocket expenditures for enrollees. Contributions to an HSA may be made by both the employer and employee. The HSA account holder essentially owns the account and can transfer funds from one HSA account to another. Funds in these accounts may earn interest, are allowed to roll over from year to year, and may accumulate subject only to annual limits on contributions. HSA funds may also be withdrawn for purposes other than qualified medical expenses subject to regular taxes and an additional tax penalty, and may be used as retirement income subject to regular taxes. Certain individuals are not eligible for HSAs, including those eligible for Medicare or covered by another health plan in addition to the HDHP. Decision support tools. CDHPs may provide decision support tools for consumers to help them become actively engaged in making health care purchase decisions. These tools may provide enrollees online access to their savings accounts to help them manage their spending. They may also provide enrollees with information to assess the quality of health care providers and the prices for health care services. While health insurance carriers may provide decision support tools to all enrollees, these tools may be more important to CDHP enrollees who have a greater financial incentive to take a more active role in their health care purchase decisions. To help enrollees choose a doctor or a hospital, experts suggest they need data to assess the quality of those providers. Such data may include the volume of procedures provided; the outcomes of those procedures, such as mortality and complication rates; as well as certain process indicators, such as the percentage of cases in which a provider followed established clinical practice guidelines for a particular procedure. To help enrollees manage their HSA account funds and evaluate the price competitiveness of various providers, some experts believe enrollees need information about the expected costs of services— such as an average or expected range of costs for a procedure, or the actual price a provider will charge based on the payment rates negotiated between the provider and the health insurance carrier. Insurance carriers have faced challenges in obtaining or presenting quality and cost data. For example, experts believe that it may be difficult for carriers to provide hospital- or physician-specific quality measures because such measures are not always readily available, particularly for physicians. They also believe that certain measures can be difficult for consumers to interpret, such as outcomes measures, and may not appropriately account for the poorer patient outcomes that may occur among providers who tend to treat sicker patients. Experts also believe that insurers have been reluctant to make negotiated provider payment rates available to consumers due to concerns over future provider contract negotiations. Therefore, the cost information insurers are willing to provide is more likely to reflect average rates or a range of costs within a geographic region rather than the actual negotiated rates. Federal employees have a choice of multiple health plans offered by private health insurance carriers participating in the FEHBP, with 19 national plans and more than 200 local plans offered in 2005. Plans vary in terms of benefit design and premiums. In 2004, nearly 75 percent of those covered under the FEHBP were enrolled in national plans, with the remainder in regional or local HMOs. Mirroring the private sector, FEHBP carriers began offering CDHP options in 2003. The FEHBP offers two types of CDHPs—high-deductible plans coupled with an HRA or an HSA. The American Postal Workers Union offered the first HRA-based option under the FEHBP in 2003. This was followed by HRA-based plans offered by Aetna and Humana in 2004. In 2005, 14 HDHPs coupled with HSAs were first offered. As of March 2005, 3,900 individuals were enrolled in these 14 HDHPs. Including retirees and family members, about 7,500 individuals were covered by the plans, with nearly all—about 96 percent—in the three multistate plans. All HDHPs offered by the FEHBP must include certain features. OPM requires that the plans cover preventive health services before the deductible has been met. In addition, because OPM is prohibited from contracting with plans that deny enrollment based on age, all must be offered with an HRA alternative of equivalent value for those who are ineligible for an HSA, such as Medicare enrollees. All HSAs and HRAs must be managed either by the insurance carrier or a trustee—such as a bank—which has received high ratings from a major financial rating service. OPM requires all HDHP carriers to offer health care decision support tools to enrollees. Finally, all HDHPs offered in the FEHBP must deposit a monthly contribution to the enrollee’s HSA, which is a portion of the enrollee’s premium payment, called the premium pass through. The premium pass through can be thought of as a required contribution to an employee’s HSA, with the remainder of the premium going to the insurance carrier to pay for the insurance coverage. HDHP enrollees were younger, earned higher federal incomes, were more likely to be male, and were more likely to have individual coverage than other FEHBP enrollees. The average age of HDHP enrollees was similar to that of another new plan, but was 13 years younger than that of all FEHBP enrollees. The share of actively employed enrollees earning federal incomes of $75,000 or more was 43 percent for HDHPs, compared to 14 percent for the other new plan, and 23 percent for all FEHBP plans. About 69 percent of HDHP enrollees were male, compared to 59 percent in both the other new plan and all FEHBP plans, and about 47 percent of HDHP enrollees had individual coverage, compared to 35 and 37 percent for the other new plan and all FEHBP enrollees, respectively. The average age of HDHP enrollees was younger than all FEHBP plan enrollees, but was similar to that of enrollees in another new FEHBP plan. The average age of HDHP enrollees was 46, compared to 47 for the other new plan, and 59 for all FEHBP plans. Differences were largely due to fewer retirees selecting the HDHPs. Eleven and 18 percent of the HDHP and other new plan enrollees were retirees, respectively, compared to 45 percent for all FEHBP plan enrollees. Excluding the retirees, the average age narrowed to 44 for both the HDHP and other new plan enrollees, and 47 for all FEHBP plan enrollees. (See table 1.) The distribution of enrollees by age group similarly illustrates the relatively younger ages of HDHP enrollees and enrollees of the other new plan. Relative to all FEHBP enrollees, the HDHP and other new plan enrollees comprise a larger share of enrollees in each age group under 55 years and a smaller share of enrollees in each age group over 64. (See fig. 1.) HDHP enrollees who were actively employed by the federal government earned higher federal salaries than other active federal employees in the FEHBP. The share of enrollees earning federal incomes of $75,000 or more in 2005 was 43 percent for HDHPs, compared to 14 percent for the other new plan and 23 percent for all FEHBP plans. These differences existed across all age groups. (See fig. 2.) Excluding retirees, HDHP enrollees were more likely to be male and to select individual rather than family plans than were enrollees in other plans. Sixty-nine percent of HDHP enrollees were male, compared to 59 percent of enrollees in both the other new plan and all FEHBP plans. Forty-seven percent of HDHP enrollees selected individual plans, compared to 35 and 37 percent of enrollees in the other new plan and all FEHBP plans, respectively. (See table 2.) HDHPs generally covered the same services as those covered by their traditional plan counterparts; however, enrollees’ financial responsibilities usually differed. The FEHBP HDHPs had higher deductibles than their traditional plan counterparts. In addition, relative to traditional plans, HDHP cost sharing after the deductible was comparable or lower for preventive services and prescription drugs. Cost sharing was mixed for physician office visits and hospital stays—higher than the carriers’ traditional plans in some instances and the same or lower in others. Two of the HDHPs had higher out-of-pocket spending limits than their traditional plan counterparts, and in most cases the HDHPs had lower premiums. All three multistate HDHPs generally covered the same services as those covered by their traditional plan counterparts. These plans covered the same broad categories of services, such as preventive, diagnostic, maternity, surgical, outpatient, and emergency care, and all plans typically covered the same services within these categories. While each HDHP defined preventive services slightly differently, each plan covered certain core services: routine physical exam, routine immunizations, cholesterol screening, colorectal cancer screening, annual prostate-specific antigen test, well-child care. These same services were also covered by the traditional plans. The few instances where covered services differed typically involved vision, dental, or chiropractic care benefits. For example, one HDHP did not include glasses or contact lenses in its vision care coverage, while its counterpart plan did. While the same services were typically covered by the three multistate HDHPs and their traditional plan counterparts, the plans sometimes imposed different restrictions and stipulations on the coverage of these services. For example, one HDHP allowed more frequent vision exams, but covered fewer days in skilled nursing facilities relative to the traditional plan. Another HDHP had no time restrictions for receiving emergency services following an accidental injury, while the traditional plan did. In addition, the HDHP for which the traditional plan counterparts were HMOs offered coverage for out-of-network providers for nonemergency care, while the HMOs did not. The other two HDHPs had similar restrictions as the traditional plans on obtaining coverage from out-of-network providers. The three multistate HDHPs often differed from their traditional plan counterparts in terms of enrollees’ financial responsibilities. All three HDHPs had higher deductibles, ranging from $1,100 to $2,500 for individual coverage and from $2,200 to $5,000 for family coverage, compared to $450 to $950 and $900 to $1,900 in their traditional PPO counterparts, respectively. Cost sharing also differed between HDHPs and the traditional plan counterparts. All HDHPs offered preventive care cost sharing for in-network providers that was the same or lower than the traditional plans. In addition, while all HDHPs covered preventive services before the deductible, those services were not always covered before the deductible by the traditional PPO plans. All HDHPs required that the deductible be met before prescription drug coverage began, whereas two of the traditional plans covered all prescription drugs before the deductible was met, and the third covered only generic drugs before the deductible was met. After the deductible was met, all HDHPs had comparable or lower cost sharing than the traditional plans for prescription drugs. Cost sharing for physician office visits for nonpreventive care and for hospital stays was mixed across plans—higher for the traditional plan counterparts in some instances, but the same or lower in others. Finally, two of the HDHPs had higher out-of-pocket spending limits for in-network providers of $4,000 and $5,000 for individual coverage and $8,000 and $10,000 for family coverage, compared to $1,500 and $4,450 and $3,000 and $5,400 for their traditional counterparts, respectively. HDHPs more often had lower monthly premiums than their traditional plan counterparts. One HDHP had lower premiums than both of its traditional plan counterparts, another plan had lower premiums than one of its two counterparts, and the third HDHP had lower premiums than a majority of its 22 traditional plan counterparts. On average, enrollees’ monthly premiums for the three HDHPs were $91 for individual coverage and $208 for family coverage, compared to $99 and $243 for their traditional plan counterparts, respectively. (See table 3.) Another difference between the HDHPs and their traditional plan counterparts was the monthly contribution HDHPs made to the enrollee’s HSA—the premium pass through—which was not a feature of the traditional plans. The average monthly pass through of the three multistate HDHPs was $82 for individual coverage and $165 for family coverage, representing 93 percent and 81 percent of the employee’s share of the monthly premium on average, respectively. The annual sum of the monthly contributions represented an average of 53 percent of the annual deductible across the three plans. Each HDHP provided online account management tools and access to health education information on the plan’s Web site. However, the extent to which they also included provider quality and health care cost data was more limited and varied across the plans. Moreover, the quality and cost information provided on the HDHP Web sites was available to both HDHP enrollees as well as to traditional plan enrollees. Each of the three multistate FEHBP HDHP Web sites provided online access to account management tools and health education information. The plans allowed enrollees to view their progress toward meeting their deductibles and track their HSA balances online. They also provided online access to certain health education information, including information on general preventive care, common medical procedures and conditions, various treatment options for certain conditions, information concerning prescription drug alternatives, and a disease management program. Two plans also provided a health risk assessment tool, and one offered access to a health advice line. The HDHPs provided varying degrees of provider quality data. Two of the three plans provided data on their Web sites for several measures to assess hospital quality, including outcomes data, procedure volumes, and patient safety ratings, and the other plan provided links to Web sites that contained this type of information. None of the plans provided similar process or outcome measures to assess individual physician quality, although one plan provided information on physicians’ medical board certifications. Each of the plans provided certain general information about the physicians in the plan networks, such as their hospital affiliations, languages spoken, and gender. Cost information provided by the three multistate plans was limited. One of the plans provided average hospital cost estimates and two provided average physician cost estimates for a limited number of services. For example, one plan provided average cost estimates within certain geographic regions based on its own claims data for certain physician services, such as diagnostic tests and surgical procedures. It also provided estimated total annual costs to treat certain conditions, such as diabetes and heart disease. None of the plans provided the actual payment rates that would be charged to enrollees that the plan had negotiated with specific hospitals or physicians. Two of the three plans provided access to average retail prescription drug prices and estimates of out-of-pocket costs for drugs, and all three plans provided actual prices for drugs purchased through the mail-order pharmacy services offered by the plans. None of the plans provided the actual payment rate the plan had negotiated with particular retail pharmacies. (See table 4.) The quality and cost information provided on each plan’s Web site was made available to the enrollees of both HDHP and traditional plans. In some instances, information was tailored to the specific plan in which an individual was enrolled. For example, one plan’s out-of-pocket cost estimates for prescription drugs took into account plan-specific coverage and cost-sharing features. Like many large employers, the FEHBP has expanded enrollee health plan choices by offering HDHPs combined with HSAs. While first-year enrollment is modest, the number of carriers offering these products in 2005 and expected to offer them in 2006 indicates that OPM and health insurance carriers anticipate continued interest in these new plans. Although the first-year enrollment in FEHBP HDHPs may not predict future trends, it does raise the possibility that individuals with certain demographic characteristics may be disproportionately attracted to these plans. For example, first-year HDHP enrollees had consistently higher incomes across all age groups than enrollees of another new plan and all FEHBP enrollees. This may suggest that aspects of HDHPs—such as the greater financial exposure coupled with the potential for tax-advantaged savings—uniquely attract higher-income individuals with the means to pay higher deductibles and the desire to accrue tax-free savings. First-year enrollees were also younger on average than all FEHBP enrollees; however, they were not younger than enrollees in another new plan. Thus it is not clear whether younger individuals were uniquely attracted to HDHPs, or if younger enrollees are typical of recently introduced health plans in general. Additional years of enrollment data will be necessary to determine whether characteristics of first-year enrollees are predictive of future trends; to identify other important characteristics of HDHP enrollees, such as their health status; and to assess the implications of these enrollment trends for the FEHBP. HDHPs, like other CDHPs, are premised on the notion that enrollees will become more actively involved in making health care purchase decisions than enrollees of traditional health plans. To do so, enrollees need information to help them assess the cost and quality trade-offs between different health care treatments and providers. However, the extent to which FEHBP HDHPs made such information available to enrollees was varied and limited, and HDHP enrollees were not provided any more or different information than was provided to traditional plan enrollees. Most notably lacking was specific information to assess the quality of health care provided by particular physicians and the actual prices plans had negotiated with particular providers. Some of this information may become available in the future. Two of the three largest HDHPs were developing physician-specific patient satisfaction ratings to help enrollees assess physician quality, and one had initiated a pilot project to provide enrollees with the actual, negotiated prices they would pay for certain services performed by a particular provider. Until such provider-specific quality and cost data become more widely available, the CDHP goal of having enrollees make health care purchase decisions based on an informed assessment of the quality/cost trade-offs may not be fully realized. We received comments on a draft of this report from OPM (see app. I). OPM expressed interest in our findings on the differences in characteristics of first-year HDHP enrollees compared to traditional FEHBP plan enrollees, and said that it would monitor enrollment trends over time to assess whether certain individuals—such as younger or healthier individuals—disproportionately enroll in HDHPs. OPM also said that it would continue to encourage plans to expand the decision support information they provide to enrollees, including the pricing of health care services. 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 after its issue date. At that time, we will send copies to the Director of OPM 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 (202) 512-7119 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. Randy DiRosa, Assistant Director; Gerardine Brennan; and Laura Brogan made major contributions to this report. | The Federal Employees Health Benefits Program (FEHBP) recently began offering high-deductible health plans (HDHP) coupled with tax-advantaged health savings accounts (HSA) that enrollees use to pay for health care. Unused HSA balances may accumulate for future use, providing enrollees an incentive to purchase health care prudently. The plans also provide decision support tools to help enrollees make purchase decisions, including health care quality and cost information. Concerns have been expressed that HDHPs coupled with HSAs may attract younger, healthier, or wealthier enrollees, leaving older, less healthy enrollees to drive up costs in traditional plans. Because the plans are new, there is also interest in the plan features and the decision support tools they provide to enrollees. GAO was asked to evaluate the experience of the 14 HDHPs coupled with an HSA that were first offered under the FEHBP in January 2005. GAO compared the characteristics of enrollees in the 14 HDHPs to those of enrollees in another recently introduced (new) plan without a high deductible and to all FEHBP plans. GAO also compared characteristics of the three largest HDHPs to traditional FEHBP plans offered by the same insurance carriers, and summarized the information contained in the decision support tools made available to enrollees by these three plans. FEHBP HDHP enrollees were younger and earned higher federal salaries than other FEHBP enrollees. The average age of HDHP enrollees (46) was similar to that of the other new plan (47) and younger than that of all FEHBP enrollees (59). These differences were largely due to a smaller share of retirees enrolling in the HDHPs and the other new plan. HDHP enrollees earned higher federal salaries compared to other enrollees. Forty-three percent of HDHP enrollees actively employed by the federal government earned federal salaries of $75,000 or more, compared to 14 percent in the other new plan and 23 percent among all FEHBP plans. In addition, nonretired HDHP enrollees were more likely to be male and to select individual rather than family plans. The three largest FEHBP HDHPs generally covered the same range of services--including preventive services--as their traditional plan counterparts; however, enrollees' financial responsibilities usually differed. Compared to the traditional plans, the HDHPs had higher deductibles. HDHP cost sharing was the same or lower for preventive services and prescription drugs, and all plans covered preventive services before the deductible. Prescription drugs in the HDHPs were subject to the deductible, while they were generally exempt from the deductible in the traditional plans. HDHP cost sharing varied with respect to nonpreventive physician office visits and inpatient hospital stays. Two of the three HDHPs had higher out-of-pocket spending limits, and HDHP premiums were lower on average than the traditional plans. The extent to which the three largest FEHBP HDHPs made available provider quality and health care cost information was limited and varied. Two of the three plans provided several hospital-specific measures of quality on their Web sites, including the volumes of procedures provided by the hospitals and the outcomes of those procedures, and the other plan provided links to other Web sites containing such information. Regarding physician-specific quality data, one plan provided a single measure. One of the plans provided average hospital cost estimates and two provided average physician cost estimates for selected services, but none provided the actual rates an enrollee would pay that the plan had negotiated with providers. Regarding prescription drugs, two of the three plans provided the average retail pharmacy drug costs, but none provided the actual negotiated rates an individual would pay at a particular retail pharmacy. In commenting on a draft of this report, the Office of Personnel Management (OPM) said that it would monitor enrollment trends over time to assess whether certain individuals--such as younger or healthier individuals--disproportionately enroll in HDHPs. OPM also said it would continue to encourage plans to expand the decision support information they provide to enrollees, including the pricing of health care services. |
GAO designated DOD contract management as a high-risk area in 1992. The lack of well-defined requirements, the use of ill-suited business arrangements, and the lack of an adequate number of trained acquisition and contract oversight personnel contribute to unmet expectations and schedule delays and place the department at risk of potentially paying more than necessary. In fiscal year 2009, DOD spent nearly $384 billion on contracts. In response to our prior recommendations and congressional direction, DOD has recently emphasized the need to improve its insight and management of UCAs. When a requirement needs to be met quickly and there is insufficient time to use normal contracting vehicles, defense regulations permit the use of an undefinitized contract action. These can be quickly entered into, but at a later date, the contract’s final price and other terms must be agreed upon by the contractor and government, a process known as definitizing the contract. UCAs can be entered into via different contract vehicles, such as a letter contract (an undefinitized stand-alone contract), a task or delivery order issued against a pre-established umbrella contract, an order against a basic ordering agreement, or a modification for additional supplies or services to an existing contract. UCAs are considered risky contract vehicles for the government. Our prior work and a DOD Inspector General report found that undefinitized contracts transfer additional cost and performance risks from contractors to the government because contracting officers normally reimburse contractors for all allowable costs they incur. With all allowable costs covered, contractors bear less risk and have little incentive to control costs. The government also risks incurring unnecessary costs as requirements may change before the contract is definitized. Contractors and the government should bear an equitable share of contract cost risk. UCAs shift much of the burden of cost risk onto the government during the undefinitized portion of the contract. Because the cost risk to the contractor may be reduced during this undefinitized period, compensation should be priced accordingly and negotiations should reflect any reduced cost risk to the contractor in determining the government’s profit or fee objective, according to defense regulations. DOD’s acquisition organization consists of several levels including department, service or agency, and local contracting commands or activities where acquisition policy and oversight take place. At the departmental level, the Under Secretary of Defense for Acquisition, Technology and Logistics is responsible for supervising and establishing policy for all DOD matters relating to procurement and acquisition policy through the Office of Defense Procurement and Acquisition Policy. At the component or agency level, each military service has its own senior acquisition executives and acquisition offices that are to establish contracting policies and conduct oversight of the local contracting commands or activities for each service. The defense agencies and combatant commands, such as the Missile Defense Agency and the U.S. Special Operations Command, also have procurement or contracting directorates within their organization that are to perform similar functions as the service senior acquisition executives in terms of establishing policy and conducting oversight. Within each military service there are numerous local contracting commands or activities that provide contracting support to many service acquisition and operational commands. DOD has taken a number of steps aimed at enhancing its insight into and oversight of UCA use among the components and local commands; however, data limitations hinder its full understanding of the extent to which UCAs are used. DOD implemented a policy in August 2008 to require centralized periodic reporting of UCA information and related management plans to the Defense Procurement and Acquisition Policy office within OUSD (AT&L). The department’s reporting requirements have evolved over time to include other types of contract actions that should be reported and DOD has instituted contract peer reviews for contracts above $1 billion, which may include UCAs. Although these steps have helped increase insight into UCA use, information gaps remain. For instance, we found DOD’s centralized reporting did not include 8 of 24 UCAs we reviewed that should have been reported in the April 2009 semi- annual report. DOD has instituted policies and proposed additional changes intended to enhance its departmental insight and oversight of UCA use. See Figure 1 for the recent changes to policies and guidance intended to increase insight and oversight of the use of UCAs. DOD’s August 2008 policy memorandum established centralized semi- annual reporting for UCAs with a not-to-exceed price above $5 million to the OUSD (AT&L) Defense Procurement and Acquisition Policy. According to DOD, the purpose of this centralized reporting is to enhance departmental insight into and management of UCAs. Starting October 31, 2008, undefinitized contract actions were required to be reported if the contract action’s not-to-exceed value was above $5 million and it was undefinitized at any point during a 6-month reporting period— either April through September, or October through March. These semi-annual reports are to include data on the reason for award, not-to-exceed amounts, obligation amounts, date of scheduled definitization, days past definitization deadline, and date the qualifying proposal is received. DOD finalized its October 2009 semi-annual report December 22, 2009. In addition to semi-annual reporting, the August 2008 policy memorandum also required each DOD component to update and submit a UCA management plan, each April and October, along with the semi-annual report as a way to improve oversight of UCA use. These management plans are required to describe the actions taken by DOD components to help ensure appropriate use, timely definitization, minimum obligation at time of award (consistent with the contractor’s requirements for the undefinitized period), appropriate recognition and documentation of the contractor’s reduced risk during the undefinitized period in the profit and fee negotiations, and milestones for completing planned actions. In October 2009, DOD updated its detailed guidance to clarify that UCAs to be recorded in the semi-annual report include undefinitized contracts awarded for foreign military sales, congressionally mandated long-lead procurement items, initial spares, special access programs, and contingency operations. A Defense Procurement and Acquisition Policy official also told us that once UCAs over $100 million are definitized, components must also submit the weighted guidelines worksheets along with their semi-annual report. Weighted guideline worksheets are an organized and structured approach to establish and document a prenegotiation objective for profit or fee based on an assessment of contractor risk. In preparing government estimates where profit is negotiated as an element of price, a reasonable profit shall be negotiated or determined for each procurement action, according to defense regulations. Requiring the worksheets to be submitted is intended to provide departmental insight into whether or not contracting officers are documenting their assessment of the contractor’s reduced risk when determining profit or fee negotiation objectives. Although we were told that weighted guidelines are to be submitted for UCAs over $100 million once definitized, we could not find documentation of this requirement in the UCA management Procedures, Guidance, and Instructions. On December 23, 2009, the department revised DFARS procedures, guidance, and instruction to require military departments and defense agencies to submit, with their semi-annual reports, a copy of the record of weighted guidelines for each definitized UCA with a value of $100 million or more. DOD also has finalized one amendment to DFARS and has proposed two additional changes which will affect how UCAs are managed within DOD. In July 2009, DFARS was amended to codify the changes communicated in the August 2008 policy memorandum. Also, in July 2009, DOD proposed a change to clarify that the existing DFARS requirement that letter contracts be definitized within 180 days or before more than 50 percent of the not-to- exceed amount is obligated will apply rather than Federal Acquisition Regulation (FAR) policy. Finally, although unpriced change orders are not UCAs, DOD has proposed a change to DFARS in recognition of the need for increased insight into and oversight of unpriced change orders to require that unpriced change orders be managed and overseen in a manner consistent with UCAs. DOD’s recent peer review process initiative may also improve DOD’s insight into and oversight of UCAs. Under the peer review process, contracts above $1 billion are to be reviewed by senior DOD officials at three points prior to contract award and then periodic post-award reviews. This peer review process is intended to increase departmental awareness of the significant events occurring with contracts valued at $1 billion or more across DOD. According to a DOD official, at least one UCA contract has been selected as part of the peer review process. Despite DOD’s efforts to collect information on UCAs, not all UCAs were in the most recent semi-annual report. For example, we found that of the 83 contract actions we reviewed, 24 met DOD’s criteria for being included in the April 2009 semi-annual report—those contracts that exceeded $5 million between October 1, 2008, and March 31, 2009. However, only 16 of them were actually reported in April 2009, leaving 8 contract actions valued at $439 million unreported. For example, because the Naval Sea Systems Command’s (NAVSEA) local list of undefinitized actions was not complete, the local command was not aware it missed four UCAs valued at $153 million in its submission to the Defense Procurement and Acquisition Policy office for the April 2009 semi-annual report. Also, at the Tank- automotive and Armaments Command (TACOM), we reviewed 4 undefinitized actions valued at $286 million that were not included in the semi-annual report. According to TACOM officials, 2 actions valued at $271 million went unreported because local officials did not report actions that were definitized during the reporting period despite DOD’s requirements to include them. The other 2 contract actions, valued at $15 million, were overlooked. In contrast, all of the 16 contract actions in our selection at the U.S. Special Operations Command and the Army’s Rock Island Contracting Center were included in local reports and reported to DOD for the April 2009 semi-annual report as required. DOD’s reporting requirements are still in flux as it takes steps to gain insight into and oversight of UCA use. For example, when DOD introduced the new reporting requirements in its August 2008 policy memorandum, UCAs over $5 million were required to be reported, but there was some confusion at the local commands as to what type of contract action this requirement applied. DOD released detailed guidance to commands for their use in time for the October 2009 report specifying that contract actions exempt from definitization and obligation limitations, such as foreign military sales and long-lead procurement items, were to be included in the semi-annual report. In addition, the proposed July 2009 amendment to DFARS is intended to increase DOD’s insight of unpriced change orders by requiring these contract actions to be reported semi- annually and managed in a manner consistent with UCAs. According to DOD, unpriced change orders pose similar risks as UCAs, therefore, increased insight and oversight are warranted. While reporting of unpriced change orders is not yet required, we identified nine unpriced change orders, within the 83 contract actions we reviewed, with a not-to-exceed value totaling $499 million, which would fit DOD’s proposed reporting criteria. Five of these—totaling $231 million—at the Aeronautical Systems Center are being tracked locally similarly to UCAs with regard to approval, obligation, and definitization requirements, but these were not included in DOD’s semi-annual reporting. Another unpriced change order awarded by the Missile Defense Agency for $14 million is also tracked according to local command policies but was not included in DOD semi-annual reporting. In contrast, we found three unpriced change orders, totaling $254 million at the Rock Island Contracting Center, that were tracked similarly to UCAs at the local level and reported to DOD. Notwithstanding the inaccurate data and evolving refinement of UCA reporting requirements, DOD has begun to use its semi-annual UCA report to oversee the extent to which local commands are using UCAs. For example, based on increased use reported in the April 2009 semi-annual report, the Director, Defense Procurement and Acquisition Policy, visited the Aeronautical Systems Center in September 2009 to better understand the situation there, reemphasize the importance of UCA management, and discuss ideas for how the contracting center can improve. Despite DOD’s recent UCA management policy, guidance, and instructions designed to improve their use, implementation varied at local commands we visited and the management policy standards were not fully met. DOD’s August 2008 policy designed to improve UCA management reemphasized requirements governing their use, including: allowable profit during the undefinitized period when determining the government’s objective for profit or fee, documenting any reduced cost risk and profit or fee determinations in definitization time frames, and obligation limits. For 66 of the 83 UCAs we reviewed that were definitized, contracting officers generally did not document the profit or fee negotiation objective or consideration of reduced cost risk to the contractor during the undefinitized period of work as required. In addition, the 180-day requirement for UCA definitization was not met in half the UCAs we reviewed. Furthermore, despite DOD policy to limit obligations to the planned work during the anticipated undefinitized period, the local commands typically obligated at or near the maximum amount permitted—up to 50 percent of the not-to-exceed amount—immediately at award of UCAs. Despite the risks involved, we also found situations when the government may have been able to avoid the use of undefinitized contract actions. The local commands we visited managed their UCA use to varying degrees. All of the locations used some sort of local management report to track information about the contracts awarded. A majority of the locations reported UCA awards and status to local acquisition management regularly ranging from weekly to monthly. Local commands also varied in the dollar threshold amounts requiring higher-level approval, such as the head of contracting authority rather than a division chief or department head, for their use of UCAs. For example, the Rock Island Contracting Center, TACOM Contracting Center, U.S. Special Operations Command, and Missile Defense Agency require management approval at the highest- level, i.e, the head of contracting activity, within the command for all UCAs regardless of price, while other commands only require management approval at the highest level for UCAs above a $10 million threshold. The local commands we visited also emphasized key aspects of UCA management standards to varying degrees. Some commands appear to have increased their focus in one of the areas identified in the August 2008 policy. For example, the Rock Island Contracting Center has decreased the 180-day requirement for definitization to 150 days. According to local command officials, if 150 days from UCA award is surpassed, management expects continuous updates on the status of definitization. Table 1 compares UCA management policies for the commands we visited. According to DOD regulations, contracting officers are required to consider any reduced cost risk to the contractor for costs incurred before negotiation of the final price. Further, contracting officers must document this risk assessment in the contract files. Sixty-six of the 83 contract actions we reviewed were definitized and should have documented a risk assessment in their contract file and used the weighted guideline worksheet or an alternative method to determine allowable profit or fee for negotiation purposes. About half of the cases we reviewed—34 of 66—did not use the weighted guidelines or document any consideration of cost risk to the contractor during the undefinitized period when establishing profit or fee negotiation objectives. Instead, we found these contracting officers based their profit or fee negotiation objectives on previously negotiated rates under contracts for similar work or other factors. None of these included the required consideration of any reduced cost risk to determine whether the contractor’s proposal included fair and reasonable prices. For example, in 12 cost-plus-award-fee contract actions, the contracting officers used the base and award fee structure in contracts previously awarded for similar work, or in one case, accepted the contractor’s proposal when determining their negotiation fee objectives prior to contract definitization. However, DOD’s contract pricing reference guide notes that automatically applying predetermined profit or fee percentages without regard to the unique circumstances of the immediate negotiation is inconsistent with government profit or fee goals. Although not required to use a weighted guidelines worksheet for cost-plus-award-fee contracts, contracting officers are still required to consider and document any reduced cost risk borne by the contractor during the undefinitized period. For these contract actions we did not see evidence in the contract file that there was consideration of any reduced cost risk. However, in one case a contracting officer was aware of the requirement to document and consider reduced cost risk, but did not know how to account for any reduced cost risk because defense regulations do not provide a procedure for how to consider any reduced cost risk for cost-plus-award-fee type contracts. In the remaining 32 of 66 UCAs we reviewed, the contract files included weighted guideline worksheets, but it was not always clear whether the contracting officers considered any reduced cost risk to the contractor during the undefinitized period as a factor when determining allowable profit or fee as required. Because of the weighted guideline worksheet design it did not show the contracting officer’s basis for risk calculations or indicate the reason for assigning a particular contract-type risk value. The contract-type risk value reflects the relative risk to the government associated with the specific contracting method. Therefore, we also reviewed the contract files for documentation of a risk assessment. In 15 of these 32 contract files, we found no risk assessment documentation in the file that provided a rationale for the values assigned to the contract- type risk in the weighted guidelines worksheet, making it difficult to verify what consideration, if any, the contracting officer made for incurred costs. In addition, within these 15 files the contracting officers did not acknowledge the requirement to ensure that the profit or fee negotiation objectives reflected any reduced cost risks to the contractor. In the remaining 17 of the 32 contract files, the contracting officers’ rationale for their decisions on the assigned contract-type risk value and, when applicable, their consideration of incurred costs during the undefinitized period, were documented in the contract file. Contracting officers are required to use the contract-type risk value in the weighted guidelines worksheet to reflect any reduced contractor cost risk during the undefinitized period. A higher contract-type risk value represents a higher risk to the contractor. For example, a contracting officer may assign a fixed-price type contract a value ranging from zero to six, while a cost-plus type contract will range from zero to two. If costs have been incurred prior to definitization, the contracting officer should account for the shift in risk from the government to the contractor by assigning a contract-type risk value that is typically lower than the normal range. According to the department’s August 2008 UCA policy, contracting officers should generally regard the contract-type risk to be in the low end of the designated range when costs have been incurred prior to definitization. Further, if a substantial portion of the cost has been incurred prior to definitization, contracting officers may assign a value as low as zero, regardless of contract-type. In 8 of these 17 contracts, contracting officers reduced the allowable profit or fee negotiation objectives based on costs incurred by the contractor during the undefinitized period. For example, in a firm-fixed-price UCA awarded by the Navy for compact solid state antennas, the contracting officer used the weighted guidelines worksheet to assign low contract-type risk values based upon incurred and projected costs resulting in a lower profit objective than normal values would have calculated. In the remaining 9 cases, the contracting officers considered making an adjustment but indicated a reduction to the contractor profit or fee negotiation objectives was not warranted. For example, in a cost-plus- incentive-fee UCA awarded by the Air Force to develop and test a Global Hawk sensor package, the contracting officer acknowledged the requirement to consider any reduced cost risk to the contractor during the undefinitized period, but determined the government shared responsibility for the definitization delay. Therefore, the contracting officer assigned a normal contract-type risk value for this contract. Despite DOD policy guidance, our analysis of the 32 UCAs that used the weighted guideline worksheets indicated that the contract-type risk factors were skewed toward the middle and high end of the DFARS designated ranges, indicating higher risk for the contractors. In the absence of documentation of the contracting officers’ analysis, we were unable to determine why the contract risk types were arrayed toward the middle and high end of the designated ranges. Our analysis indicated that contracting officers tended to assign middle and high values for fixed- price contracts rather than cost reimbursement contracts. Figure 2 shows the distribution of the contract-type risk values assigned for those UCA contract files containing weighted guideline worksheets. Local commands we visited did not meet the 180-day requirement in the federal and defense regulations for 51 percent of the UCAs we reviewed. We have previously reported that this situation places the government at risk of paying increased costs, thus potentially wasting taxpayers’ money. Table 2 shows the number and percentage of UCAs we reviewed that were not definitized within the 180-day requirement. We found 24 contract actions that took more than 180 days to be definitized, including 4 that took over a year. The longest took over 582 days to definitize. We also found 18 contract actions that were undefinitized beyond 180 days, including one from the Aeronautical Systems Center awarded in February 2008, which as of December 2009 had yet to be definitized after more than 645 days. Officials at the local commands stated that they attempt to follow defense acquisition requirements for definitization within 180 days. However, we found increased management emphasis on definitization time frames at the Rock Island Contracting Center. Specifically, the Rock Island Contracting Center focused on definitizing UCAs within 150 days. Of the 12 UCAs we reviewed at this location, 11 were definitized within the 180-day time frame. We found no relationship between the dollar value of the contract action and the length of time it took to definitize. Likewise, final contract- type did not appear to influence the timeliness of definitization. We found both fixed-price and cost-reimbursable contracts that exceeded the 180-day definitization requirement. Contracting officers cited several reasons why UCAs may not be definitized within the 180-day time frame. The most common reasons cited were problems with contractor and subcontractor proposals, protracted negotiations between the government and contractor, timeliness of government audits, and unstable requirements and funding. Several contracting officers told us that delays were the result of a combination of these issues. Most of the contract actions we reviewed were awarded at or near the maximum not-to-exceed price authorized under DFARS. Of the 83 UCAs we reviewed, 66 had initial obligation amounts of 45 percent or more of the not-to-exceed price at award. As we have noted in prior work, contractors may have little incentive to quickly submit proposals and agencies have little incentive to demand their prompt submission, since funds are available to proceed with the work. Of the 66 actions that obligated near 50 percent of the not-to-exceed price, 34—52 percent— exceeded the 180-day time frame for definitization. By limiting the amount of funding obligated at award to reflect contractors’ requirements during the anticipated undefinitized period, the contractor may be incentivized to work with the government to submit proposals quickly and enter negotiations sooner, potentially saving the government money. Contracting officers at each of the eight commands we visited told us that it was standard practice to obligate at or near the maximum funds allowed when issuing the UCA. At one command we visited, one contracting officer told us that obligating at 50 percent has become force of habit and noted that contractors have come to expect the maximum allowed at award. Some commands have issued guidance on assessing the contractor’s requirement during the anticipated undefinitized period. For example, the Aeronautical Systems Center issued guidance in July 2008 instructing contracting officers to only obligate the percentage of funds needed by the contractor during the undefinitized period. At the Aeronautical Systems Center, 17 of the 25 contract actions we reviewed initially obligated 45 percent or more at award—totaling more than $335 million—including 2 with 100 percent of funds obligated at award. At the Missile Defense Agency, contracting officers told us they are encouraged by the Director of Acquisition to obligate only what is needed during the undefinitized period; however, formal instructions implementing this policy have not been issued. Three of 5 UCAs we reviewed at the Missile Defense Agency were obligated with 45 percent or more at award—totaling almost $18 million—1 of which was obligated at 100 percent. Figure 3 shows the distribution of the initial obligation percentages of the not-to-exceed amounts for the UCAs we reviewed. Although contracting officers are authorized to obligate up to 50 percent or more at award, we found instances where it may not have been necessary. For example, an Aeronautical Systems Center UCA for aircraft modernization kits obligated 50 percent at award. However, the contractor only incurred costs equal to 2.4 percent of the not-to-exceed amount during the 13-month undefinitized period. At the same command, a UCA to procure ground control stations for unmanned aircraft was given approval to obligate 100 percent at award due to the fact this equipment was required for contingency operations. However, the contractor incurred costs of only slightly more than 1 percent of the not-to-exceed amount during the 11-month undefinitized period. Given the low amount of incurred costs during the anticipated undefinitized period, obligating at or above 50 percent may encourage extended periods of performance prior to definitization. The UCAs we reviewed were used to fill a variety of goods and services needs, from providing immediate support to the warfighter in theater to procuring long-lead items to keep weapon system program schedules on time. In several cases UCAs were used to prevent a lapse in service or allow for equipment used in contingency operations to be upgraded. In one example, the Navy issued a UCA to fund an engineering study on spares and repair parts to prevent the grounding of helicopters. In another, the U.S. Special Operations Command used a UCA to expand the ammunition capacity and add ballistic protective armor on vehicles already in theater. In yet another example, the Army issued a UCA to create a forward-deployed water packaging system capable of producing 7,000 bottles of water per day. The majority of UCAs we reviewed—64 percent—were used to purchase goods. Examples of goods acquired with UCAs include: UCA awarded by Rock Island Contracting Center to fill ammunition shortages for the F-15, F-16, F/A-18, and AH-1 Cobra aircraft; UCA awarded by NAVSEA to procure five compact solid state antennas to support the Marine Corp’s and the Army’s ground-based network radar system; and UCA awarded by the U.S. Special Operations Command to procure a small armored vehicle to increase survivability, and guard forces with increased protection. The other UCAs we reviewed—36 percent—were used to purchase services. Examples of services acquired with UCAs include: UCA awarded by the Rock Island Contracting Center for basic life support services (e.g., camps, dining facilities, waste, water, other services/utilities) necessary to support the Logistics Civil Augmentation Program in Iraq; UCA awarded by TACOM for the design, development, and fabrication of a rocket-propelled grenade active protection system for integration onto the mine-resistant ambush-protected vehicle; and UCA awarded by the Air Force Aeronautical Systems Center to provide contract logistics support for unmanned aerial systems efforts known as Predator/Reaper. Table 3 provides a list of categories of goods and services, as reported in FPDS-NG, procured with UCAs at the eight local commands we visited. According to DFARS, UCAs should only be used when the negotiation of a definitized contract is not possible to meet government requirements and the government’s interest demands the contractor be given a binding commitment so contract performance can begin immediately. For the 83 files we reviewed, it appeared that the use of a UCA may have been avoided in some cases. In one example, the Air Force awarded a UCA for $54.9 million in April 2008 for an upgrade to the Global Hawk program that was necessary to meet the September 30, 2008, initial operational test and evaluation deadline. However, as of November 2009, the Global Hawk program had yet to undergo that testing and evaluation process due to other program delays. In another example, the Army justification for awarding a UCA for almost $50 million was to reevaluate a contractor who was determined to be performing poorly. It was determined that rather than using provisions in the existing contract allowing for an extension of services, it would be best if the contract was extended for a 6-month review period using a UCA, a contracting tool that is to be used only when time does not permit the negotiation of a contract action and contractor performance must begin immediately to meet the government’s requirements. Undefinitized contract actions can be an important tool for DOD to meet urgent contracting needs. However, when UCAs are used the government bears the majority of the cost risk during the undefinitized period. DOD has issued new policies and guidance and now requires components to report semi-annually on UCA use as well as submit updated management plans detailing actions taken to ensure appropriate use. Such efforts are intended to enable better departmental insight into the extent to which UCAs are used and how to manage their use to minimize the risk to the government. While DOD’s recent actions are a positive step and are still evolving, clear guidance and accurate reporting are key. Further, despite DOD’s call for increased management attention of UCA use at DOD components, management standards and tools designed to help mitigate UCA-related cost risk have not always been met or used. Weighted guideline worksheets, a tool designed to help contracting officers determine allowable profit or fee for negotiation purposes, have not been used consistently or included with information for the semi-annual report as required. When guidelines have been used, it was not always clear whether contracting officers considered any reduced risk to the contractor during the undefinitized period because the required weighted guideline worksheet documentation, as designed, does not show the calculation and basis for any reduced profit or fee. Also, in instances when cost-plus- award-fee contracts were awarded and weighted guidelines were not required, guidance was not clear as to how to consider and document any reduced risk borne by the contractor during the undefinitized period. DOD’s sustained attention on strengthening its reporting and insight into the extent UCAs are used and ensuring UCA management is improved at the component level is essential to minimizing the government’s risk of paying unnecessary costs and excessive profit or fees. We recommend the Secretary of Defense take the following two actions. To mitigate the risks of paying increased costs when using an undefinitized contract action, revise DFARS to provide specific guidance on how to perform an assessment of any reduced cost risk for profit or fee during the undefinitized period for cost-plus-award-fee UCAs. To ensure DOD officials are able to gain insight into the risk assessment that is required to be documented in the contract file and the basis for the government’s profit or fee negotiation objective, redesign the weighted guidelines worksheet to explicitly show the incurred cost calculations and a narrative description of the reason for assigning a specific contract-type risk value. We provided a draft of this report to DOD for review and comment. In written comments, DOD concurred with our recommendations and cited planned actions to address them. Specifically, DOD plans to revise either the DFARS regulations or its corresponding Procedures, Guidance, and Instruction to provide specific guidance on how to perform an assessment of any reduced cost risk for profit or fee during the undefinitized period for cost-plus-award-fee UCAs. In addition, the department plans to redesign the weighted guidelines worksheet to explicitly identify the incurred cost calculations and justification for the assigned contract-type risk value. The draft report also contained a recommendation for DOD to clarify that weighted guideline worksheets are to be submitted with the semi-annual UCA report submission for all definitized UCAs which equal or exceed $100 million. In its written comments, DOD informed us on December 23, 2009 they revised the DFARS Procedure, Guidance, and Instruction 217.7405 to require military departments and defense agencies to submit, in conjunction with their semi-annual UCA reports, weighted guideline worksheets for each definitized UCA with a value of $100 million or more. Because of DOD’s action on this recommendation, we have removed it from the report. In addition, DOD provided technical comments, which we incorporated as appropriate. The department’s comments are included in their entirety in appendix IV. We are sending copies of this report to the Secretary of Defense; the Secretaries of the Air Force, Army, and Navy; the Administrator of the Office of Federal Procurement Policy; and interested congressional committees. In addition, the report will be made available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-4841. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. To identify and assess the actions the Department of Defense (DOD) has taken to improve departmental insight into and oversight of undefinitized contract actions (UCA), we interviewed senior DOD and service acquisition policy officials as well as local officials at the selected commands to identify new policies and guidance that would affect the amount of insight senior DOD officials have. We reviewed the August 2008 Defense Procurement and Acquisition Policy memorandum along with the updated October 2009 guidance, which provided additional Office of the Secretary of Defense (OSD) policy and guidance for UCAs. In addition, we reviewed the relevant sections of the Federal Acquisition Regulation and the Defense Federal Acquisition Regulation Supplement (DFARS), as well as service-level guidance pertaining to the use and management of UCAs. We also reviewed relevant proposed changes to DFARS. To determine the accuracy of UCA information available to senior officials, we analyzed and compared information on UCAs from the Federal Procurement Data System-Next Generation (FPDS-NG), DOD’s newly implemented semi-annual UCA reports, and the local acquisition command-generated UCA reports. We noted any differences in information among the various sources and documented those contract actions which did not appear in DOD’s semi-annual report, but were recorded in FPDS-NG and the local reports. We also discussed these discrepancies with DOD officials at both the local level and OSD level to try to understand the underlying cause of these differences. To identify whether DOD’s recent actions have resulted in local commands meeting DOD’s UCA management standards with regard to documenting the basis for negotiating the contractor profit or fee, definitization time lines and obligation percentages, and the circumstances in which UCAs are used, we conducted a contract file review using a randomized list of UCAs from among six military commands, one joint service combatant command, and a defense agency. In order to choose the locations of the contract file reviews, we analyzed UCA information from FPDS-NG for fiscal year 2008. We used these data to compile a random selection of UCAs. We selected the locations for our UCA file review based on two criteria. First, we selected one contracting command from each of the three military services (Air Force, Army, and Navy) and one defense agency based on its placement within the top 50 percent of total-dollar value of UCAs issued during fiscal year 2008 as recorded in the FPDS-NG system. Second, for comparative purposes, we selected one contracting command from each of the three military services (Air Force, Army, and Navy) and one defense agency that fell outside of the top 50 percent of total-dollar value of UCAs issued during fiscal year 2008 as recorded in the FPDS-NG system. The contracting commands in this second group were then selected using subjective criteria which included commands with significant UCA use recommended by the services, the command’s geographic location, and the command’s history of UCA use. The specific contracting commands we selected for our review were: Tank-automotive and Armaments Command Contracting Center, Rock Island Contracting Center, Rock Island, Illinois Naval Sea Systems Command, Washington, D.C. Naval Inventory Control Point, Philadelphia, Pennsylvania 303rd Aeronautical Systems Wing (Reconnaissance Systems Wing), Wright-Patterson Air Force Base, Ohio 516th Aeronautical Systems Wing (Mobility Systems Wing), Wright- Patterson Air Force Base, Ohio Missile Defense Agency, Redstone Arsenal, Alabama United States Special Operations Command, MacDill Air Force Base, Using the data provided by FPDS-NG, we established a population of undefinitized contract actions at each location. We identified all actions that were either coded in FPDS-NG as letter contracts or other undefinitized actions for fiscal year 2008 and the first 5 months of fiscal year 2009. We also identified UCAs in FPDS-NG that referenced an undefinitized action in the description of the requirement or reason for modification fields. Using these methods, we derived a random selection of contract actions to review. For some commands we verified whether or not a contract action was a UCA through DOD’s Electronic Document Access database, a Web-based system that provides secure online access, storage, and retrieval of contracts and contract modifications to authorized users throughout DOD. In addition, the selections were also checked for accuracy against lists maintained in DOD’s semi-annual report as well as those maintained at each local command. Over 200 potential UCAs were selected for this review. From this selection, we expected to collect data on approximately 10 to 12 at each command we visited for a total of 80 to 96 UCAs. In the end, we collected data on 92 UCAs from which we eliminated 9 and analyzed the remaining 83 UCAs valued at a total of $6.1 billion. Observations made from our review cannot be generalized to the entire population of undefinitized contract actions issued by DOD. We omitted UCAs for foreign military sales, purchases that did not exceed the simplified acquisition threshold, special access programs, and initial spares purchases, since these actions are not subject to compliance with the definitization requirements we were reviewing. To assess the data reliability of FPDS-NG for the purpose of selecting locations and identifying UCA contracts, we verified UCA information in FPDS-NG with other data systems, such as Electronic Data Access, local command UCA reports, the semi-annual DOD reports, and with the information recorded in the contract files. On the basis of this, we determined that the FPDS-NG data were sufficiently reliable for the purposes of this report. At each location, we reviewed contract document files and interviewed responsible contracting officials. During these interviews we asked the contracting officials to explain the rationale for using a UCA and the circumstances which led to the decision, as well as the events and circumstances involved with definitizing the contract action. We also reviewed local command UCA management policies to determine whether they were consistent with DOD’s management standards and whether these policies differed from one command to another. To determine whether contracting officers considered and documented the basis for their determination of the government’s profit or fee negotiation objective to reflect any reduced risk to the contractor for the undefinitized period, we analyzed the contract file documents, including the price negotiation documentation and weighted guidelines worksheets. We used this information to determine whether the contracting officers considered and adjusted the contract-type risk factor using incurred cost and projected cost information. To determine whether UCAs were meeting definitization timelines, we recorded data from the contract files on when the contract actions were awarded and subsequently definitized. We aggregated these data to determine the number of contracts definitized in less than 180 days, definitized over 180 days, and those still undefinitized over 180 days. To determine how DOD’s policy to limit initial obligations to only the amount required for the undefinitized period of work was being implemented, we recorded initial obligation amounts from the contract files. We analyzed these data to determine how many contract actions in our review were obligated at or near the 50 percent limit at the time of award. Finally, to determine how and when UCAs were being used, we reviewed the contract files and analyzed the types of requirements being filled with UCAs and the circumstances behind the decision to use this contracting method. We also discussed each case with the contracting officers to obtain their rationale for using a UCA. We conducted this performance audit from March 2009 to January 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. CPFF - Cost plus fixed fee CPIF - Cost plus incentive fee FFP - Firm fixed price FPIF - Firm fixed price incentive fee T&M - Time-and-Materials The Logistics Civil Augmentation Program (LOGCAP) is a program of the U.S. Army to use civilian contractors to provide the Army with an additional means to adeuately support the current and programmed force by performing selected services in wartime and other operations. Appendix III: Information for UCAs Omitted from DOD’s April 2009 Semi-Annual Report Description of goods or services Authorized Stockage List Parts and Frag Kit for HMMWV Electronic Jamming Systems to Protect against Radio-Controlled IEDs Evolve and Maintain the Aegis Combat System at the Platform Level for the Aegis CG-47 and DDG-51 Ship Classes Multi-Mission Signal Processor, Ballistic Missile Defense Equipment, and Aegis Weapon System Hardware Upgrades Procurement of Software, Maintenance, Equipment, and Documentation Necessary to Support the Ship Self Defense System Ship Self Defense System Kits to Support Aircraft Carrier and Amphibious Ship Modernization Efforts. In addition to the individual named above, key contributors to this report were Penny Berrier Augustine, Assistant Director; Megan Hill; Rob Miller; Brian Smith; J. Andrew Walker; Julia Kennon; John Krump; Ken Patton; and Bob Swierczek. | To meet urgent needs, DOD can issue undefinitized contract actions (UCA), which authorize contractors to begin work before reaching a final agreement on contract terms. Such actions are considered to be a risky contract vehicle for the government because contractors lack incentives to control costs during this period. Defense regulations provide that the government determination of contractors' allowable profit or fee should reflect any reduced cost risk. Pursuant to the 2008 National Defense Authorization Act, GAO assessed whether DOD actions taken as required by the act have (1) improved departmental insight and oversight of UCA use and (2) resulted in local commands meeting DOD's standards for documenting the basis for negotiating the contractor profit or fee, definitization timelines, and obligation amounts. GAO reviewed relevant DOD regulations and policies, and contract files for 83 randomly-selected UCAs totaling $6.1 billion at eight local commands. The findings from this contract file review can not be generalized across DOD. DOD has taken several actions since August 2008 to enhance departmental insight into and oversight of UCAs; however data limitations hinder its full understanding of the extent to which they are used. DOD issued policy that requires centralized, semi-annual reporting of undefinitized actions to gain insight in UCA use, including information on reason for award, obligation amounts at award, and definitization timelines. Over time, reporting requirements have evolved as DOD has taken steps to clarify guidance on the types of contract actions to be reported. DOD has also required components to submit management plans to describe actions taken for improved UCA use. Although these actions have helped enhance insight and oversight of UCA use, not all UCAs are included in the reports. Of the 24 UCAs GAO reviewed that should have been included in the April 2009 semi-annual report, 8 actions valued at $439 million were unreported by the local commands to DOD. Implementation of DOD's recent policies and guidance on the use of UCAs has varied at the local commands GAO visited and the associated management standards were not fully met. For the 66 UCAs GAO reviewed that were eventually definitized, contracting officers generally did not document their consideration of cost risk to the contractor during the undefinitized period of work as required. In 34 cases, the weighted guideline worksheets were not used when required, nor any other documentation of how any reduced cost risk during the undefinitized period of performance was considered in determining the negotiation objective. This was particularly the case for cost-plus-award fee contracts where defense regulations are not clear about how any cost risks are to be considered and documented. Even for the remaining 32 cases in which weighted guideline worksheets were used, the contracting officers' basis for risk calculations were often not clear due to limitations of the weighted guideline documentation. Other management standards were not always met. Only 41 UCAs--about 50 percent of the actions GAO reviewed--met the 180-day definitization requirement. Moreover, 66 of the 83 UCAs GAO reviewed were awarded with obligations near or above the 50 percent maximum. |
CCE, which falls organizationally under ACA, provides contracting support to 125 DOD customers in the National Capitol Region, including the Joint Chiefs of Staff, TRICARE Management Activity, Defense Information Systems Agency, DOD Inspector General, Pentagon Renovation Office, and Office of the Judge Advocate General. During fiscal year 2007, the agency awarded about 5,800 contract actions and obligated almost $1.8 billion. CCE is one of many government agencies that have turned to contractors to support their contracting functions. While use of contractors provides the government certain benefits, such as increased flexibility in fulfilling immediate needs, we and others have raised concerns about the federal government’s services contracting, in particular for professional and management support services. A major concern is the risk of loss of government control over and accountability for mission-related policy and program decisions when contractors provide services that closely support inherently governmental functions. Inherently governmental functions require discretion in applying government authority or value judgments in making decisions for the government, such as approving contractual requirements; as such, they must be performed by government employees, not private contractors. The closer contractor services come to supporting inherently governmental functions, the greater the risk of their influencing the government’s control over and accountability for decisions that may be based, in part, on contractor work. Decisions may be made that are not in the best interest of the government and may increase vulnerability to waste, fraud, or abuse. The FAR sets forth examples of services closely supporting inherently governmental functions. These include acquisition support services, such as services in support of acquisition planning, services that involve or relate to the evaluation of another contractor’s contractors providing assistance in contract management (such as where the contractor might influence official evaluations of other contractors), and contractors working in any situation that permits or might permit them to gain access to confidential business information, any other sensitive information, or both. It is now commonplace for agencies to use contractors to perform activities historically performed by federal government contract specialists. Although these contractors are not authorized to obligate government money, they provide acquisition support to contracting officers, the federal decision makers who have the authority to bind the government contractually. Among other things, contract specialists perform market research, assist in preparing statements of work, develop and manage acquisition plans, and prepare the documents the contracting officer signs, such as contracts, solicitations, and contract modifications. In its 2007 report to Congress, DOD’s Panel on Contracting Integrity noted that the practice of using contractors to support the contracting mission merits further study because it gives rise to questions regarding potential conflicts of interest and appropriate designation of governmental versus nongovernmental functions. The panel concluded that potential vulnerabilities may exist that could result in fraud, waste, and abuse. A November 2005 DAU study cited four top reasons that federal agencies are contracting out for procurement services: (1) to meet workload surge requirements, (2) inability to hire adequate resources to meet workload, (3) relative speed of contracting versus hiring to meet workload, and (4) ability to select specific required expertise. The DAU data showed that contractors performed duties across the spectrum of contracting functions, from acquisition planning to contract closeout. The study’s authors noted that as DOD’s personnel levels have dropped, activity rates for procurement organizations have increased, driving a gap between the requirements and government capability in many DOD contracting offices. The report warned that the government must be careful when contracting for the procurement function to ensure that government leaders retain thorough control of policy and management functions and that contracting does not inappropriately restrict agency management in its ability to develop and consider options. CCE has relied on contractors to help meet its increasing workload requirements since 2003 and plans to continue doing so, although agency officials would prefer an all-government workforce. The roles and responsibilities of the contractor contract specialists mirror those of the government contract specialists. In fact, contractor and government contract specialists work side by side and perform the same duties. CCE has not taken into consideration what constitutes a reasonable and feasible balance of the number of government versus contractor personnel or developed a training program for its permanent government employees. According to agency officials, CCE began using contractor contract specialists in 2003 as a stopgap measure to meet an increase in workload, but the agency has continued to rely heavily on their support. Our analysis of CCE’s contract actions showed that contractors supported from 24 to 30 percent of all actions from fiscal year 2005 through 2007. In fiscal year 2007, CCE spent over $2.8 million on over 32,600 hours (approximately 15.6 full-time-equivalent employees) of contracting support services from two contractors—CACI and The Ravens Group. In August 2007, 42 percent of CCE’s contract specialists were contractors. CCE officials stated that the agency plans to continue relying on contractors, although they would prefer an all-government workforce. CCE officials told us that prior to 2005, the majority of the agency’s contracting activity consisted of issuing orders against GSA schedule contracts—a relatively simple contracting method. After a DOD policy memorandum placed limitations on the use of non-DOD contract vehicles because of widely reported misuse of interagency contracts, CCE began relying less on using contract vehicles awarded by other agencies. Our analysis of Federal Procurement Data System-Next Generation data found that from fiscal years 2005 to 2007, the number of CCE contract actions through other agency contract vehicles decreased by 55 percent and obligations through use of these vehicles decreased by 45 percent. According to agency officials, CCE began awarding more of its own contracts through full and open competition, but the contracting staff generally lacked experience with these more complex types of procurements. Much of the workload had to be assigned to a limited number of more experienced staff, creating a situation where officials believed they had no choice but to turn to contractor support. Contractor contract specialists at CCE perform the same tasks as government contract specialists. Typical tasks include pre-procurement research and planning, preparing contract documents, monitoring contracts, assisting with negotiations, and closing out contracts. These “cradle-to-grave” procurement activities are performed as support for a government contracting officer, who performs an inherently governmental function with the ability to bind the government by contract. According to CCE contracting officers, the work is generally assigned based on knowledge and experience, not whether the specialist is a government or contractor employee, with the only exception being cases where there could be a potential organizational conflict of interest (such as when the contractor employee’s company could bid on the contract in question). We reviewed contract files for 42 randomly selected contract actions on which contractor contract specialists worked during fiscal years 2006 and 2007 and found that the contractors had prepared a range of contracting documents, such as contract modifications, requests for legal review, small business coordination records, cover sheets to route contract actions for approval, award decision memorandums, and memorandums to the file. Contractors also had requested or received documents from vendors or other DOD entities, such as proposals, technical evaluations, and past performance questionnaires, and assisted in preparing statements of work. The contracting officers and government and contractor-provided contract specialists we interviewed at CCE emphasized that while the contractors can recommend a course of action, the contracting officers make the decisions, such as deciding on an acquisition strategy and making contract award determinations. The contracting officers and specialists also told us that although contractors may assist in negotiations, the contracting officer takes the lead role in negotiating the terms of the contract. CCE officials informed us that the agency has had trouble recruiting and retaining government contract specialists. For example, an official told us that as of October 2007 the agency had 10 contract specialist positions that have been vacant for as long as 5 months, as well as another 12 vacancies, such as procurement analysts and a cost/price analyst. According to the official, from August 2006 through August 2007, 24 contract specialists— more than one-quarter of its government contracting workforce during the period—left the agency. Agency officials stated that some of these personnel retired, but many had gone to work for private contractors that support the federal government. In fact, CCE officials said that they cannot compete with the private sector when it comes to offering some employment incentives. Additionally, both CCE and ACA officials stated that the government’s hiring process takes too long and that potential candidates are often hired by a contractor or another agency before CCE can make an offer. For example, it took CCE over 5 months, from solicitation to job offer and placement, for two recent contract specialist hires. In contrast, a CCE official told us that they can order and have a contractor employee in place within as little as a couple of weeks. CCE officials stated that the agency’s recruitment difficulties are in large part caused by the high demand for contract specialists—by both the many federal agencies in Washington, D.C., and contractors from which the government purchases these services—making it difficult to compete for them. Contractor representatives, too, reiterated that the employment market for well-qualified contract specialists is extremely competitive. CACI employees who were supporting CCE as contract specialists confirmed that there is a high demand for their skill set, and several of these individuals stated that a well-qualified person can be selective when searching for a new employer. In addition, these employees said CACI offers some better benefits than the federal government, including higher salaries, fewer responsibilities, and shorter work weeks (because of contract restrictions on extended hours). Senior managers from The Ravens Group told us that their firm recruits contract specialists who have worked for and been trained by the government and hires them at a higher rate of pay. CCE plans to continue relying on contractors to help meet its mission, but has not considered the appropriate and feasible ratio of government employees to contractors. In a November 2005 study on contracting out the procurement function, DAU concluded that it is reasonable to contract out functions or tasks that are not inherently governmental to meet a sudden or temporary increase in workload or when special expertise is required. However, the study cautioned that contracted procurement support needs to be maintained at a “reasonable” level. The study recommended that each contracting activity be limited in the percentage of its workforce that may be contractors, acknowledging that the appropriate limitation is a matter for debate. It noted that using contractors only in limited situations would provide contracting agencies with flexibility to quickly react to surge enable managers to assign the contractors to lower-priority tasks so that government employees would handle the more sensitive procurement tasks, and help address the concern that extensive contracting out of the contracting function could reduce, in the long term, the opportunity to develop adequate numbers of government personnel with a full range of contracting experience. Defining the right mix of contractor to government contract specialists is not just a matter of numbers, but also of skill sets. The DAU study envisions contractors playing a limited role and performing lower-priority tasks. However, at CCE, complex, high-priority work is often assigned to the contractors, whose role has been ongoing since 2003. In part, according to agency officials, this is because many of the government employees lack experience with complex procurements. However, we found that while CCE has implemented a 2-year training program for its contract specialist interns, the agency does not have in place a training program for its permanent staff. In fact, according to CCE’s former Commander and the current Director of Contracting, contracting staff have had to learn these practices on the job, which has resulted in some performance problems. An agency’s overall training strategy—including planning, developing, implementing, and continuous improvement of its programs—is an important factor in ensuring that the staff has the skills, knowledge, and experience to meet agency missions. Three broad areas of risk of using contractors as contract specialists are present at CCE, with the risks being mitigated to various degrees. First, we found that the blurred lines demarcating contractor from government personnel could result in creating the impression that contractor employees are government personnel. Contractor employees were not always identified as such to the public and in some cases were named on documents as the government’s point of contact. Second, the work being done reflects the descriptive elements listed in the FAR as guidance for assessing the existence of personal services contracts, which are prohibited unless authorized. However, a determination as to whether a personal services contract exists must be made on a case-by-case basis; here, CACI’s on-site managers retain control over supervisory and managerial functions, such as approving time cards and making hiring and firing decisions, thus negating the existence of a personal services contract. We found no DOD guidance that elaborated on the factors to be considered in determining whether an unauthorized personal services contract exists or how to mitigate that risk. Finally, although policies and procedures are in place to help mitigate organizational and personal conflicts of interest, in practice, CCE relies on contractor employees to self-identify potential conflicts. To avoid confusion by vendors and customers over whether they are speaking to a government employee, it is important to clearly distinguish between contractors and government employees in all interactions. Contractor personnel attending meetings, answering government telephones, and working in other situations where their contractor status is not obvious to third parties should identify themselves as such to avoid creating the impression that they are government officials. In addition, the FAR states that agencies must ensure that all documents or reports contractors produce are suitably marked as contractor products or that contractor participation is appropriately disclosed. Further, in December 2005, the Assistant Secretary of the Army issued a memorandum, “Contractors in the Government Workplace,” stating that “while it is preferred that contractor personnel work in company office space, if Government and contractor personnel must be co-located in the same office space, then, to the maximum extent possible, the contractor personnel should have separate, and separated, space.” At CCE, we found the line separating government from contractor personnel to be blurry. There is no physical separation; the two work side by side in identical office space, and contractor employees are not identified as such on their cubicles. The only apparent distinction is their different badge color. In addition, contractors were not always identified as such on contracting documents they had prepared. We reviewed 23 contract modifications prepared by contractor employees and found that their status as contractors was not indicated on the documents. Further, on 16 of these modifications, the contractor was identified as administering the contract, and on four, the contractor was listed as the point of contact without identification as a contractor—for example, as the “CCE contact” or “government point of contact.” Instances such as these, where the contractor is not identified as such or is misidentified, can cause confusion about the contractor’s status and create an impression that the contractor is speaking or acting for the government. For example, we found a situation in which a vendor, in submitting a proposal to the government, listed the contractor contract specialist as the contracting officer, who has the contract source selection authority for the government. Another contract file contained e-mails between a contractor employee and third-party entities—correspondence with a CCE customer agency and notification to a vendor that its bid would not be considered— with no contractor identification at all. CCE officials told us that the agency has no requirement that contractor employees identify themselves as contractors in the e-mail signature line, which could help ensure that outside parties know they are dealing with a contractor. Further, although the FAR and CCE’s orders for contract specialists under the BPAs specifically cite telephone contacts as situations in which contractors should identify themselves as such, a CCE management official did not know whether this was occurring in practice. When we brought these issues to CCE’s attention, the agency began to establish policies to mitigate the risk of contractors being mistaken for government employees and appearing to be speaking for the government. It has since issued a policy that contractor support personnel are not to communicate orally or in writing with other contractors, such as vendors. The contractor contract specialists will still communicate with CCE’s federal customers. In addition, the CACI on-site senior manager notified CACI employees at CCE that they are to identify themselves as contractors in all correspondence, including e-mail and voice mail, and documents. At CCE, the work of the contractor contract specialists, performed in direct support of the government contracting officer and under his or her day-to-day supervision, results in an arrangement that can have characteristics of a personal services contract. Personal services contracts are generally prohibited, unless authorized by statute. The government is normally required to obtain its employees by direct hire under competitive appointment or other procedures required by the civil service laws. Section 37.104 of the FAR lists six descriptive elements to be used as a guide in assessing the existence of a personal services contract. The presence of any or all of these elements does not necessarily establish the existence of a personal services contract. Such a finding can only be established based on a case-by-case analysis of the totality of the circumstances of each case. The FAR elements are shown in table 1 along with the working environment of the contract employees at CCE. We found that the actual working environment for the contractor contract specialists at CCE touched on all six elements. The FAR provides that each contract arrangement be judged in the light of its own facts and circumstances, with the key question always being whether the government will exercise relatively continuous supervision and control over the contractor personnel performing the contract. For example, GAO bid protest decisions have considered, along with the existence of other factors, the fact that government “managers interviewed and selected contractor personnel for assignment to positions, and routinely requested pay increases and promotions for contractor personnel” to be contributing factors in the existence of a personal services contract. Another bid protest decision considered that “the contractor’s right to hire and fire employees, to grant or deny individual leave requests, and to reassign employees negate the existence of a personal services contract as defined in the FAR.” CACI’s performance, in this case, of supervisory and management functions, such as approving time cards and leave requests, preparing performance evaluations, and making hiring and firing decisions, means a personal services contract does not exist, even if the six FAR elements are present. Although the distinction between a personal services contract and a non-personal services contract is somewhat murky and requires a case-by-case analysis based on the facts of each circumstance, we found no additional DOD guidance that elaborated on the factors contracting officers or program officials should consider in determining whether a personal services contract exists and how to mitigate against this risk when contractors are working side by side with their government counterparts, perhaps even receiving their daily task assignments from a government supervisor. Because of the type of contract and nature of the contract services provided along with the presence of the FAR’s descriptive elements, the CACI contract runs the risk of becoming a personal services contract if the government does not carefully monitor the manner in which services are provided. When we brought these issues to the attention of CCE, the agency began to take actions to strengthen the management distinction between government and contractor personnel. Before, the contractor personnel were assigned to a team consisting of government and contractor employees, and they generally worked for one contracting officer most of the time. Now, all of the contractor personnel are on a separate team, and the contractors’ managers on-site are responsible for assigning work to the contractor employees—unlike the previous situation where the government contracting officer assigned the work. Under this arrangement, contractor contract specialists can work for several different contracting officers, according to a CCE official. In addition, CCE has plans to situate contractors together in an area separate from government personnel and to put nameplates on cubicles to clearly distinguish between contractor and government employees, but these plans have not yet been implemented. The Acquisition Advisory Panel recently reported that as the extent of service contracting has grown, the current ban on personal services contracts has created two responses—government managers may find themselves crafting cumbersome and inefficient processes to manage the work of contractor personnel to avoid the appearance that they are exercising continuous supervisory control, or they may simply ignore the ban. The panel recommended replacing the ban with guidance on the appropriate and effective use of personal services contracts. The panel stated that in implementing the recommendation, the government should be allowed to supervise the work performed by the contractor workforce, but current prohibitions on government involvement in purely supervisory or management activities—such as hiring, leave approval, and performance ratings—should be retained. Reliance on contractor support to meet agency missions can raise the risk of organizational and personal conflicts of interest. In fact, the Acquisition Advisory Panel noted that the government’s increased reliance on contractors, coupled with increased contractor consolidations, has escalated the potential for organizational conflicts of interest (OCI). With respect to protecting contractor confidential or proprietary data, the panel recognized the increased threat of improper disclosure as more contractor employees support the government’s acquisition function. The panel also found that while there are numerous statutory and regulatory provisions that apply to federal employees to protect against personal conflicts of interest, most do not apply to contractor personnel. An OCI may be present when a contractor organization has other interests that either directly or indirectly (because of business or relationships with other contractor organizations) relate to the work to be performed under a contract and (1) may diminish its capacity to give impartial, technically sound, objective assistance or advice or (2) may result in it having an unfair competitive advantage. The FAR and GAO bid protest decisions provide guidance for contracting officers to mitigate three types of OCIs: unequal access to nonpublic information as part of its performance under a government contract that might provide the contractor firm unfair competitive advantage in a future competition; biased ground rules, such as the firm being in a position to write a statement of work that might provide it an unfair advantage in a future competition; and impaired objectivity when the contractor firm’s work under a contract entails evaluating its own work or that of a competitor either through an assessment of performance under another contract or through an evaluation of proposals. As required under its BPA with CCE, CACI submitted an OCI risk mitigation plan, which lays out the elements of its plan to mitigate the risk of an OCI. According to the plan, the contractor has established a separation, or “firewall,” between the business unit that provides contract specialists and program support services to CCE and all other divisions and corporations owned by the company. As a part of the firewall, the business unit’s employees are physically separated from the company’s other operating groups, proposal databases are separated, and the business unit’s employee financial incentives do not depend on the performance of the company’s other operating organizations. Also, the business unit providing contract specialists is precluded from submitting proposals in response to solicitations issued by CCE, except for those related to the BPA for contract specialists. In addition, the company provides its employees with OCI training and instructions to immediately notify the contracting officer of a potential OCI; requires them to sign conflict of interest and nondisclosure agreements to protect proprietary or sensitive information belonging to the government or other contractors— for example, cost and pricing data, government spend plan data, and contractor technical proposal data—and not use this information to violate procurement integrity rules; and limits where employees can work within CACI for 2 years after leaving CCE. The nondisclosure agreement also addresses personal conflicts of interest, as the contractor employee must agree not to engage in any conduct prohibited by the Procurement Integrity Act as implemented in FAR 3.104. Finally, a group internal to the company conducts annual reviews of the effectiveness of and adherence to the OCI risk mitigation plan. Although CCE and the contractor have taken steps to mitigate OCI risks, in practice, identifying and mitigating the risks necessarily relies, to a large extent, on individual contractor personnel. Contractor officials indicated that it is the responsibility of the contractor contract specialists to immediately notify the company supervisor and contracting officer of potential OCIs. CACI officials and employees told us of cases where contractor contract specialists had been exposed to potential conflicts of interest, that is, they were assigned to procurements that the company planned to bid on. We were told these employees were subsequently removed from working on the procurements after notifying contractor management and government officials of a potential conflict. Despite these instances, CCE officials told us that they are careful about what procurements they assign to the contractors. For example, the CCE contracting officer’s representative told us that she screens requirements packages to determine which ones would present a potential conflict if assigned to a contractor. However, she does not have visibility to the subcontract level, where the contractor could be a subcontractor to a potential bidder. For purposes of this report, we define a personal conflict of interest as a situation when an individual, employed by an organization in a position to materially influence research findings, recommendations, or both, may lack objectivity or be perceived to potentially lack objectivity because of his or her personal activities, relationships, or financial interests. For example, a conflict can occur when a government employee contacts an offeror during the conduct of an acquisition since this could be construed as seeking employment. Defense contractor employees are not subject to the same laws and regulations that are designed to prevent federal employee conflicts of interests. Moreover, although a new FAR subpart states that contractors should have a written code of business ethics and conduct, neither the FAR nor DOD contracting policy requires that contractor employees be free from conflicts of interest or that they deploy other safeguards to help ensure that the advice and assistance the employees provide is not tainted by personal conflicts of interest. Therefore, mitigating the risks associated with personal conflicts of interest depends on the integrity of the contractors and their employees. For example, one of the contractors providing contract specialists to CCE has an internal policy for standards of employee ethics and business conduct that addresses personal conflicts of interest. In addition, the company provides mandatory ethics training that covers personal conflicts of interest. According to a company official, rather than having a formal financial disclosure process, its employees are equipped with knowledge of what constitutes a personal conflict of interest, and it is the employees’ responsibility to self-report if they have a personal conflict of interest. The company also has a moonlighting policy that requires employees to obtain company approval prior to forming any relationship with a for-profit company. CCE is paying more on average for contractor-provided contract specialists than for its government specialists. We reviewed the hours of contractor services CCE purchased under orders pursuant to the four BPAs it established at the end of fiscal year 2006. By the end of fiscal year 2007, CCE had purchased contract support services only from CACI and The Ravens Group, with the vast majority being from CACI. Agency officials informed us that CCE has purchased services of two types of contract specialists: (1) contract specialists II, which are Defense Acquisition Workforce Improvement Act (DAWIA) II-certified/GS-12 equivalents, and (2) contract specialists III, which are DAWIA III- certified/GS-13 equivalents. Because the orders issued pursuant to the BPAs are time-and-materials contracts, payments to contractors are based on the number of labor hours billed at a fixed hourly rate—which includes wages, benefits, and the company’s overhead; general and administrative expenses; and profit. Because agency officials stated that CCE has government contract specialists with the same certifications and GS levels as the contractor contract specialists, we determined that these specialists were comparable. Therefore, we compared the costs and experience of the government and contractor employees within these two categories. We found that the average hourly cost of a contract employee is higher than a government specialist performing the same duties, as shown in table 2. Key elements of our analysis were as follows: The loaded hourly cost of a government employee includes salary, costs of the government’s contributions to the employee’s benefits, the costs to train the employee, the employee’s travel expenses, and the costs of operations overhead—which are the costs of government employees who provide support services, such as budget analysts or human capital staff. Government employee salaries and benefits were based on actual data from one pay period. These data were then compared to hourly cost of contractor employees ordered during that same pay period. The cost of a contractor employee is the fully loaded hourly rate the government pays for these services. We reported the weighted average of those hourly rates because the agency used two contractors at two different rates during that pay period. We excluded the costs that the government incurs for both government and contractor-provided specialists. These include the costs of supplies, facilities, utilities, information technology, and communications. Based on a limited number of résumés we reviewed, the contractors generally had more contracting experience than their government counterparts. Résumés were available for six CACI employees supporting CCE as contract specialists for at least 6 months during fiscal year 2007; they had from 5 to 32 years, or an average of about 18 years, of contracting-related experience. In contrast, the five CCE government contract specialists hired during fiscal year 2007 had from 6 to 17 years, or an average of about 12 years, of contracting-related experience prior to joining the agency. All six contract employees previously worked for, and were trained by, the federal government before being hired by the contractor. CCE’s issuance of the BPAs with four contractors for contract specialists under GSA’s MOBIS schedule was inappropriate as some of the services required in CCE’s performance work statements were outside the scope of the underlying contracts. The labor category descriptions in the vendors’ GSA schedule contracts were, in most cases, significantly different from the description on CCE’s performance work statements and, for the two contractors who have been issued task orders, did not accurately represent the work performed. A GSA official confirmed that contract specialist services were not within the scope of the MOBIS schedule but said it is the responsibility of the ordering agency to ensure that orders are within scope. In addition, we found that one of the other contractors had improperly advertised on GSA’s Web site that its contract contained contract specialist services. GSA has initiated corrective actions with the four contractors based on our findings. Because of federal agencies’ demand for contract support services, GSA recently implemented a revised MOBIS category for acquisition management support, which includes contract specialist services. Finally, CCE did not comply with Army policy requiring an assertion that work performed by a contractor under a non-DOD contract is within scope of the contract. The four contractors’ BPAs with CCE (CACI, The Ravens Group, Tai Pedro & Associates, and Government Contracts Consultants), established under the GSA schedule contracts, were inappropriately issued as some of the services required in the performance work statements were outside the scope of these underlying contracts. Specifically, their labor category descriptions differed significantly from those required in CCE’s performance work statements, and they did not accurately represent the work that the contractor was to perform. Moreover, CCE has issued task orders for contract specialists against CACI’s and The Ravens Group’s MOBIS contracts that were outside the scope of those contracts. Where an agency announces its intention to order from an existing GSA contractor, all items ordered are required to be within the scope of the vendors’ contracts. Orders issued outside the scope of the underlying GSA contract do not satisfy legal requirements under the Competition in Contracting Act for competing the award of government contracts and limit the government’s ability to know if it is paying a fair and reasonable price. In such cases, the out-of-scope work should have been awarded using competitive procedures or supported with a justification and approval for other than full and open competition. CCE has issued task orders for contract specialists against CACI’s and The Ravens Group’s MOBIS contracts. Table 3 provides examples of the differences between the GSA schedule contract labor category descriptions and CCE’s statements of work for these contractors for a contract specialist—level 3 position. Although the performance work statement does not delineate responsibilities that are specific to the contract specialist, level 3 position, it contains responsibilities for all contract specialist positions as described in the table. Our review of the contract file shows that during acquisition planning, CCE’s policy and legal offices raised concerns about the use of the GSA MOBIS schedule to meet CCE’s requirements. Specifically, in a September 1, 2006, letter to the contracting officer and government contract specialist, CCE’s Acting Chief Attorney expressed concern that the schedule “may not provide the right personnel for this requirement,” and cited an applicable GAO decision in which the protest was sustained on the basis that vendors’ quoted services were outside the scope of their GSA contracts. The CCE attorney determined that the request for quotations (RFQ) was “legally insufficient” because of this and other issues and indicated that the out-of-scope issue, among others, should be considered. According to the legal office, despite this determination, CCE contracting personnel issued the RFQ without returning it to the attorney for further review. According to the Army’s internal policies and a March 2006 CCE memorandum regarding legal review procedures, where the contracting officer makes a decision or takes a proposed action that is contrary to legal advice, the contract file must include written evidence to that effect, including a statement of the contracting officer’s rationale for proceeding contrary to such legal advice. No such evidence was included in the contract file in this case. Contractor representatives told us that the linkage between labor categories and the work to be performed is more of an art than a clean-cut science. They told us that they attempted to match the labor categories as best they could by using their GSA labor rates and CCE’s requirements. Although acknowledging that the mapping was strained, CACI officials pointed out that it was disclosed in their proposal to CCE and that the company provided CCE with résumés that more closely matched the agency’s requirements. CACI officials told us that they have had discussions in the past with GSA about offering contracting support skill sets and what schedule is appropriate. The Ravens Group officials said that the key is the evaluation of the qualifications and level of effort required and relating those factors to the various MOBIS schedule job descriptions and labor rates. GSA agreed that CCE’s orders for contract specialists were issued out of scope of the vendors’ underlying MOBIS contracts, but a senior official stated that it is the responsibility of the ordering agency to ensure that orders are within scope of the vendors’ contracts. The official told us that while GSA has ownership of the MOBIS schedule, it is only able to perform limited oversight of the orders issued under schedule contracts. The official acknowledged that GSA is aware of instances where agencies have improperly used the MOBIS schedule to hire contract specialists, although it does not know the extent to which this has occurred. We found that other DOD agencies had used the MOBIS schedule to procure contract specialists but stopped doing so because of concerns about out-of-scope work. In 2004, ACA’s Capital District Contracting Center in Fort Belvoir, Virginia, used the MOBIS schedule to hire contract specialists in support of what is now the Joint Contracting Command- Iraq/Afghanistan (JCC-I/A). However, in 2005, the contracting center changed its approach, awarding a similar contract for additional support using full and open competition instead of continuing to issue orders under the MOBIS contract. When the period of performance expired, JCC- I/A awarded its own contract in 2006 for contract specialists, again using full and open competition. According to a former JCC-I/A official involved in the award, the driving factor in the decision to issue a competitive solicitation was the determination that contract specialist services were not in the scope of the MOBIS schedule. Based on our findings, CCE is planning to solicit a new contract for contract specialists using full and open competition, under the FAR’s commercial item acquisition procedures, with a target award date of June 30, 2008. In the interim, according to a CCE official, no more orders are being placed under the current BPAs for contract specialists. Although CCE has not placed orders for contract specialists with two other firms with which it has established BPAs—Tai Pedro & Associates and Government Contracts Consultants—we found troublesome issues related to their schedule contracts as well. Tai Pedro & Associates’ MOBIS contract actually includes a labor category for “contract specialist” services under a category for competitive sourcing support, which allows contractors to perform competitive sourcing surveys or to assist agencies in developing A-76 procurement strategies. According to GSA officials, the competitive sourcing support category allows contractor contract specialists to assist with A-76 projects and outsourcing efforts, but not with other efforts. Government Contracts Consultants’ MOBIS contract did not contain acquisition support categories. However, the contractor advertised that its contract contained these categories—including contract specialists—on the GSA Advantage Web site, the agency’s portal for Web-based procurement. The contractor took this action despite having affirmed in writing to GSA prior to its contract award its understanding that “contract support services are not authorized” under the contract. Until we informed GSA officials of this situation in September 2007, they were unaware that it had occurred. They told us that they normally check postings on GSA Advantage against awarded contracts to ensure that inappropriate services are not advertised, but in this case the situation was overlooked. Based on our findings, GSA began in the fall of 2007 to notify the four contractors that contract specialist services are out of scope of their schedule contracts. For example, GSA notified Government Contracts Consultants that it had been found to be performing out-of-scope services. GSA sent its internal reviewers to the company’s facilities to review its task orders to determine what services the company was offering federal customers under its GSA contract. GSA also directed Government Contracts Consultants to remove the incorrect labor categories from its posting on the GSA Advantage Web site, which the company has since done. GSA also notified both CACI and The Ravens Group that they had been found to be performing services outside the scope of their schedule contracts and informed Tai Pedro & Associates that acquisition support services are out of the scope of its MOBIS schedule contract, which is limited to support for competitive sourcing efforts. GSA told CACI, The Ravens Group, and Tai Pedro & Associates that internal reviewers would visit their facilities in fiscal year 2008 to ensure that they are performing within the scope of their contracts and that GSA may periodically ask for copies of recently awarded task orders to be reviewed for scope appropriateness. GSA advised all four companies—Government Contracts Consultants, The Ravens Group, CACI, and Tai Pedro & Associates—that if any new out-of-scope work is performed, GSA will take appropriate action, up to and including canceling their contracts or initiating termination for cause proceedings. Because of the demand for contract support services, GSA recently implemented a revised Special Item Number category—Acquisition Management Support—under the MOBIS schedule. Contract specialist services can be ordered under this category to perform functions such as cost estimating; preparing price negotiation memorandums and statements of work; assisting with acquisition planning, including performing market research and recommending procurement strategies; providing expert assistance in supporting proposal evaluations; assisting with reviews of contractor performance; and investigating reports of contract discrepancies. GSA has links on its Web site for special ordering instructions and an ordering guide for the revised category. These documents primarily discuss mitigating conflicts of interest and ensuring that contractors do not perform inherently governmental functions. In placing the orders for contract specialist services, CCE did not follow ACA policy and guidance pertaining to interagency contracts. After a number of reports by inspectors general and others regarding problems with interagency contracting, DOD established requirements in October 2004 for reviewing and approving the use of non-DOD contract vehicles when procuring supplies and services for amounts greater than the simplified acquisition threshold. These requirements included determining that the tasks to be accomplished or supplies to be provided were within the scope of the contract to be used. ACA’s implementing guidance, issued before CCE established the BPAs with the four contractors, required that specific certifications be made when using non- DOD contracts, including procedures for direct acquisitions (i.e., orders placed by an Army contracting or ordering officer against a non-DOD contract), such as CCE’s orders against the vendors’ GSA schedule contracts. Prior to the contracting officer’s placement of a direct acquisition order for supplies and services, the head of the requiring activity must execute, among other things, a written certification that the supplies, services, or both, are within the scope of the non-DOD contract. Additionally, for the acquisition of services, (1) the requiring activity must obtain written concurrence from the non-DOD contracting officer at the servicing organization (in this case, GSA) that the services to be provided are within the scope of the non-DOD contract, unless the DOD contracting office has access to the non-DOD contract, and (2) the contracting officer must obtain written coordination from supporting legal counsel prior to placement of the order. CCE’s certification for use of a non-DOD contract was undated but signed by the contracting officer. It stated that the services were within the scope of the non-DOD contract, despite the fact that there was a clear disconnect between the descriptions in the contractors’ GSA contract labor categories and the services CCE required. In addition, we could find no evidence that CCE obtained written concurrence from a GSA contracting officer, as required, or written coordination from its legal counsel. In fact, the certification listed the point of contact at the non-DOD agency as “to be determined.” The CCE example delineates two major areas of concern in today’s environment: hiring contractors for sensitive positions in reaction to a shortfall in the government workforce rather than as a planned strategy to help achieve an agency mission, and the need to properly manage those contractors once they are hired. When contractors are performing duties closely supporting inherently governmental functions—such as those performed by contract specialists at CCE—risks are present that can result in loss of government control and decision making, absent proper mitigation and government vigilance. CCE and its contractors alike bear responsibility for helping to mitigate risks, such as ensuring that measures are in place to prevent conflicts of interest and that contractor personnel are clearly identified as such. Given the blurred lines separating government from contractor employees in such situations as that at CCE, an additional risk is that the work may be done under an improper personal services contract. DOD guidance on this issue—which could help contracting and program officials look beyond the FAR elements to determine the condition and mitigate the risk—is lacking. Because CCE has not considered the appropriate balance of contractor and government personnel performing specific functions, or adequately trained its government workforce, the agency runs the risk of over reliance on contractors to meet its mission and of paying more in the long run. If CCE relies too heavily on contractors and cannot adequately develop its own workforce, it may not be able to support its DOD customers. The cost of decreased mission capability could be far higher than paying more for contractors. And GSA, as the agency responsible for the schedule program, needs to take steps to ensure that contractors appropriately advertise their available services. We recommend that the Secretary of Defense issue guidance to clarify the circumstances under which contracts risk becoming improper personal services contracts and to provide direction on how the risk should be mitigated. To help ensure that CCE has sufficient qualified government personnel to meet its mission, and uses contractors appropriately, we recommend that the Secretary of the Army direct ACA to work with CCE in taking the following three actions: identify the appropriate mix of contractor and government contract specialists over the long term and develop a plan to help fill positions to achieve the desired balance; implement a training program designed to ensure that CCE’s permanent employees develop and maintain needed skills; and implement formal oversight procedures to ensure that contractors identify themselves as such in all interactions external to CCE, including telephone communications, e-mail signature lines, and documents, as required by the FAR. Finally, we recommend that the Administrator of GSA strengthen internal controls to guard against situations where contractors advertise services on the GSA Advantage Web site that are not in their underlying GSA schedule contracts. DOD and GSA provided written comments on a draft of this report. Their comments are reprinted in appendixes II and III, respectively. DOD’s Director, Defense Procurement, Acquisition Policy, and Strategic Sourcing, concurred with all four of our recommendations and outlined actions DOD plans to take or has taken to address them. The Director stated that contractors performing as contract specialists is viewed as a matter of grave concern. While one of our recommendations called for ACA to work with CCE to identify the appropriate mix of contractor and government contract specialists over the long term, the Director stated that he plans to meet with the Army’s Senior Procurement Executive in an effort to eliminate, within 180 days, contractors acting as contract specialists at CCE. If this time frame cannot be met, the Director plans to urge the Army to transfer the workload within CCE to other DOD contracting agencies or sister federal agencies so that contract specialist functions are performed solely by government employees. In response to our recommendation that formal oversight procedures be implemented to ensure that contractors are identified as such in all interactions external to CCE, DOD stated that CCE had recently distributed to its government personnel and support contractors an information paper reinforcing such a policy. DOD’s response states that CCE provided GAO with this information paper in February 2008. We did not receive such a paper. After seeing this reference in DOD’s comments, we contacted CCE to request a copy of this document, but as of our report issuance date, we had not received it. GSA agreed with our recommendation that the agency strengthen controls to guard against situations where contractors advertise services on the GSA Advantage Web site that are not in their underlying schedule contracts. GSA noted that while it provides limited oversight of the orders issued under schedule contracts, it takes actions to educate customers about how best to use the contracts. GSA also pointed out that because the revised Special Item Number category “Acquisition Management Support” has been implemented under the MOBIS schedule, contracting for contract specialist work is now within the scope of that schedule. We are sending copies of this report to interested congressional committees; the Secretary of Defense; the Secretary of the Army; the Commander, ACA; the Commander, CCE; the Administrator of GSA; and the Director, Office of Management and Budget. We will provide copies to others on request. This report will also be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report or need additional information, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Staff acknowledgments are provided in appendix IV. To learn more about the use and roles of contractors providing contract specialist services, we conducted a case study under the authority of the Comptroller General to conduct evaluations on his own initiative. We selected the Army’s Contracting Center of Excellence (CCE), in the Washington, D.C., area, as one Department of Defense (DOD) agency using contractors in this role based on a bid protest that had been submitted to our office. The protest, which was denied, challenged the Defense Contracting Command–Washington’s (now known as CCE) acceptance of CACI, International’s (CACI) organizational conflict-of- interest mitigation plan and the evaluation of proposals for contract specialist services. In fiscal year 2007, CCE obligated almost $1.8 billion in contract actions. Because nearly all of the contractor- provided contract specialists at CCE during the performance of our review were employees of CACI, our primary focus was on the CACI contract. CCE had also ordered a few contract specialists from another firm, The Ravens Group. In all, CCE had established blanket purchase agreements (BPA) with four contractors in September 2006, under General Services Administration (GSA) schedule contracts, to provide contract specialist services. To determine the extent to which and the reasons CCE is relying on contractors, we obtained contract specialist staffing levels in fiscal year 2007. We reviewed CCE’s task orders issued under schedule contracts using the agency’s BPAs for contracting support services and agency billing information. We also interviewed CCE’s commander and contracting, training, and human capital officials and spoke with officials from the Army Contracting Agency (ACA), which is CCE’s parent organization. We analyzed information from the Federal Procurement Data System-Next Generation to determine trends in CCE’s use of other agencies’ contracts from fiscal years 2005 through 2007. To identify the roles and responsibilities of the contractor contract specialists, we randomly selected 42 contract actions worked on by contractor contract specialists during fiscal year 2006 and fiscal year 2007 through June 13 to determine what work they perform on a daily basis. The intent of this file review was to understand the contractors’ day-to-day duties; we selected the files randomly to avoid selection bias. We interviewed management officials from CACI and The Ravens Group. We also interviewed CACI’s contract specialists at CCE, but The Ravens Group management would not allow us to interview their employees. We did not consider this to be a scope limitation because of the small number (2 to 3) of The Ravens Group’s contract specialists at CCE during the time of our review. For comparison, we interviewed government contract specialists at CCE regarding their roles and responsibilities. We also interviewed government contracting officers about the roles and responsibilities of the government and contractor-provided contract specialists. To obtain information on the general demand for contract specialists in today’s marketplace, we interviewed contractor management representatives, and we reviewed a Defense Acquisition University report on contracting out the procurement function, an Air Force-sponsored study to assess the status of contracting out procurement functions within DOD and federal agencies. We also looked at job postings on USA Jobs, the federal government’s Web site for job vacancies. To determine what actions have been taken to mitigate the risks associated with using contractors in contract support roles, we interviewed CCE managers and contracting officers and CACI contract specialists at CCE. We reviewed CACI’s organizational conflicts of interest (OCI) mitigation plan and interviewed employees about their knowledge of policies and procedures regarding OCIs. We interviewed CACI officials regarding the company’s policies and procedures to mitigate personal conflicts of interest, and we examined related documents—such as CACI’s Standards of Ethics and Business Conduct—and the ethics training provided by CACI to its employees. We also reviewed other documents, such as the Acquisition Advisory Panel’s 2007 report. In addition, we reviewed sections of the Federal Acquisition Regulation (FAR) pertaining to organizational and personal conflicts of interest, as well as those related to personal services contracts. We conducted a legal review of CCE’s performance work statement, BPAs, and orders for contract specialists and compared the elements of personal services contracts in FAR Subpart 37.104 with the environment in which contractors are working at CCE as contract specialists. To compare the cost of contractor contract specialists to their government counterparts, we reviewed CCE’s fiscal year 2007 task orders with CACI and The Ravens Group and agency billing information to identify the hourly labor rate the government is paying for these positions. Because the orders issued pursuant to the BPAs are time-and-materials contracts, payments to the contractors are based on the number of labor hours billed at a fixed hourly rate, which includes wages, benefits, overhead, general and administrative expenses, and profit. We identified the number of hours purchased from each contractor during August 2007 and calculated the weighted average hourly cost for contract specialist II and III positions. We reported the weighted average hourly cost because the agency used two contractors at two different rates in August 2007. To compare these costs to those for a government contract specialist, we identified two groups of CCE employees that perform the same tasks and share similar qualifications, those who were GS-12s with Defense Acquisition Workforce Improvement Act (DAWIA) II certification—which are equivalent to contractor-provided contract specialist II positions—and those who were GS-13s with DAWIA III certification—which are equivalent to contractor-provided contract specialist III positions. We obtained the actual salaries and the government’s contributions to the benefits of those contract specialists during the pay period ending on August 18, 2007. We used data from one pay period to capture the costs of government contract specialists because CCE has had turnover in these positions, making it difficult to capture costs throughout the year. From those data, we determined the average hourly rate and costs of benefits for these two groups based on 68.3 productive hours during the pay period. To determine the government’s overhead costs, we used the actual costs of support services—salaries and government contributions to the benefits of human capital personnel, manpower personnel, and other support staff as identified by ACA during the pay period ending on August 18, 2007. CCE also provided the agency’s expenditures on travel and training during fiscal year 2007. We then determined the average travel and training costs per person per hour for only those government employees who were directly associated with these costs. This average travel and training cost estimate was applied to all government contract specialists supporting CCE and may be higher than the agency’s actual cost per person. We excluded from our analysis the costs for supplies, information technology, and communication services because the government pays these costs for contractors as well. We also excluded the costs of facilities and utilities because the Director of Resource Management told us that ACA could not specifically identify these costs (which the government also covers for contractor employees). We compared the average hourly cost—actual salary, government’s contribution to benefits, and overhead—of the two groups of CCE contract specialists to the weighted average hourly rate paid for the respective contractor positions. To determine how CACI and CCE employee contracting experience differs, we reviewed available résumés of contractor and government contract specialists. Résumés were available for six CACI contract specialists who have supported CCE for at least 6 months and were identified by CCE officials as doing the same work as government contract specialists. Five résumés were available for CCE contract specialists hired in fiscal year 2007, who were identified by agency officials as doing the same work as the contractors. In reviewing these résumés, we considered previous contracting experience to be the time spent in jobs related to the field of contracting. To determine whether the contract vehicles used to acquire the specialists were appropriate, we reviewed CCE’s contracting strategies to determine whether new contracts were awarded to obtain contract specialists or whether interagency contracts through other federal agencies, such as GSA’s schedule program, were used. We analyzed CCE’s BPAs with four contractors—CACI, The Ravens Group, Tai Pedro & Associates, and Government Contracts Consultants—and their underlying GSA Mission Oriented Business Integrated Services (MOBIS) schedule contracts to which the BPAs were tied. We also reviewed CCE’s performance work statements and analyzed the task orders that have been issued for contract specialists. We reviewed the contract files to obtain documentation, such as legal reviews and compliance with DOD policies on interagency contracting. We interviewed CCE officials and GSA officials, including the Director of GSA’s Management Services Center, Region 10, who is responsible for the MOBIS schedule. We reviewed reports by GAO and others concerning the use of interagency contracts. We also reviewed FAR Subpart 8.4, which sets forth the regulations pertaining to GSA’s schedule program. We conducted this performance audit from May 2007 through March 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the individual named above, Michele Mackin, Assistant Director; Erin Schoening; William Allbritton; Timothy Carr; Daniel Chen; Justin Jaynes; Kenneth Patton; Charles Perdue; and Sylvia Schatz made key contributions to this report. | In 2007, the Department of Defense (DOD) paid contractors $158.3 billion for a range of services, including contract specialists. To better understand the use of contractors in this role, GAO initiated a case study, under the authority of the Comptroller General, at the Army Contracting Agency's (ACA) Contracting Center of Excellence (CCE). GAO determined (1) the extent to which and why CCE relies on contractor contract specialists, (2) how risks of contractor use are mitigated, (3) how the cost of the contractors compares to that for CCE's government employees, and (4) whether the contract vehicles were appropriate. GAO reviewed a random sample of contract files to understand the contractors' duties and responsibilities, compared compensation costs, and reviewed documents from the General Services Administration (GSA), under whose contracts CCE ordered the contract specialists. CCE has relied on contractor contract specialists since it began hiring them in 2003. In August 2007, contractors--who work side by side and perform the same functions as their government counterparts--comprised 42 percent of CCE's contract specialists. CCE officials cited difficulties hiring and retaining government personnel in light of the competition from government and the private sector for this competency. While CCE officials said that they prefer to use government employees, they have not considered the appropriate balance of contractor versus government contract specialists. Furthermore, CCE has not addressed the need for more training of its government employees to strengthen their skills in conducting CCE's increasingly more complex procurements. Methods to mitigate the risks of using contractors have been mixed in effect. First, the line separating contractor from government employee is blurry, and contractors did not always clearly identify themselves as such when dealing with the public. Second, the potential for the work being done under a personal services contract, which the Federal Acquisition Regulation generally prohibits because of the government-contractor relationship it creates, was clearly present. While contractor managers retained control over matters such as approving leave requests, CCE took steps to further strengthen the management distinction between government and contractor employees based on GAO's findings. Finally, risks of organizational and personal conflicts of interest were mitigated to some extent, but in practice the government relies on individual contractor employees to identify potential conflicts. These types of risks must be mitigated to ensure that the government does not lose accountability over policy and program decisions. CCE is paying up to almost 27 percent more for its contractor-provided contract specialists than for similarly graded government employees. This comparison took into account government salary, benefits, and overhead and the loaded hourly labor rates paid to contractors. Our review of available r?sum?s showed that six contractor employees supporting CCE in fiscal year 2007 had on average more contracting experience than CCE's five recent government hires. Despite CCE's legal counsel's concerns, CCE has been inappropriately ordering contract specialists under a GSA contract because the services were out of scope of those contracts. GAO found additional problems, such as a contractor advertising contract specialist services on GSA's Web site that it was not authorized to provide. Due to what it characterizes as the growing demand by federal agencies for contractor contract specialists, GSA recently posted a revised contract category, under which government agencies can procure contract specialists to provide acquisition management services, such as cost estimating and proposal evaluation support. In response to GAO's findings, GSA contacted each of the contractors involved in our review about their out-of-scope services and plans further follow-ups with them. |
Located in FAA’s Office of Aviation Safety (Aviation Safety), the Aircraft Certification Service (Aircraft Certification) and Flight Standards Service (Flight Standards) issue certificates and approvals for new aviation products to be used in the national airspace system as well as for new operators in the system, such as air carriers, based on federal aviation regulations (see fig. 1 below). FAA inspectors and engineers interpret and implement these regulations governing certificates and approvals through FAA policies and guidance, including orders, notices, and advisory circulars. Additionally, FAA also has the authority to use private individuals and organizational entities, known as designees, to carry out many certification activities on behalf of the FAA Administrator in order to enable FAA to better concentrate its limited staff resources on safety- critical functions. In Aircraft Certification, approximately 880 engineers and inspectors issue certifications and approvals to the designers and manufacturers of new aircraft and aircraft engines, propellers, parts, and equipment, including the avionics and other equipment required for modernizing the air traffic control system under the Next Generation Air Transportation System (NextGen). Since 2005, Aircraft Certification has used a project sequencing system to nationally prioritize certification submissions on the basis of available resources. In fiscal year 2013, Aircraft Certification issued 3,496 design approvals, 57 production approvals, and 536 airworthiness certificates. In Flight Standards, approximately 4,000 inspectors issue certificates and approvals allowing individuals and entities to operate in the national airspace system. These include certificates to commercial air carriers, operators of smaller commercial aircraft, repair stations, and flight training schools and training centers. Flight Standards field office managers in over 100 field offices initiate certification projects within their offices on a first-come, first served basis. In fiscal year 2013, Flight Standards issued 259 air operator certificates and 159 air agency certificates. When FAA receives aviation industry submissions for certificates and approvals, it must determine whether or not resources are available to begin the project. According to FAA, the agency considers its highest priority to be overseeing the continued operational safety of the people and products already operating within the national airspace system. The same staff that provide this oversight are also tasked with other oversight activities, such as processing new certifications and approvals that FAA considers to be lower priority. FAA wait-lists new certification and approval projects when resources are not available to begin the work. Flight Standards, in particular, has historically had difficulty keeping up with its certification workload across its regions and offices, a problem that persists. FAA has considered ways to supplement its annual budget by expanding its sources of funding to deal with its increasing workload and staff shortages. However, FAA has limited options as it cannot levy fees on its customers for most of the services it provides to industry, including aviation product certifications and approvals. Attempts have been made to provide FAA with additional funding from industry stakeholders for processing certifications and approvals. In 2007, the administration submitted a reauthorization proposal to Congress that called for major changes to FAA’s funding and budget structure. These changes were intended to provide a more stable, reliable basis for funding in the long term, in part by allowing FAA to impose fees on manufacturers for the various activities and costs related to aircraft certification and approval. Congress has previously authorized other agencies to charge these types of “user fees” for services rendered for processing product certification and approval. For example, the Medical Device User Fee and Modernization Act of 2002 authorized the Food and Drug Administration (FDA) to charge and retain a fee for providing services related to reviewing medical device products. However, this broad authority has not been granted to FAA. In May 2012, the Certification Process Committee made six recommendations to Aircraft Certification to streamline and reengineer the product certification and approval processes, improve efficiency and effectiveness within Aircraft Certification, and redirect resources for support of certification. The Certification Process Committee further recommended that FAA develop measures of effectiveness for its activities and a means of tracking its progress. In August 2012, FAA reported its plan to Congress for addressing the Certification Process Committee’s recommendations, and, in July 2013, the agency issued an implementation plan with 14 initiatives. FAA updated this plan in January 2014 and plans to issue further updates on the status of the initiatives periodically. Since the January update, Aircraft Certification has continued its efforts to address the recommendations to improve its certification and approval processes and is implementing the 14 initiatives. These initiatives touch on various aspects of Aircraft Certification’s work and, according to FAA several predate the committee’s recommendations and were part of on- going continuous efforts to address long-standing certification issues and to improve the certification process. The initiatives range from developing a comprehensive road map for major change initiatives, to improving the project sequencing process, to reorganizing the small aircraft certification regulation. Figure 2, based on an interim May 2014 update that FAA provided to us, summarizes FAA’s determination of the status of the 14 initiatives. According to the May 2014 update that FAA provided to us, 1 of the 14 initiatives has been completed, and 10 initiatives are on track for completion within planned time frames. FAA deployed a tracking system to monitor the implementation of the initiatives in June 2013, but the agency indicated it is still finalizing the mechanisms for authorizing staff with the appropriate level of review and approval rights in the system. Also, ten of the initiatives were on track for meeting their planned completion milestones. For example, the initiatives to expand the authority for approving aircraft emissions data and noise compliance under the organization designation authorization (ODA) program are on track to be completed in 2015. In addition, the initiative to expedite rulemaking by, among other things, adopting a rulemaking prioritization tool to update airworthiness standards for special conditions is scheduled to be completed in September of this year. Further, three of the initiatives were in danger of getting off track between 2011 and 2013 and are now back on schedule. Although most initiatives are on track, according to FAA’s May 2014 interim update, 2 of the 14 initiatives will not meet planned milestones: Improve effectiveness of the ODA program: FAA and two aviation industry groups—the Aerospace Industries Association and General Aviation Manufacturers Association—developed a plan to improve the effectiveness of the ODA process, which is used to authorize organizations to act on behalf of FAA in conducting some safety certification work. In conjunction with the plan, FAA revised the order that outlines the new ODA procedures. However, this initiative was purposely delayed to provide industry with additional time to adapt to the changes in the ODA procedures. Representatives of three industry associations we interviewed for this testimony supported the use and expansion of ODA by FAA. In contrast, while the Professional Aviation Safety Specialists (PASS) agrees with the concept of ODA, it has concerns related to expanding the program because representatives contend that oversight of the program requires significant FAA resources. PASS also contends that due to current staffing shortages and increased workload, FAA does not have enough inspectors and engineers to provide the proper surveillance of the designees who would be granted this additional delegation authority. On May 14, 2014, the DOT OIG announced a review of FAA’s oversight of the ODA program. The OIG plans to assess FAA’s (1) process for determining staffing levels for ODA oversight and (2) oversight of delegated organizations’ program controls. Update 14 C.F.R. Part 21: FAA chartered another aviation rulemaking committee in October 2012 to evaluate improvements to the effectiveness and efficiency of certification procedures for aircraft products and parts, along with incorporating new safety management system (SMS) concepts into the design and manufacturing environment. The committee submitted its report to FAA in July 2014. FAA indicated that the government shutdown in October 2013 delayed some of the actions that the agency had planned to move this effort into the rulemaking process, including submission of the application for rulemaking. According to FAA, however, this delay will have no effect on completion of the final rule, which is planned for 2017. According to FAA’s May 2014 update, 1 of the 14 initiatives was at risk of not meeting planned milestones, which increases the risk that FAA will miss its established implementation time frames for the initiative for addressing its associated recommendation. Improve consistency of regulatory interpretations: The May 2014 interim update also indicated that the initiative for improving the consistency of regulatory interpretation is at risk of getting off track or off schedule. This initiative responds to the Regulatory Consistency Committee’s recommendations for improving the consistency of regulatory interpretation within both Aircraft Certification and Flight Standards. However, Aircraft Certification is relying on Flight Standards to complete the implementation plan for addressing the recommendations. Therefore, Aircraft Certification has placed this initiative on hold. (The next section of this statement discusses in more detail FAA’s response to the Regulatory Consistency Committee’s recommendations.) As of May 2014, FAA had not developed metrics for measuring the effectiveness of 9 of the 14 initiatives it has undertaken, nor has it determined metrics to measure the effectiveness of its actions as a whole. According to FAA officials, they plan to develop these metrics in three phases. For the first phase, to be included in the July 2014 update of its implementation plan, FAA will include metrics to measure the progress of the implementation of the initiatives. For the second phase, FAA plans to subsequently develop metrics for measuring the outcomes of each initiative. For the third phase, working with the Aerospace Industries Association, FAA plans to develop metrics for measuring the global return on investment in implementing all of the initiatives, to the extent that such measurement is possible. We believe that this plan for establishing performance measures is reasonable. Unlike FAA’s efforts to improve the certification process, although FAA has made some progress towards addressing the regulatory consistency recommendations, the details remain unclear about how FAA will structure its efforts. In November 2012, the Regulatory Consistency Committee made six recommendations to Aircraft Certification and Flight Standards to improve (1) the consistency in how regulations are applied and (2) communications between FAA and industry stakeholders. In July 2013, FAA reported to Congress on its plans for addressing the regulatory consistency recommendations, and included its preliminary plan for determining the feasibility of implementing these recommendations. The report also indicated that FAA would develop a detailed implementation plan that would include an implementation strategy, assign responsibilities to offices and staff, establish milestones, and measure effectiveness for tracking purposes. We found in February 2014 that FAA expected to publish such a detailed implementation plan by late June 2014, more than 6 months after its initial target date of December 2013. In June 2014, FAA officials told us that the implementation plan was under review within FAA and estimated that the agency would issue its detailed plan in August 2014. Until this detailed plan is released, the specific initiatives for addressing the recommendations are unknown; thus, we cannot analyze information on the status of any planned efforts similar to the information we provided above for the certification process initiatives. Further, FAA’s July 2013 preliminary plan does not specify how FAA plans to measure the effectiveness of the initiatives. FAA indicated that “although there may not be any baseline for each recommendation against which to compare improvements, FAA intends to consider: (1) identifying metrics, (2) gathering and developing baseline data, and (3) periodically measuring any changes, positive or negative, in rates of completion.” FAA officials provided the following information on how the agency is planning to respond to the six recommendations. The Regulatory Consistency Committee recommended that Aircraft Certification and Flight Standards (1) review all guidance documents and interpretations to identify and cancel outdated material and electronically link the remaining materials to its applicable rule, and (2) to consolidate Aircraft Certification’s and Flight Standards’ electronic guidance libraries into a master source guidance system, organized by rule, to allow FAA and industry users access to relevant rules and all active and superseded guidance material and related documents. This recommendation for creating the master source guidance system is the top priority of the Regulatory Consistency Committee. FAA officials indicated that establishing this system will require two main components: As a first step, for linking (mapping) all relevant guidance materials to the regulations, FAA plans to determine which "guidance" documents exist across regional and field offices—including orders, notices, and advisory circulars—outside FAA’s electronic guidance libraries, which are being used to answer questions, interpret or analyze regulations, and provide guidance on regulatory matters. In December 2013, Flight Standards sent out a memorandum requesting that staff discontinue using any guidance documents outside those found in the guidance libraries, to be effective January 15, 2014. The memorandum also asked for the staff to submit any unofficial guidance worth preserving to FAA for review. Flight Standards then conducted a review to determine which of the unofficial guidance documents submitted should be added to the guidance libraries. Several members of the Regulatory Consistency Committee responded in an e-mail to FAA to express serious concerns about this approach and stated that the committee did not envision the cancellation of any guidance before FAA developed a methodology to include or exclude such guidance. The committee members further noted that FAA’s memorandum provided no method to allow existing certificate holders to retain certifications that were based on any applied guidance that had been cancelled. Further, these members requested that FAA either withdraw the memorandum or address the issues they raised and extend the date for FAA staff to comply with the memorandum. However, two other Regulatory Consistency Committee members we interviewed considered FAA’s actions to get staff to discontinue the use of unofficial guidance in the field to be an appropriate first step. Second, FAA plans to develop a master source guidance system with the capability to consolidate information from Aircraft Certification’s and Flight Standards’ electronic guidance libraries as well as legal interpretations from the Office of Chief Counsel into a master guidance system to allow FAA and industry users access. Specifically, the Regulatory Consistency Committee recommended that this system be searchable so that FAA and industry users can easily access relevant rules and find the relevant guidance for the rule. FAA officials assessed the possibility of using the existing Aviation Safety Information Management System, but determined that it is not adequate because (1) users cannot search for guidance by word and (2) it is not compatible with other FAA data systems. According to FAA officials, with about $750,000 in approved funding for this project, FAA’s information technology division is in the process of developing a dynamic regulatory system that should provide the needed capabilities. Officials indicated that when users conduct a search for a particular topic in this system, the search results should bring up multiple entries for specific guidance. Initially, Flight Standards plans to use an Excel spreadsheet for storing the guidance and then transition to the new system once it is deployed. Flight Standards hopes to test out a first version of this system within calendar year 2014. However, the officials were unsure of the total cost of developing and deploying the system. Representatives from four of the committee stakeholders we interviewed for this testimony acknowledged that creating this system is a major effort for FAA because of the volume of FAA guidance that potentially exists across regional and field offices, some of which may not be in Aircraft Certification’s and Flight Standards’ electronic guidance libraries. Representatives of five industry stakeholders we interviewed provided insights on how FAA might devise a plan for creating and populating this system. Three of these noted that FAA will need to ensure that the various types of guidance—such as orders, notices, and advisory circulars—include links to the original federal aviation regulations. One of these stakeholders recommended that FAA develop the system to allow a user looking at FAA guidance to also see all relevant background information on related decisions, and the past actions related to the guidance in question and their relation to the original regulation. Because of the large volume of FAA guidance, some stakeholders also suggested that FAA begin by first choosing a starting date for which any new rules or other new guidance it issues would include links to the relevant original regulations. However, one stakeholder we interviewed noted that FAA should consider prioritizing its effort by first mapping the guidance materials for specific key regulations and then the guidance for less significant regulations. The Regulatory Consistency Committee noted multiple instances where FAA guidance appeared to have created inconsistent interpretation and application, and confusion; the Consistency Committee recommended that FAA develop a standardized decision-making methodology for the development of all policy and guidance material to ensure such documents are consistent with adopted regulations. In interviews for this testimony, FAA officials also provided some updates on how the agency will respond to the recommendation to develop instructional tools for its policy staff. FAA officials told us they had not initiated any efforts yet to address this recommendation, but would begin by focusing on developing instructions for policy staff to use for populating the master source guidance system. In August 2014, FAA plans to form an internal work group to establish a document management framework and work processes that can be used by Aircraft Certification’s and Flight Standards’ policy division staffs as they map existing guidance documents to applicable source regulations in the master source guidance system. The officials expected the work group would issue an internal directive for FAA personnel on work processes to be used in populating the guidance system by June of 2015. The Regulatory Consistency Committee recommended that FAA, in consultation with industry stakeholders, review and revise its regulatory training for applicable agency personnel and make the curriculum available to industry. FAA officials told us that FAA has begun to develop improved training for its field staff—the third recommendation of the Regulatory Consistency Committee—so that field inspector staffs are better equipped to answer routine compliance-related questions confidently and in a consistent manner. In addition, the officials told us starting in 2015, FAA plans to conduct a gap analysis of existing training for all FAA staff who are responsible for interpreting and applying certification and approval regulations. For this analysis, FAA plans to assess whether existing training can be modified to sufficiently address any gaps. FAA also plans to coordinate with industry to share the results of this review and analysis by the end of 2015. The Regulatory Consistency Committee made two similar recommendations for FAA to consider: (1) establish a Regulatory Consistency Communications Board comprising various FAA representatives that would provide clarification on questions from FAA and industry stakeholders related to the application of regulations and (2) determine the feasibility of establishing a full-time Regulatory Operations Communication Center as a centralized support center to provide real- time guidance to FAA personnel and industry certificate/approval holders and applicants. FAA officials also discussed the agency’s conceptual approach and plans for establishing a board—likely by the end of calendar year 2014—to address these two recommendations. The purpose of the board would be to provide a neutral and centralized mechanism with a standardized process for addressing and resolving regulatory compliance issues between FAA and industry. According to the committee, this board would be comprised of representatives from the relevant headquarters policy divisions in FAA to help answer complex regulatory interpretation issues that arise between FAA inspectors and engineers, and industry during the certification and approval processes. FAA officials told us the board’s process, once established, would use a modified version of the agency’s current Consistency and Standardization Initiative (CSI), a process established as a means for industry to appeal FAA decisions and actions. As we found in 2010, resolution through the CSI can be a lengthy process, with the total length of the process depending on how many levels of appeal the industry stakeholder chooses. However, as we also found, industry stakeholders have generally been reluctant to use CSI for initiating appeals and raising concerns with the local field office for fear of retribution. FAA officials told us in interviews that the modified process would help address the retribution issue, because it would rely instead on multiple sources to raise issues—not just solely on industry—and would be the final arbiter for FAA and industry in disagreements on certification and approval decisions. According to FAA officials, the board could also serve the function of the proposed operations center recommended by the committee to be a resource for assisting FAA personnel and industry stakeholders with interpretation queries and establishing consistency in regulatory application. FAA officials indicated that the agency had decided not to establish the communications center because (1) the board could serve a similar function and (2) FAA has limited resources available to staff a communications center. Several industry stakeholders we spoke with told us they support FAA’s preliminary plans to establish the board and modify the CSI process as part of this effort. For example, several stakeholders told us that they support FAA’s plans to modify the current CSI process. One of these stakeholders noted that a modified process would be more effective if it allowed for industry stakeholders to raise issues anonymously. Also, another stakeholder noted the board would not be beneficial until after FAA has established the master source guidance system because the board should be able to refer to that guidance in demonstrating how it makes decisions. The Regulatory Consistency Committee recommended that FAA improve the clarity of its final rules by ensuring that each final rule contains a comprehensive explanation of the rule’s purpose and how it will increase safety. FAA officials told us that this recommendation has been addressed through the work of the Aviation Rulemaking Advisory The officials told Committee’s Rulemaking Prioritization Working Group.us that, as a result of this effort, all final rules, are now well-vetted across FAA. The industry representatives we interviewed had mixed opinions about whether FAA had addressed this recommendation as intended. For example, two stakeholders were in agreement with FAA that the agency had addressed it while two other stakeholders noted that FAA’s new rules are still not as clear as they should be. Two stakeholders also said that it is often not the final rules but the guidance that accompanies or follows the final rules that is unclear and contributes to inconsistent interpretation and application among FAA staff. In our previous work on organizational transformations, we noted that implementing large-scale change management initiatives—like those the committees tasked FAA with—are not simple endeavors and require the concentrated efforts of both leadership and employees to realize intended synergies and accomplish new organizational goals. People are at the center of any serious change management initiative because people define the organization’s culture, drive its performance, and embody its knowledge base. The best approach for these types of initiatives depends upon a variety of factors specific to each context, but there has been some general agreement on a number of key practices that have consistently been found at the center of successful change management initiatives. These include, among other things, securing organizational support at all levels, developing clear principles and priorities to help change the culture, communicating frequently with partners, and setting performance measures to evaluate progress. In this final section of this testimony, we discuss challenges for FAA in implementing the committees’ certification and approval and regulatory consistency recommendations that relate to these key practices. FAA officials and industry representatives we spoke to noted that shifting priorities as well as declining resources may prohibit FAA from devoting the time and resources needed for completing the initiatives in the planned time frames. They agreed that a primary challenge for FAA will be having the dedicated resources that will be needed to successfully implement the committees’ recommendations. We have previously found that successful organizational transformations and cultural changes require several years of focused attention from the agency’s senior leadership. This lesson is consistent with our previous work on organizational transformation, which indicates that support from top leadership is indispensable for fundamental change. Top leadership’s clear and personal involvement in the transformation represents stability for both the organization’s employees and its external partners. Top leadership must set the direction, pace, and tone for the transformation. Additionally, buy-in and acceptance among the workforce will be critical to successful implementation of the initiatives to address the two committees’ recommendations. Additionally, as we described in our 2010 report, FAA prioritizes ensuring the continued operational safety of the people and products already operating in the national airspace system over processing new certifications and approvals. We reported in the 2010 report that Flight Standards staff had little or no incentive to perform certification work under the system in which their pay grades are established and Other than inspectors involved with overseeing air carriers, maintained.Flight Standards inspectors are typically responsible for a variety of types of certificate holders. Each certificate is allocated a point value based on the complexity of the certificate or operation, and the combined point value for each inspector’s oversight responsibilities must meet or exceed the points allocated for the inspector’s grade. However, not all of the inspectors’ duties—including certification work—receive points in this system, and inspectors are subject to a downgrade if entities in their portfolio relocate or go out of business. FAA and industry representatives also cited FAA’s organizational culture as a primary challenge for FAA in successfully implementing these initiatives. They noted that many of the certification process and regulatory consistency initiatives FAA is attempting to implement represent cultural shifts for FAA staff in how regulations, policy, and guidance are applied, and ultimately how certification and approval decisions are made. As we have previously found, the implementation of recommendations that require a cultural shift for employees can be delayed if the workforce is reluctant in accepting such change. Further, industry representatives have identified the lack of communication with and involvement of stakeholders as a primary challenge for FAA in implementing the committees’ recommendations, particularly the regulatory consistency recommendations. Successful agencies we have studied based their strategic planning, to a large extent, on the interests and expectations of their stakeholders, and stakeholder involvement is important to ensure agencies’ efforts and resources are targeted at the highest priorities. However, representatives of two industry organizations we interviewed told us that FAA did not provide the opportunity for early input and that outreach is low regarding the certification process recommendations, and representatives of four industry organizations indicated that FAA has not sought their input in responding to the regulatory consistency recommendations. They reported that FAA had neither kept in contact with or advised them of its plans nor engaged the Regulatory Consistency Committee participants in the drafting of the detailed implementation plan that is expected to be published in August. As an example, as previously discussed, when Flight Standards published a memo in December 2013 calling for the cancellation of non-official guidance, several members of the Regulatory Consistency Committee were unaware of the change and expressed surprise and dissatisfaction with the action and offered their assistance. Representatives of one industry group noted that FAA sought their input on addressing the Certification Process Committee’s recommendations for subsequent revisions of its implementation plan. FAA has not fully developed performance metrics to ensure that any initiatives it implements are achieving their intended outcomes. We have previously found that agencies that have been successful in assessing performance use measures that demonstrate results and provide useful information for decision making.that FAA had not completed developing performance measures for either the certification improvement or the regulatory consistency initiatives: Earlier in this testimony, we reported FAA had developed performance measures for 5 of the 14 certification process initiatives as of May 2014 and plans to further develop measures in three phases. In addition, most of the initiatives are scheduled to be implemented by 2017. Although we have assessed FAA’s plan for developing these metrics as reasonable, the agency may miss an opportunity to gather early data for evaluating the effectiveness of its actions and making any needed corrections. There is no detailed plan for implementing initiatives addressing the consistency of regulatory interpretation recommendations and measuring their outcomes. In recent meetings, FAA officials told us they have had difficulty in determining how to measure the outcomes of its regulatory consistency initiatives and have not been able to determine what specific performance metrics could be used. Going forward, it is critically important that FAA develop outcome-based performance measures to determine what is actually being achieved through the current and future initiatives, thereby making it easier to determine the overall outcomes of each of the initiatives and to hold FAA’s field and headquarters offices and employees accountable for the results. We are not making any new recommendations because the recommendation we made in 2010 for FAA to develop outcome-based performance measures and a continuous evaluative process continue to have merit related to this issue. To its credit, FAA has initiated some efforts and sound planning for addressing the committees’ recommendations. However, it will be critical for FAA to follow through with its initiatives and plans for developing performance metrics to achieve the intended efficiencies and consistencies. As we noted in our October 2013 statement, however, some improvements to the certification and approval processes, will likely take years to implement and, therefore, will require a sustained commitment as well as congressional oversight. Chairwoman Cantwell, Ranking Member Ayotte, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions at this time. For further information on this testimony, please contact Gerald L. Dillingham, Ph.D., at (202) 512-2834 or [email protected]. In addition, 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 statement include Vashun Cole, Assistant Director; Andrew Von Ah, Assistant Director; Jessica Bryant-Bertail; Jim Geibel; Josh Ormond; Amy Rosewarne; and Pamela Vines. The following individuals made key contributions to the prior GAO work: Teresa Spisak, Assistant Director; Melissa Bodeau, Sharon Dyer, Bess Eisenstadt, Amy Frazier, Brandon Haller, Dave Hooper, Sara Ann Moessbauer, and Michael Silver. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Among its responsibilities for aviation safety, FAA issues certificates for new aircraft and parts, and grants approvals for changes to air operations and aircraft, based on federal aviation regulations. Various studies, GAO's prior work, and industry stakeholders have raised questions about the efficiency of FAA's certification and approval processes, as well as the consistency of its staff in interpreting aviation regulations. Over time, FAA has implemented efforts to address these issues, but they persist as FAA faces greater industry demand and its overall workload has increased. The 2012 FAA Modernization and Reform Act required FAA to work with industry to resolve these issues. In response, FAA chartered two committees—one to address certification processes and another to address regulatory consistency—which recommended improvements in 2012. In 2013, FAA published an implementation plan for addressing the certification process recommendations and promised to publish an implementation plan for addressing the regulatory consistency recommendations at a later date. This testimony provides information on FAA's progress in implementing the (1) certification and approval process recommendations and (2) regulatory consistency recommendations. It also discusses future challenges industry stakeholders believe FAA will face in implementing these recommendations. This testimony provides the same information as GAO-14-728T , which was based on GAO products issued from 2010 to 2014, updated in July 2014 through reviews of recent FAA documents and interviews of FAA officials and industry representatives. The Federal Aviation Administration's (FAA) Aircraft Certification Service (Aircraft Certification) is responsible for addressing the certification and approval process recommendations, and has made progress. Aircraft Certification is implementing and has set milestones for completing 14 initiatives, several of which were originally begun as part of earlier certification process improvement efforts. The initiatives range from developing a comprehensive road map for major change initiatives, to improving Aircraft Certification's process for prioritizing requests for certifications and approvals (project sequencing), to reorganizing the small aircraft certification regulation. According to an update prepared by FAA in May 2014, one initiative has been completed and most are on track to be completed within 3 years. However, according to this update, two initiatives will not meet planned milestones, including the one for improving FAA's program for delegating authority to organizations to carry out some certification activities. Also, a third initiative for improving consistency of regulatory interpretation was at risk of not meeting planned milestones. Two additional initiatives, while on track for meeting planned milestones in May 2014, faced challenges because of opposition by FAA's labor unions, including one for improving Aircraft Certification's project sequencing process. GAO found in October 2013 that Aircraft Certification continued to lack performance measures for many of these initiatives, a condition that persists. In 2010, GAO had previously recommended that FAA develop a continuous evaluative process with performance goals and measures. FAA agreed but has not yet fully addressed the recommendation. Aircraft Certification officials discussed plans to develop metrics in three phases, beginning in July 2014 and in the future, for measuring (1) the progress of implementing the initiatives throughout FAA, (2) the outcomes of each initiative, and (3) the return on investment for FAA and the industry resulting from implementing the initiatives as a whole. FAA's Flight Standards Service (Flight Standards) is responsible for addressing the regulatory consistency recommendations, and is finalizing plans to do so. FAA has not published a detailed plan with milestones and performance metrics, and officials told GAO that they intend to publish a plan by August 2014. Flight Standards officials said they were making progress in addressing the committee's top priority recommendation—mapping all FAA policy and guidance to relevant federal aviation regulations and developing an electronic system that maintains this information and that is accessible by FAA and industry users. As part of this effort, officials told GAO that Flight Standards has begun eliminating obsolete guidance and linking existing policy and guidance to the regulations. Going forward, Aircraft Certification's and Flight Standards' efforts may face challenges that could affect successful implementation of the committees' recommendations. Many of these recommendations represent a significant shift in how FAA normally conducts business, and if the workforce is reluctant to implement such changes, FAA's planned initiatives for addressing the recommendations could be delayed. Also, the fact that FAA has not yet implemented performance measures for most of the initiatives is a concern for both GAO and the industry. As GAO concluded in October 2013, without performance measures, FAA will be unable to gather the appropriate data to evaluate the success of current and future initiatives. |
S. 261 would change the cycle for the President’s budget, for the budget resolution, for enactment of appropriations, and for authorizations to a biennial cycle. The President would be required to submit a 2-year budget at the beginning of the first session of a Congress; this budget would contain proposed levels for each of the 2 fiscal years in the biennium and planning levels for the 4 years beyond that. The budget resolution and reconciliation instructions would also establish binding levels for each year in a given biennium—and for the sum of the 6-year period. The bill requires appropriations to be enacted every 2 years. It contains a two-pronged mechanism to ensure this. First, it provides for a point of order against appropriation bills not covering 2 years. Second, if that does not work, S.261 provides for an automatic second-year appropriation at the level of the first year of the biennium. During the first year of the biennium, authorizations and revenue legislation would be expected to wait until completion of the budget resolution and appropriations bills. At the beginning of the second session of the Congress the President would submit a “mid-biennium review.” This second year then would be devoted to authorizations, which would be required to cover at least 2 years; to revenue legislation, which also would be required to cover at least 2 years; and to oversight of federal programs. S. 261 would also change some reporting requirements in GPRA and add some new reports. Attached to this testimony are two illustrations of the proposed timelines for both budget and GPRA reports. As we read the legislation, it does not direct changes in the period of availability of appropriated funds. The bill consistently refers to each fiscal year within a biennium. Although appropriations bills must cover a 2-year period, the bill seems to require separate appropriations for each of the 2 fiscal years within the biennium. It would seem, therefore, that appropriations committees could—as they do today—provide funds available for one, 2 or more years. This serves to remind us that there is a distinction between the frequency with which the Congress makes appropriations decisions and the period for which funds are available to an agency. Even in today’s annual appropriations cycle, the Congress has routinely provided multiple-year or no-year appropriations for accounts or for projects within accounts when it seemed to make sense to do so. As I noted in my previous testimony, about two-thirds of budget accounts on an annual appropriation cycle contain multiple-year or no-year funds. In addition, for those entities for which the Congress has recognized a programmatic need to have appropriations immediately available at the beginning of the fiscal year (such as grants to states for Medicaid), the Congress has accommodated this need with advance appropriations. The second year of the proposed biennium seems, in effect, to provide advance appropriations to all programs. Whether a biennial budget and appropriations cycle truly saves time for agency officials and reduces the time members of the Congress spend on budget and appropriations issues will depend heavily on how mid-biennium changes are viewed. Will there be a presumption against supplementals? Will changes in the second year be limited to responses to large and significant, unforeseen or unforeseeable events? Even with an annual cycle the time lag between making initial forecasts and budget execution creates challenges. Indeed, increased difficulty in forecasting was one of the primary reasons states gave for shifting from biennial to annual budget cycles. Even in this era of discretionary spending caps, the Congress has demonstrated the need to address changing conditions among the numerous budget accounts and program activities of the federal government. Although in the aggregate there may be little change, individual agencies or accounts have seen significant changes from year to year. Some statistics may give an indication of the extent of that change. While total current appropriations grew by only 0.9 percent between 1994 and 1995, more than half of all budget accounts that received current appropriations had net changes greater than plus or minus 5 percent. More recently, between 1996 and 1997, almost 55 percent of budget accounts with current appropriations experienced changes of more than plus or minus 5 percent although total current appropriations declined by about 0.5 percent. Because these are account-level statistics, it is possible that annual changes at the program activity level may have been even greater. Dramatic changes in program design or agency structure, such as those considered in the last Congress and those being considered now, will make budget forecasting more difficult. For biennial budgeting to exist in reality rather than only in theory, the Congress and the President will have to reach some agreement on how to deal with the greater uncertainty inherent in a longer budget cycle and/or a time of major structural change. You also asked me to review the information on state experiences with biennial budgeting and to comment on any issues I thought pertinent in considering S. 261, with particular attention to (1) the requirement directing that “during the second session of each Congress, the Comptroller General shall give priority to requests from Congress for audits and evaluations of Government programs and activities” and (2) issues involved in the integration of GPRA into a biennial budget cycle. Let me turn now to these areas. Advocates of biennial budgeting often point to the experience of individual states. In looking to the states it is necessary to disaggregate them into several categories. In 1996, when we last looked at this data, 8 states had biennial legislative cycles and hence necessarily biennial budget cycles.As the table below shows, the 42 states with annual legislative cycles present a mixed picture in terms of budget cycles: 27 describe their budget cycles as annual, 12 describe their budget cycles as biennial, and 3 describe their budget cycles as mixed. The National Association of State Budget Officers reports that those states that describe their system as “mixed” have divided the budget into two categories: that for which budgeting is annual and that for which it is biennial. Connecticut has changed its budget cycle from biennial to annual and back to biennial. In the last 3 decades, 17 other states have changed their budget cycles: 11 from biennial to annual, 3 from annual to mixed, and 3 from annual to biennial. Translating state budget laws, practices, and experiences to the federal level is always difficult. As we noted in our review of state balanced budget practices, state budgets fill a different role, may be sensitive to different outside pressures, and are otherwise not directly comparable. In addition, governors often have more unilateral power over spending than the President does. However, even with those caveats, the state experience may offer some insights for your deliberations. Perhaps most significant is the fact that most states that describe their budget cycles as biennial or mixed are small and medium sized. Of the 10 largest states in terms of general fund expenditures, Ohio is the only one with an annual legislative cycle and a biennial budget. According to a State of Ohio official, every biennium two annual budgets are enacted, and agencies are prohibited from moving funds across years. In addition, the Ohio legislature typically passes a “budget corrections bill.” A few preliminary observations can be made from looking at the explicit design of those states that describe their budget cycles as “mixed” and the practice of those that describe their budget cycles as “biennial.” Different items are treated differently. For example, in Missouri, the operating budget is on an annual cycle while the capital budget is biennial. In Arizona, “major budget units”—the agencies with the largest budgets—submit annual requests; these budgets are also the most volatile and the most dependent on federal funding. In Kansas, the 20 agencies that are on a biennial cycle are typically small, single-program or regulatory-type agencies that are funded by fees rather than general fund revenues. In general, budgeting for those items that are predictable is different from budgeting for those items subject to great volatility whether due to the economy or changes in federal policy. Section 8 of S. 261 directs that “During the second session of each Congress, the Comptroller General shall give priority to requests from Congress for audits and evaluations of Government programs and activities.” GAO has long advocated regular and rigorous congressional oversight of federal programs. Such oversight should examine both the design and effectiveness of federal programs and the efficiency and skill with which they are managed. Indeed, much of GAO’s work is undertaken with such oversight purposes in mind. For example, financial management is one area in which GAO assists the Congress with its oversight responsibilities. The Chief Financial Officers (CFO) Act of 1990, as amended, directs that 24 major agencies have audited annual financial statements beginning with fiscal year 1996. It also requires the preparation of annual governmentwide financial statements and calls for GAO to audit these statements beginning with fiscal year 1997. As you know, there have been serious problems with financial management processes in many agencies. We have been both auditing these agencies and working with them to improve the quality of their financial management. Careful management of taxpayer funds is critical to ensuring proper accountability and keeping the faith of the American people. These annual audited financial statements can serve as an important oversight tool. Good evaluation often requires a look at a program over some period of time or a comparison of several approaches. This means that in order for the results of audits and evaluations to be available for the second year of the biennium, it is important for the committees and GAO to work together in the first year—or even in the prior biennium—to structure any study. As part of our planning process, we strive to maintain an ongoing dialogue with Members and staff to identify areas of current and emerging interest so that the work is completed and we are ready to report when the results will be most useful. It is important to our ability to assist you that we understand your areas of concern and be able to accumulate a body of knowledge and in-depth analysis in those areas. Mr. Chairman, GAO stands eager to assist the Congress in the performance of its oversight responsibilities at all times. Many of you and your colleagues in the House and the Senate currently use us in this way. Let me note just a few examples. Our work on the Internal Revenue Service (IRS) Tax System Modernization program has uncovered major flaws, such as the lack of basic elements needed to bring it to a successful conclusion. We have worked closely with this Committee, other IRS oversight committees, and the Appropriations Committees in an effort to move IRS toward (1) formulating a much needed business strategy for maximizing electronic filings, (2) implementing a sound process to manage technology investments, (3) instituting disciplined processes for software development and acquisition, and (4) completing and enforcing an essential systems architecture including data and security subarchitectures. Our work regarding aviation safety and security has noted that serious vulnerabilities exist in both domestic and international aviation systems. Recent experiences during 1996 have served to raise the consciousness of the Congress, the Administration, and the public of the need to expand the existing margin of safety. Recent proposals have merit and would fundamentally reinvent the Federal Aviation Administration, but challenges remain, including key questions about how and when the recommendations would be implemented, how much it will cost to implement them, and who will pay the cost. GAO reviews of the Supplemental Security Income program have highlighted several long-standing problem areas: (1) determining initial and continuing financial eligibility for beneficiaries, (2) determining disability eligibility and performing continuing disability reviews, and (3) inadequate return-to-work assistance for recipients who may be assimilated back into the work force. We have reported on long-standing serious weaknesses in the Department of Defense’s (DOD) financial operations that continue not only to severely limit the reliability of DOD’s financial information but also have resulted in wasted resources and undermined its ability to carry out its stewardship responsibilities. No military service or other major DOD component has been able to withstand the scrutiny of an independent financial statement audit. These, and other areas included in our High-Risk Series, which we prepare for each new Congress, are examples of our efforts to assist the Congress in its oversight responsibilities. In fiscal year 1996, almost 80 percent of GAO’s work was done at the specific request of the Congress. GAO testified 181 times before 85 committees and subcommittees, presented 217 formal congressional briefings, and prepared 908 reports to the Congress and agency officials. Existing provisions of law requiring GAO to assist the Congress are sufficiently broad to encompass requests such as those envisioned in Section 8 of S. 261. However, the decision about whether to modify the existing provisions to add a more specific requirement is appropriately a decision for the Congress to make. Before turning to the interrelationship of this proposal and GPRA, let me note a few BEA-related issues that would need to be addressed should S. 261 be enacted. The bill explicitly modifies the rules for the pay-as-you-go (PAYGO) scorecard in the Senate by specifying three time periods during which deficit neutrality is required: the biennium covered by the budget resolution, the first 6 years covered by the budget resolution, and the 4 fiscal years after those first 6 years. That is, it retains the form of the current rules. The bill, however, is silent on the existence of discretionary spending limits. It does specify that in the Senate, the joint explanatory statement accompanying the conference report on the budget resolution must contain an allocation to the Appropriations Committee for each fiscal year in the biennium. One might infer from this that if discretionary caps are to be extended, they will continue to be specified in annual terms. However, this bill does not extend the caps. Other issues regarding the interaction of S. 261 and BEA (assuming its extension) also need to be considered. Would biennial budgeting change the timing of BEA-required sequestration reports? How would sequestrations be applied to the 2 years in the biennium and when would they occur? For example, if annual caps are maintained and are exceeded in the second year of the biennium, when would the Presidential Order causing the sequestration be issued? Would the sequestration affect both years of the biennium? These questions may not necessarily need to be answered in this bill, but they will need to be considered if BEA is extended under a biennial budgeting schedule. There are a number of other smaller technical issues on which we would be glad to work with your staff should you wish. Let me turn now to the interaction between this proposal and the Government Performance and Results Act (GPRA). S. 261 makes a number of changes to GPRA—most designed to make the requirements of GPRA consistent with the proposed biennial budget cycle, but others that seek to make substantive revisions to GPRA. I’ll discuss each separately. GPRA is part of a statutory framework for addressing long-standing management challenges and helping the Congress and the executive branch make the difficult trade-offs that the current budget environment demands. The essential elements of this framework include, in addition to GPRA, the CFO Act, as amended, and information technology reform legislation, including the Paperwork Reduction Act of 1995 and the Clinger-Cohen Act. These statutes collectively form the building blocks to improved accountability—both for the taxpayer’s dollar and for results. GPRA, the centerpiece of this statutory framework, is intended to promote greater confidence in the institutions of government by encouraging agency managers to shift their attention from traditional concerns, such as staffing and workloads, toward a single overriding issue: results. GPRA requires agencies to set goals, measure performance, and report on their accomplishments. It also defines a set of interrelated activities and reporting requirements, which are designed to make performance information more consistently available for congressional oversight and resource allocation processes. Specifically, GPRA requires: strategic plans to be issued for virtually all executive agencies by September 30, 1997. The plans are to cover at least a 5-year period; be updated at least every three years; and describe the agency’s mission, its outcome-related goals and objectives, and how the agency will achieve its goals through its activities and available resources. annual performance plans that include performance indicators for the outputs, service levels, and outcomes of each program activity in an agency’s budget. The first performance plans are to cover fiscal year 1999 and will be submitted to the Congress in February 1998, along with a governmentwide plan prepared by the Office of Management and Budget (OMB). annual performance reports that compare actual performance to goals and indicators established in annual performance plans, and that explain the reasons for variance and what actions will be taken to improve performance. The first reports, covering fiscal year 1999, will be issued to the President and the Congress no later than March 31, 2000. The Congress recognized that implementing GPRA will not be easy. Accordingly, GPRA incorporates several critical design features—phased implementation, pilot testing, and iterative planning and reporting processes—designed to temper immediate expectations and allow for an orderly but well-paced transition. Following the completion in 1996 of about 70 pilot projects, OMB has been working with federal agencies to ensure that the first strategic plans are submitted to the Congress by the end of September and performance plans 5 months later with the President’s fiscal year 1999 budget submission. S. 261 capitalizes on these initial GPRA implementation efforts by making the effective date of its proposed changes—March 31, 1998—after the first strategic plans and performance plans have been completed and submitted to the Congress. Other changes in timelines proposed in S. 261 also appear consistent with GPRA requirements. For example, S. 261 requires strategic plans in September 2000 consistent with its proposed biennial cycle. This should pose no problem for agencies, which under, current GPRA provisions, are expected to complete updates by this date of the plans submitted in September 1997. Similarly, changing the governmentwide performance plan to the year 2000 merely updates GPRA timelines to reflect the biennial timelines proposed by S. 261. S.261 also proposes several substantive changes to GPRA, including revised requirements for agency performance plans and new requirements for preliminary agency performance plans and governmentwide performance reports. Although it would be important to adjust the timelines in GPRA should the Congress shift to a biennial budget process, the proposals for substantive changes can be considered separately. As a group, they raise the question of whether the Congress wishes to make changes in GPRA during the first implementation cycle. Individually, they raise other issues—which I will discuss below. This bill proposes adding several new requirements to the annual agency performance plans currently required by GPRA beyond changing them to a biennial cycle, including (1) adding an executive summary focusing on the most important goals of an agency, but limited to a maximum of 10 goals and (2) requiring that the Congress be consulted during the preparation of these plans. The bill also adds a new reporting requirement for draft preliminary performance plans. While the change to a biennial cycle is consistent with the overall goals of S. 261, the bill is silent as to whether performance goals and indicators associated with each program activity would be required for each fiscal year. However, as I noted earlier, because the bill appears to require separate appropriations for each year of the biennium, annual performance goals and indicators, as now required for GPRA performance plans, would presumably still be required. Requiring an executive summary within annual performance plans makes sense. However, it is worth considering whether limiting an agency’s performance goals to a fixed number—10 in S. 261—could prove unnecessarily restraining. OMB guidance to date has largely refrained from specifying form and content standards for GPRA documents, allowing agencies substantial discretion while emphasizing the need for clarity and completeness. We generally agree with that approach, at least in the formative years of GPRA. Further, we have endorsed OMB pilot projects on accountability reports, which seek to integrate a wide range of required reports. A decision to incorporate fixed form and content rules in statutory language might better be delayed until after several years’ experience. While we agree with the premise of S. 261 that performance goals should be reduced to a “vital few,” it may make sense to give agencies the flexibility to define the absolute number shown in their plans within the circumstances of their program activities. As noted above, S. 261 proposes two additional changes to GPRA’s requirements regarding the preparation of performance plans. First, it adds a requirement that agencies consult the Congress in the preparation not only of their strategic plans but also of their performance plans. Second, it also adds a new reporting requirement: agencies would be required to submit preliminary drafts of performance plans for the upcoming biennium to their committees of jurisdiction in March of each even-numbered year. We have strongly endorsed the need for the Congress to be an active participant in GPRA and are currently assisting the Congress in its ongoing consultations on the development of agency strategic plans. Currently, GPRA requires congressional consultation for strategic plans but not for annual performance plans. As essential components of the President’s budget development process, an Administration is likely to see biennial performance plans as documents captured under the established policy of administrative confidentiality prior to formal transmission of the President’s budget to the Congress. Moreover, because these biennial plans would accompany the President’s budget submission, they would likely become the basis for extensive discussions, both as authorizing committees prepare their views and estimates to submit to the Budget Committees and as part of the budget and appropriations process. The new requirement that agencies submit preliminary drafts of performance plans for the upcoming biennium to their committees of jurisdiction raises related but not identical issues. Currently, GPRA performance plans are expected to explicitly establish goals and indicators for each program activity in an agency’s budget request, thus allowing the Congress to associate proposed performance levels with requested budget levels. The proposal in this bill appears to require a similar level of specification almost a year before the President submits a budget for that period. It is unlikely that agencies would be able to provide any degree of specificity with this draft plan. The lengthening of the budget cycle might raise one additional question about the cycle for performance plans: Should there be updates in mid-biennium? Currently, GPRA allows but does not require updated performance plans, but that decision was made on the assumption of an annual cycle. Whether performance plans should be updated is part of two larger issues: (1) What is Congress’ view about changes in mid-biennium? and (2) Should GPRA be substantively changed during its initial phase-in cycle? Finally, S. 261 proposes that a biennial governmentwide performance report be submitted as part of the President’s biennial budget request. This report would compare “actual performance to the stated goals” as expressed in previous governmentwide performance plans. This proposal raises both substantive and operational questions. The underlying premise of GPRA is that the day-to-day activities of an agency should be directly tied to its annual and strategic goals. GPRA performance reports are to be linked, just as the goals and indicators of performance plans are linked, to an agency’s activities. A governmentwide performance report would need to be fundamentally different. If the Congress wishes to require such a report, careful consideration should be given both to its likely content and to its timing. As to content, the question arises: Would a governmentwide report become a report on selected national indicators, and how would they be selected? If the governmentwide performance report is envisioned not as a rollup of agency reports but rather as a broad report on how well government has performed, then the question arises as to whether it is tied most appropriately to the President’s budget, as proposed in S. 261, or to a narrative discussion associated with the consolidated financial statement required by the CFO Act of 1990, as amended. Mr. Chairman, we have previously testified that the decision to change the entire budget process to a biennial one is fundamentally a decision about the nature of congressional oversight. Biennial appropriations would be neither the end of congressional control nor the solution to many budget problems. Whether a biennial cycle offers the benefits sought will depend heavily on the ability of the Congress and the President to reach agreement on how to respond to the uncertainties inherent in a longer forecasting period and on the circumstances under which changes should be made in mid-biennium. If biennial appropriations bills are changed rarely, the planning advantages for those agencies that do not now have multiyear or advance appropriations may be significant. Whether a biennial cycle would in fact reduce congressional workload and increase the time for oversight is unclear. A great many policy issues present themselves in a budget context—one thinks of welfare reform and farm policy. It will take a period of adjustment and experimentation and the results are likely to differ across programs. Finally, we are pleased to see so much thought go into the integration of GPRA into this process. GPRA represents a thoughtful approach to systematizing serious and substantive dialogue about the purposes of government programs and how they operate. Today, I have raised some issues that I think need careful attention should you decide to move to a biennial budget process while GPRA is being implemented. I have tried to differentiate between those changes necessary for consistency with a biennial cycle and those which represent substantive changes to GPRA independent of such a change. We, of course, stand ready to assist you as you proceed. Performance Budgeting: Past Initiatives Offer Insights for GPRA Implementation (GAO/AIMD-97-46, March 27, 1997). Managing for Results: Using GPRA to Assist Congressional and Executive Branch Decisionmaking (GAO/T-GGD-97-43, February 12, 1997). High-Risk Series: An Overview (GAO/HR-97-1, February 1997). High-Risk Series: Quick Reference Guide (GAO/HR-97-2, February 1997). Budget Process: Issues in Biennial Budget Proposals (GAO/T-AIMD-96-136, July 24, 1996). Budget Issues: History and Future Directions (GAO/T-.Al.MD-95-214, July 13, 1996). Budget Process: Evolution and Challenges (GAO/T-AIMD-96-129, July 11, 1996). Managing for Results: Key Steps and Challenges In Implementing GPRA In Science Agencies (GAO/T-GGD/RCED-96-214, July 10, 1996). Correspondence to Chairman Horn, Information on Reprogramming Authority and Trust Funds (GAO/AIMD-96-102R, June 7, 1996). Executive Guide: Effectively Implementing the Government Performance and Results Act (GAO/GGD-96-118, June 1996). Budget and Financial Management: Progress and Agenda for the Future (GAO/T-AIMD-96-80, April 23, 1996). Managing for Results: Achieving GPRA’s Objectives Requires Strong Congressional Role (GAO/T-96-79, March 6, 1996). GPRA Performance Reports (GAO/GGD-96-66R, February 14, 1996). Financial Management: Continued Momentum Essential to Achieve CFO Act Goals (GAO/T-AIMD-96-10, December 14, 1995). Budget Process: Issues Concerning the Reconciliation Act (GAO/AIMD-95-3, October 7, 1995). Budget Account Structure: A Descriptive Overview (GAO/AIMD-95-179, September 18, 1995). Budget Issues: Earmarking in the Federal Government (GAO/AIMD-95-216FS, August 1, 1995). Budget Structure: Providing an Investment Focus in the Federal Budget (GAO/T-AIMD-95-178, June 29, 1995). Managing for Results: Status of the Government Performance and Results Act (GAO/T-GGD/AIMD-95-193, June 27, 1995). Managing for Results: Experiences Abroad Suggest Insights for Federal Management Reforms (GAO/GGD-95-120, May 2, 1995). Correspondence to Chairman Wolf, Transportation Trust Funds (GAO/AIMD-95-95R, March 15, 1995). Managing for Results: State Experiences Provide Insights for Federal Management Reforms (GAO/GGD-95-22, Dec. 21, 1994). Budget Policy: Issues in Capping Mandatory Spending (GAO/AIMD-94-155, July 18, 1994). Executive Guide: Improving Mission Performance Through Strategic Information Management and Technology (GAO/AIMD-94-115, May 1994). Budget Process: Biennial Budgeting for the Federal Government (GAO/T-AIMD-94-112, April 28, 1994). Budget Process: Some Reforms Offer Promise (GAO/T-AIMD-94-86, March 2, 1994). Budget Issues: Incorporating an Investment Component in the Federal Budget (GAO/AIMD-94-40, November 9, 1993). Budget Policy: Investment Budgeting for the Federal Government (GAO/T-AIMD-94-54, November 9, 1993). Correspondence to Chairmen and Ranking Members of House and Senate Committees on the Budget and Chairman of Former House Committee on Government Operations (B-247667, May 19, 1993). Performance Budgeting: State Experiences and Implications for the Federal Government (GAO/AFMD-93-41, February 17, 1993). The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO discussed the provisions of S. 261, focusing on: (1) state experiences with biennial budgeting; and (2) provisions regarding GAO, the Budget Enforcement Act, and the Government Performance and Results Act (GPRA). GAO noted that: (1) in 1996, when GAO last looked at this data, 8 states had biennial legislative cycles and hence necessarily biennial budget cycles; (2) the 42 states with annual legislative cycles present a mixed picture in terms of budget cycles; (3) 27 describe their budget cycles as annual, 12 describe their budget cycles as biennial, and 3 describe their budget cycles as mixed; (4) perhaps significant is the fact that most states that describe their budget cycles as biennial or mixed are small and medium sized; (5) of the 10 largest states in terms of general fund expenditures, Ohio is the only with an annual legislative cycle and a biennial budget; (6) a few preliminary observations can be made from looking at the explicit design of those states which describe their budget cycle as "mixed" and the practice of those which describe their budget cycle as "biennial"; (7) in general, budgeting for those items which are predictable is different than for those items subject to great volatility whether due to the economy or changes in federal policy; (8) existing provisions of law requiring GAO to assist the Congress are sufficiently broad to encompass requests such as those envisioned in Section 8 of S. 261; (9) the bill explicitly modifies the rules for the pay-as-you-go scorecard in the Senate by specifying three time periods during which deficit neutrality is required: (a) the biennium covered by the budget resolution; (b) the first 6 years covered by the budget resolution; and (c) the 4 fiscal years after those first six; (10) S. 261 makes a number of changes to GPRA, most designed to make the requirements of GPRA consistent with the proposed biennial budget cycle, but others which seek to make substantive revisions to GPRA; (11) other changes in timelines proposed in S. 261 also appear consistent with GPRA requirements; (12) S. 261 also proposes several substantive changes to GPRA, including revised requirements for agency performance plans and new requirements for preliminary agency performance plans and governmentwide performance reports; (13) this bill proposes adding several new requirements to the annual agency performance plans currently required by GPRA beyond changing them to a biennial cycle, including: (a) adding an executive summary focusing on the most important goals of an agency, but limited to a maximum of 10 goals; and (b) requiring that the Congress be consulted during the preparation of these plans; and (14) the bill also adds a new reporting requirement for draft performance plans. |
Average tuition for a resident undergraduate student to attend a public 4-year college or university (referred to throughout this report as a “public college”) rose from $804 per year in school year 1980-81 to $2,689 in 1994-95, an increase of 234 percent. During approximately the same period, the median household income rose 82 percent. This was a reversal from the 1970s, when the cumulative percentage increase in the Consumer Price Index (CPI) exceeded that of the percentage increase in college tuition. The rising cost of college continues to be an issue of widespread concern. Studies and polls show fears about being able to afford a college education—and, in particular, about the debt that students and their families must often incur to pay for college. A 1995 survey of college freshmen, for example, found that 71 percent of the students surveyed expressed concern that they might not be able to pay for the schooling required for their intended careers. Research indicates that the reasons for this concern show no sign of abating in the near future. In a 1995 survey, a majority of the heads of state legislative higher education committees said that their states’ current funding level for public colleges was inadequate to meet higher education’s future needs and that legislatures were unlikely to increase funding for higher education in the next 3 to 5 years. Only 9 percent said that increasing state taxes was a likely option for providing more funds for state colleges. Given this, the states’ continuing demands for social services, and limited state revenue, states may shift even more of the college cost burden to students and their parents. Although college students may be paying significantly more for their education than their predecessors did 10 or 15 years ago, the earnings advantage of college graduates over those not getting college degrees has also grown substantially. According to a recent analysis of U.S. Census Bureau data by an economist with the University of Chicago, a graduated college student in 1980 earned about 43 percent more per hour than a person with a high school diploma. By 1994, this earnings advantage had increased to 73 percent. State-supported 4-year colleges and universities are a substantial public enterprise. During the 1993-94 school year, for example, they served about 5.9 million students and had expenditures totaling about $94 billion. Federal student financial aid support that year for all schools totaled about $31.4 billion, including about $12 billion in grants and federally guaranteed loans for students enrolled in public colleges. While private colleges and universities also have a major role in American higher education, public colleges have the lion’s share of students—about two-thirds of the students in 4-year schools. Although tuition and related fees may be the most visible cost of higher education to students, tuition pays for only about one-fourth of educational and general expenditures at public colleges. On average, the nation’s public colleges’ expenditures totaled over $14,000 per student during the 1993-94 school year. Tuition funded about 23 percent of this amount (see fig. 1.1). Almost twice as much, 42 percent, came from state general funds. The remainder came from a variety of other sources, such as endowments, grants, gifts, and contracts. This study, undertaken at the request of 23 Members of Congress, provides information that should be of help in understanding rising tuition levels and the increasing costs of operating public colleges as the Congress begins its deliberations on the reauthorization of the Higher Education Act of 1965, as amended. Although private college tuition has also risen dramatically and some of these schools have tuition exceeding $20,000 per year, we focused our review on public colleges because a majority of students attend these schools. As a result of discussions with requesters’ staffs, we focused our work on these questions: To what extent have tuition levels at public colleges changed over time relative to increases in consumer prices and families’ ability to pay? To what extent have instruction, administration, research, and other expenditures each contributed to the schools’ rising costs? How do tuition levels vary among states, and what factors help explain the differences? What kinds of actions have states and public colleges taken to deal with affordability issues? Our analysis of tuition, college and university expenditures, and states’ efforts to make college more affordable is based on data maintained by the U.S. Department of Education and other sources, contacts with state and school officials, and discussions with representatives of higher education organizations and individuals familiar with higher education issues. Appendix I describes our objectives, scope, and methodology in more detail. We provided the Department of Education a draft copy of this report. The Department had no comments. Our work was conducted from October 1995 to July 1996 in accordance with generally accepted government auditing standards. During the last 15 years, tuition at public colleges has risen almost three times more than household incomes have. This rise reflects two main trends: public college expenditures have generally risen more than inflation, and states have paid a lower portion of expenditures with appropriated funds. During this same period, growth in grant aid to students has not matched the increase in tuition. As a result of these factors, many students and their families have borrowed more to finance the cost of college. From school year 1980-81 through 1994-95, increases in tuition at public colleges considerably outpaced increases in both median household income and inflation. From school year 1980-81 through 1994-95, the average tuition for full-time, in-state students increased from $804 per year to $2,689, or 234 percent. During approximately the same period, median household income rose 82 percent, from $17,710 to $32,264, and the cost of living—as measured by CPI—rose 74 percent. Computed on an annualized basis, the rates of increase were about 9.0 percent for tuition, 4.4 percent for median household income, and 4.0 percent for CPI. Figure 2.1 compares the cumulative percentage increase in tuition, median household income, and consumer prices over the 15-year period beginning with school year 1980-81. As figure 2.1 shows, the cumulative percentage increase in tuition was almost 3 times more than the percentage increases in household income and consumer prices. The rate of increase has been especially pronounced since 1990. As a result of these increases, paying for tuition now takes about twice the proportion of household income as it did in 1980. As a proportion of median household income, average tuition cost has grown from 4.5 percent in school year 1980-81 to 8.3 percent in 1994-95. The two factors most responsible for the 234-percent increase in tuition from school year 1980-81 to 1993-94 were (1) an increase of 121 percent in schools’ expenditures and (2) an increase from 16 percent to 23 percent in the portion of schools’ funding provided by tuition. School expenditures have significantly outpaced inflation. In school year 1980-81, the nation’s public colleges spent an average of $6,540 per full-time-equivalent (FTE) student. By 1993-94 (the last school year for which comparative data were available), FTE expenditures had grown to $14,483, an increase of 121 percent. During the same period, CPI rose 69 percent. Possible reasons, other than inflation, for this rise in schools’ expenditures are many and varied. Chapter 3 further discusses schools’ expenditures, and chapter 4 discusses the correlation between states’ average costs and state tuition levels. From school year 1980-81 through 1993-94, tuition funded a progressively larger portion and state appropriations funded a diminishing portion of public colleges’ revenues. Even though state appropriations increased 96 percent during the period, schools’ revenues from tuition and other sources rose more rapidly. Figure 2.2 shows how funding sources were split among tuition, state appropriations, and other sources of fundingduring 4 school years: 1980-81, 1985-86, 1990-91, and 1993-94. As a proportion of schools’ revenues, state appropriations fell from 56 percent in school year 1980-81 to 42 percent in 1993-94. During this same period, the portion of school revenue provided by tuition rose from 16 percent to 23 percent, and the portion provided by other funding sources rose from 28 percent to 35 percent. Had the portion of schools’ revenue provided by each funding source remained at 1980-81 levels, tuition levels would have been 30 percent lower than they actually were at the end of the period because tuition would have provided 30 percent less of school revenues (that is, 16 percent instead of 23 percent). One factor researchers say affects the level of state support is the competition for state funds from other state programs, most notably elementary and secondary education, health care, prisons, and welfare. Spending on these four areas is largely mandated by federal and state laws, court orders, and voter initiatives. Higher education funding is considered discretionary spending and is, therefore, more vulnerable to funding reductions than spending for these items. This vulnerability has been particularly evident when economic downturns have put stress on state finances. Tuition increases since school year 1980-81 have generally been the greatest when national economic conditions were poor and the states were more limited in their ability to generate tax revenues. For example, following the 1981-82 and 1990-91 recessions, tuition at public colleges increased annually by 8 percentage points more than consumer prices, as measured by CPI. In contrast, in better economic times, such as the mid- and late-1980s, states increased their financial support for higher education, and annual tuition increases tended to exceed consumer price increases by 2.4 to 5 percentage points. Grant aid available to students and their families has not kept pace with tuition increases. One of the largest sources of this aid is federal Pell grants, which are awarded to students who meet certain tests of financial need. In school year 1994-95, the average Pell grant per FTE student was $409, an increase of 72 percent over 1980-81. However, tuition rose more than three times as fast during the same period. To pay for rapidly rising tuition and other college expenses, students and parents have increasingly relied on loans to finance college educations. The volume of loans provided to students at public colleges by the Department of Education’s major student loan programs rose 435 percent during the 15-year period, from an estimated $2.2 billion in fiscal year 1980 to an estimated $11.5 billion in fiscal year 1995. While part of the increase resulted because more students were taking out loans in 1994-95 than in 1980-81, much of it was the result of the increased size of loans. The annual average student loan at 4-year public schools rose from $518 per FTE student in fiscal year 1980 to $2,417 in fiscal year 1995, an increase of 367 percent. But since not all students had student loans, the average loan amount was higher—$3,282—and some borrowers received more than one loan. Figure 2.3 shows the relationship between the average amount of federal student loans, Pell grants per FTE student, and tuition levels at public colleges in school years 1980-81 through 1995-96. Using 1980-81 as a base year, average federal student loan amounts showed larger percentage increases than tuition beginning in 1986, while the rate of Pell grant increases lagged behind both in recent years. From school year 1980-81 through 1993-94, public colleges increased their spending on a per-student basis by 121 percent, due largely to a 90-percent increase in the amount spent on the goods and services they purchased, such as computer expenditures and instructors’ salaries. The three types of expenditures that accounted for over two-thirds of all college expenditures in 1980-81—instruction, administration, and research—also accounted for over two-thirds of the increase in expenditures during the 1980-81 to 1993-94 period. Although state appropriations and tuition payments are the primary funding sources for most public colleges’ instruction and administrative expenditures, research expenditures are largely funded by government and private grants and contracts. However, the degree to which state appropriations and tuition receipts are used to fund research cannot be readily determined on a national level with existing data, and the influence of these expenditures on tuition levels is the subject of much debate. From school year 1980-81 through 1993-94, public colleges increased their expenditures from about $6,500 per student to nearly $14,500, or by about 121 percent. This increase was about 30 to 50 percentage points higher than inflation, depending on the price index used. Schools’ expenditures increased 52 percentage points more than the 69-percent increase in CPI during the 1980-81 to 1993-94 period. One reason why schools’ expenditures rose more than CPI is that schools spend their funds on a different group of components than is measured by CPI: Whereas CPI measures increases in the prices of such items as food, clothing, housing, and health care, schools spend their monies on such items as faculty and administrator salaries, fringe benefits, and library materials. Some researchers believe a better measure of school cost increases is the Higher Education Price Index (HEPI)—an index specifically designed to measure changes in the prices of goods and services commonly purchased by higher education institutions. Items that HEPI measures include faculty and administrators’ salaries, fringe benefits, communication and data processing services, supplies and materials, library acquisitions, and utilities. The HEPI measurement includes 2-year and 4-year public and private colleges and universities and, therefore, the expenditures of public colleges may have increased somewhat more or less than the expenditures for all schools. Nonetheless, many researchers believe that HEPI is a better measurement of the increases in prices of the types of goods and services purchased by public colleges than is CPI, which measures the increase in a market basket of consumer goods. As shown in figure 3.1, the increases in HEPI consistently outpaced increases in CPI from school year 1980-81 through 1993-94, with HEPI rising 90 percent compared with CPI’s 69-percent increase. Also, the HEPI increase is equivalent to about three-fourths of the 121-percent increase in schools’ expenditures during the period. The 31-percentage point difference between the increase in public colleges’ expenditures and the increase in HEPI can be attributed to either an increase in the volume of goods and services schools purchased or a more expensive mix of goods and services purchased—for example, more computers and fewer adding machines. While about three-fourths of schools’ overall increases in expenditures were due to higher prices paid as reflected in HEPI, data were insufficient to analyze the reasons for the increases in the remaining expenditures. To gain a better understanding of why increases in school expenditures have outpaced increases in inflation, we analyzed changes in the individual components of schools’ expenditures. In general, we found that three components—instruction, administration, and research expenditures— were the most influential in driving up school expenditures (see fig. 3.2). In terms of expenditures per student, school spending for instruction was the largest single factor contributing to the increase in school expenditures from school year 1980-81 through 1993-94. During this period, public colleges increased their spending from $2,719 to $5,669 per student—an increase of $2,950, or 108 percent. The largest component of instructional expenditures was the increase in salaries and wages. The average salary for faculty at public colleges increased by $23,646 (97 percent), from $24,373 in 1980-81 to $48,019 in 1993-94. According to the literature we reviewed, average faculty salaries have increased, in part, because schools have been competing with one another and industry for high-quality scholars and researchers. The average salary has also increased because the faculty workforce has been aging. A greater proportion of faculty are at the full professor level, and this has resulted in a gradual increase in the average salary over the last 10 to 15 years. However, some higher education policy analysts have pointed out that the increase in faculty salaries during the 1980s and 1990s has merely returned salary levels to where they were in the early 1970s, in real terms. Faculty salaries did not keep up with inflation from 1973 to 1982 and did not start to experience any real growth until 1983. The literature we reviewed also suggested another reason for the increase in instructional costs: the decline in faculty productivity in terms of teaching workload. Faculty are spending less time in the classroom and more doing research and, partly as a consequence, colleges and universities are hiring more faculty. This additional hiring drives up instructional costs, which in turn results in higher tuition. Some believe the underlying cause of this phenomenon is the reward system that values research over teaching, particularly with regard to granting tenure. To address this issue, a number of states have conducted or initiated studies on faculty workload and productivity. To review these studies and more thoroughly evaluate this complex issue was beyond the scope of our work. In addition to the increases in faculty salaries, other factors have contributed to the increase in instructional expenditures. For example, faculty fringe benefits have increased substantially—by 162 percent from 1980-81 to 1993-94. Schools are also spending more for instructional supplies and equipment. A modern science curriculum, for example, calls for the use of more sophisticated laboratory equipment, such as electron microscopes, and this equipment is more costly to purchase and maintain than the equipment used in the past. Increased administrative expenditures was another significant factor causing school expenditures to outpace inflation from school year 1980-81 through 1993-94. During this period, these expenditures grew about 131 percent, or 41 percentage points more than HEPI increased. School administrative expenditures increased $1,284 per student, from $979 in 1980-81 to $2,263 in 1993-94. Although the literature contains no consensus on what constitutes administrative expenditures, the Department of Education defines them as institutional and academic support expenditures, excluding expenditures for libraries. Institutional support includes expenditures for such items as general administrative services, executive direction and planning, legal and fiscal operations, and public relations/development. Academic support includes expenditures for museums, galleries, audiovisual services, academic computing support, ancillary support, academic administration, personnel development, and course and curriculum development. According to Department of Education data, approximately 56 percent of administrative expenditures in 1993-94 were for salaries and wages. Because we were unable to obtain nationwide data on the numbers of administrative personnel or their salaries for 1980-81, we could not determine how much of the increase in administrative expenditures could have been attributed to increased staff, as distinguished from higher salaries. However, the administrative and institutional services personnel component of HEPI increased by 108 percent from 1980-81 to 1993-94, which indicates that a large portion of the growth in administrative costs was likely due to an increase in salaries. The literature we reviewed offered a number of reasons for the increase in administrative expenditures, including additional expenditures for recruiting students, expanded student financial aid programs, and administrative computing services. Another reason cited in the literature was that schools have increased their administrative budgets to ensure compliance with such federal statutes as hazardous waste disposal laws; the Equal Employment Opportunity Act; title IX of the Education Amendments of 1972 (which prohibits discrimination on the basis of sex in educational programs or activities, including collegiate sports for women); and the Americans with Disabilities Act of 1990 (which prohibits discrimination on the basis of disability in public services, programs, or activities). Research expenditures at public colleges increased $1,439 per student (157 percent), from $914 in school year 1980-81 to $2,353 in 1993-94. It is unclear whether the growth in research expenditures contributed to the increase in net college research expenditures (research expenditures that exceeded amounts received from research grants and contracts). In any case, whether increased net research expenditures contributed to the increase in tuition prices is a matter of debate within the higher education community. We could not determine the extent that net college research expenditures may have changed on a nationwide basis because such information was not readily available from the Department of Education. Schools receive funds from government and private grants and contracts to pay for specific research projects. For example, federal government research contracts pay for direct costs specifically identified with a particular research project as well as for certain indirect costs for associated administrative and facilities expenses. For every dollar spent for the direct costs of colleges’ research, subject to certain exclusions, the government pays an additional amount to cover its share of the colleges’ indirect costs. Since 1991, schools have been limited to a 26-percent cap on federal reimbursements for certain indirect costs. Previously, the level of reimbursement for indirect costs varied among institutions, with some having overall rates greater than 60 percent. The extent to which colleges and universities use their own funds to pay for research is a matter of controversy within the higher education community. Some contend that schools are not collecting sufficient grant or contract monies to fully pay for their expenditures on research projects, especially for indirect costs, and that, therefore, tuition and state appropriations are being used to subsidize research. Although there is anecdotal information on this issue, neither side of this controversy has presented comprehensive, factual data in support of its position. Furthermore, nationwide data collected by the Department of Education through its Integrated Postsecondary Education Data System (IPEDS) surveys are aggregated at too high a level to be useful in settling this issue. In addition to instructional, administrative, and research expenditures, a number of other types of school expenditures have also risen faster than the rate of inflation. These expenditures include scholarships and fellowships, student services, and plant operation and maintenance. While the average dollar-per-student increases for each of these categories are relatively small, collectively they account for about one-fourth of the total per-student increase in school expenditures. Expenditures by public colleges for scholarships and fellowships (excluding Pell grants) experienced the fastest rate of growth of all expenditure items in terms of percentage increases. In school year 1980-81, schools spent $219 per student; in 1993-94, this amount had grown to $759, an increase of $541 per student, or 247 percent. Expenditures for scholarships and fellowships include funds the school gives in the form of outright grants, trainee stipends, and tuition and fee waivers. Also included are federal grant programs for which the recipients and award amounts are determined by the school, such as Supplemental Educational Opportunity Grants and State Student Incentive Grants; monies expended for scholarships and grants from funds provided by state and local governments and private sources; and institutional funds, including matching funds for federal, state, or local grant programs. Scholarships and fellowships are like research in that, to the degree they are funded by outside revenue sources, they do not increase colleges’ net expenditures. As in the case of research expenditures, we could not determine the extent that net expenditures for scholarships and fellowships may have changed on a nationwide basis, because such information was not readily available from the Department of Education. Although these expenditures had the largest percentage increase from school year 1980-81 through 1993-94, the $541 per-student increase in spending represented only about 7 percent of the $7,944 total increase in per-student spending for the period. In addition, although these expenditures are included in our calculation of schools’ expenditures, the increase in schools’ net expenditures for scholarships and fellowships is reduced by the funds received from the federal government and private sources for scholarships and fellowships. School spending on student services more than doubled from school year 1980-81 through 1993-94. Total expenditures for student services increased from $322 per student in 1980-81 to $723 in 1993-94, an increase of $401 or 125 percent. As in the case of institutional and academic support, a significant portion (53 percent) of the expenditures for the student services function consists of salaries and wages. Student services include funds expended for admissions, registrar activities, career guidance, counseling, financial aid administration, student health services, and any other activity that contributes to students’ emotional and physical well-being and to their intellectual, cultural, and social development outside the context of the formal instructional program. The literature we reviewed offered a number of reasons for the growth in spending for student services. One reason given is that student demographics have been changing. A growing number of students attending college are older, and many of them attend on a part-time basis. These students tend to need more remedial services, counseling, and administrative support. Another reason offered is that students in general appear to want and expect more personal counseling, tutoring, and mentoring, all of which require more support staff and facilities. Expenditures for operating and maintaining physical plants include funds spent for the operation and upkeep of grounds and facilities used for general and educational purposes, utilities, fire protection, property insurance, and similar functions. School expenditures for plant operation and maintenance increased by $495 (72 percent) per student, from $684 per student in school year 1980-81 to $1,179 in 1993-94. School expenditures for operation and maintenance grew at a slower rate than HEPI (a 72-percent increase versus a 90-percent increase) during this period. However, if the findings of a report issued in 1989 are still valid, school expenditures on plant operation and maintenance may become a much larger factor fueling tuition and cost increases in the future.According to this study, the 209 institutions surveyed deferred $4 of needed maintenance for every $1 spent in 1988, and repairs and renovations considered “priority” or “urgent” totaled an estimated $20.5 billion through 1988. This study was being updated at the time of our review, and an official participating in the study said that deferred maintenance had grown to about $26 billion. Other items on which schools spend money include libraries; public service; debt service on academic and administrative buildings; monies deposited into institutional loan funds; transfers into endowment funds; and additions, renewals, and replacements of plants (land, buildings, machinery, and furniture). Institutional expenditures for these kinds of items, which we termed “other cost components” for our analysis, increased by $835 per student (119 percent), from $703 in school year 1980-81 to $1,538 in 1993-94. Nationwide, average tuition for resident, undergraduate full-time students at public colleges was $2,865 for school year 1995-96, but tuition levels varied considerably by state, ranging from $1,524 in Hawaii to $5,521 in Vermont. These variations reflected both fiscal and demographic characteristics of the states and their public schools. We identified four economic characteristics that were closely related to state tuition levels: in-state students were likely to incur lower tuition charges if, relative to other states, the states in which they lived had low tax rates, high per-student appropriations for higher education, low per-student college expenditures, and low median household income. These four characteristics were associated with 78 percent of the variation in tuition levels among states. The average tuition levels at public colleges for in-state undergraduate students varied widely among states in school year 1995-96. In four states (Vermont, Pennsylvania, New Hampshire, and Massachusetts) tuition levels were 40 percent or more above the national average tuition of $2,865 for the year, while in Hawaii, North Carolina, and Idaho, tuition levels were 40 percent or more below the national average. (See table 4.1.) However, major increases have been approved for tuition at the University of Hawaii’s 10 campuses for school year 1996-97. For example, tuition for full-time, resident undergraduate students at the University of Hawaii’s flagship campus in Manoa will increase from $1,534 to $2,832 a year, or 85 percent. Tuition charges tended to vary by geographic region, as illustrated in figure 4.1. For example, most of the states with the highest in-state tuition levels were in the Northeast. In contrast, the 10 states with the lowest tuition were in the southern and western states. We analyzed various characteristics common to states to determine how much each of them helped account for the differences in tuition levels among states. We found that, collectively, four of these characteristics accounted for 78 percent of the state differences in tuition levels. Using the methodology discussed in appendix II, we found that states tended to have lower tuition if they had relatively low state and local taxes as a percentage of the state’s tax capacity, larger per-student state appropriations to public colleges, lower per-student expenditures by public colleges, and lower median household income. Though our analysis shows there is significant correlation between these four characteristics and state tuition levels, these characteristics cannot be said to cause tuition levels to be high or low in any state. However, a discussion of the correlations can provide help in understanding the variations in tuition levels among states. Most of the other characteristics we considered did not relate as closely to the differences in tuition levels among states as the four listed above. Also, we eliminated from our analysis several state characteristics we judged to be most probably the result of in-state undergraduate tuition levels, even if they were highly correlated—for example, undergraduate tuition for out-of-state students. See appendix II for a detailed description of the correlation between the four characteristics. There is a strong correlation between high composite tax rates and high tuition levels. For example, 9 of the 10 states with the highest composite tax rates had tuition levels above the 50-state average, and 9 of the 10 states with the lowest composite tax rates had below-average tuition levels. This might seem counterintuitive at first. But if tuition is considered a “use tax or fee” for attending a state-supported college or university, then it might be expected that this tax or fee tends to be high in states where other taxes are high. The variation in tuition levels among states is also related to differences in the levels of state support for higher education. Tuition tends to be lower in states that provide high levels of per-student financial support to their public colleges. To some degree, the amount of state support, in turn, is a function of the states’ tuition philosophies. On a nationwide basis, state appropriations provided on average about 42 percent of public college revenues, and tuition, about 23 percent, in school year 1993-94 (see table 4.2). However, in the 10 states in which state appropriations provided 50 percent or more of public schools’ revenues, the average tuition was about $2,000, or 21 percent below the national average of $2,525 for the year. Conversely, in the eight states in which state appropriations provided 35 percent or less of public colleges’ revenues, the average tuition was about $3,500, or about 38 percent above the national average that year. Differences in states’ tuition subsidy levels relate to a number of factors, one of which involves the states’ general philosophies regarding tuition. A 1993 survey of state higher education financial officers on state tuition policies found that a majority of states followed one of several basic philosophies in making decisions about tuition levels, although the states varied in the type of philosophy they followed. For example, eight states subscribe to a “low tuition” philosophy in order to maximize student access to public college. The state constitutions of two of these states, Arizona and Wyoming, specify that university instruction be as nearly free as possible. In contrast, five states reported following a “high tuition” philosophy in the belief that students who have the ability to pay should bear a larger proportion of their education expenditures. Under this policy, some of the tuition revenues are used to provide financial aid to students with lesser financial means to help ensure that the high tuition does not adversely affect access. Seven states set their tuition at levels comparable to tuition charged by similar institutions (such as a research university comparing itself with another research university rather than a teachers college) or they index their schools’ tuition to various economic variables, such as HEPI or personal income levels. For example, South Dakota’s policy is to index resident tuition and fees to the prior year’s HEPI. Alaska’s tuition levels are indexed to the average HEPI over the last 3 years. The remaining states said they either had a “moderate tuition” philosophy of trying to maintain a proportional sharing of expenditures between the state and student, had no underlying statewide philosophy for setting tuition, or left these decisions up to the individual schools. We found a significant positive correlation between states’ average tuition levels and expenditures per enrolled student at public colleges. In other words, the less a state’s schools spent per college student, the lower the tuition was likely to be. For example, the seven states with the lowest expenditures per student had tuition below the national average during the 1993-94 school year. (See table 4.3.) However, there were several notable exceptions to this low expenditures/low tuition relationship. Hawaii’s public colleges, for example, had the highest expenditures per student but the lowest tuition. Not surprisingly, Hawaii identified itself as a state with a low tuition policy in the 1993 study. The explanation for this anomaly is that Hawaii’s unusually high level of state funding support more than compensates for its high expenditures per student and thus enables it to keep tuition rates low. However, Hawaii’s schools may not have the lowest tuition level in school year 1996-97. The state approved an 84.6-percent increase in resident, undergraduate tuition at the University of Hawaii’s Manoa campus, which accounts for most of the resident undergraduate students attending a 4-year public college in the state. The increase came after the governor of Hawaii ordered the University to cut $48 million, over 2 years, from its $313 million budget to help cover a state-revenue shortfall. Although we found a positive correlation between states’ tuition levels and the total per-student cost of providing a college education, individual cost components varied in their correlation to tuition. For example, high tuition states typically had higher expenditures for student services, such as admissions, financial aid administration, and counseling. Similarly, high tuition states tended to have higher expenditures per student for certain administrative functions, such as general administrative support, executive direction and planning, legal and fiscal operations, and public relations/development. On the other hand, in states where public colleges spent more per student on research and public service, tuition levels were generally lower. Public colleges in states with low median household incomes tended to set tuition at a level below the national average. For example, the six states with the lowest median income (Alabama, Arkansas, Kentucky, Mississippi, Tennessee, and West Virginia) all had tuition levels more than 10 percent below the national average in school year 1993-94. States with lower median household incomes may set below-average tuition levels in recognition of their residents’ lower average income levels. In fact, the 1993 survey of state higher education financial officers showed that state personal or disposable income is considered by 20 states in setting tuition levels. States and schools are taking a wide range of actions to address the growing burden of paying for college. The actions we identified were of three main types: limiting tuition increases, expediting students’ progress toward their degrees, and providing payment alternatives that may lower costs for participants or mitigate students’ difficulty in paying those costs. The approaches ranged from long-standing, widely available programs (such as giving students an opportunity to earn college credits while still in high school) to very recent arrangements (such as guaranteeing completion of a degree in 4 years, if students follow certain school- specified conditions). The arrangements we describe are not intended to be a comprehensive inventory of state and school efforts but, rather, to provide a sense of the range and general flavor of those efforts. Though our focus is on the benefits of programs to students, some of these efforts—particularly those that expedite students’ progress toward earning a degree—also benefit schools and the states. Many of the states and schools we contacted said that they were attempting to keep tuition increases as small as possible through general cost-cutting measures, while some states were taking more definitive steps by setting prescribed limits on tuition levels. We identified two principal approaches that were being applied in setting tuition levels. Some states report holding tuition at existing levels, or even reducing it. For example, the Virginia Council of Higher Education, the governing body for Virginia’s state-operated colleges and universities, recommended to the state legislature that tuition be held constant in school years 1996-97 and 1997-98. A Council official explained that tuition, rather than additional state support to schools, had borne the brunt of efforts to help schools offset their increasing expenditures from the mid-1980s through school year 1993-94. The Massachusetts Higher Education Coordinating Council cut school year 1996-97 tuition for state residents by 5 percent at 4-year state colleges. The Committee asked school administrators to make similar reductions in fees set by the institutions. According to a Massachusetts official, the fees are about equal to tuition payments. Other states and schools are tying their tuition charges to changes in the cost of living. For example, the tuition level at the University of Colorado at Boulder was set specifically to reflect the rate of inflation. For school year 1995-96, this school’s tuition for out-of-state students increased by 4.3 percent, which was equal to the increases in the Denver-Boulder CPI. In-state tuition increased even less. Because the Colorado legislature wanted to minimize the effect of inflation on resident students, it increased state funding to hold down the resident tuition increase to 2.3 percent. The state of Washington shifted from setting tuition based on schools’ expenditures to a policy that limits tuition increases to about 4 percent in the 1995-96 and 1996-97 school year budgets, with some variation among schools. The change is intended to hold tuition increases to a rate close to the rate of inflation. Where schools themselves have tuition-setting authority, states may create inducements for them to limit tuition increases. For example, the Pennsylvania legislature appropriated $24 million in fiscal year 1995-96 for distribution to public colleges that restricted tuition increases to 4.5 percent or less. About $143 per full-time resident student was allocated for schools that complied. Michigan enacted a different type of incentive, providing for a credit equal to 4 percent of tuition, up to $250, to be deducted from the state income tax liability of residents paying tuition at state schools whose tuition increases do not exceed the change in CPI. Before this legislative revision, Michigan State University approved a policy guaranteeing that tuition increases would not exceed inflation for the 4 years required to complete a baccalaureate degree for freshmen classes entering the school in school years 1995-96 and 1996-97. The guarantee is contingent on state appropriations for the school’s general fund keeping pace with inflation. Some actions and programs can lower students’ costs without directly addressing the issue of rising tuition. We identified a variety of state and school initiatives to help expedite students’ progress toward their degrees. These actions, according to experts, can result in substantial savings for students, schools, and states by reducing both college costs and the length of time students forgo earnings. State and national data show that many students take longer than 4 years to complete their degrees. For example, a 1994 University of Illinois study found that about half the degree recipients at Illinois who entered as freshmen needed more than 4 years to finish. And, according to a 1995 State University of New York (SUNY) report, 60 percent of the university’s students, and 45 percent of students nationally, receive their bachelors degrees within 6 years. We found similar results analyzing Department of Education national data on the proportion of seniors who did not graduate during their fourth year. At public 4-year institutions in 1992-93, fewer than half the full-time, fourth-year students finished their baccalaureate degrees by the end of their senior year. Although many students may take longer for reasons of their own choosing (such as taking less than a full load of course work), actions to help students move through a degree program as expeditiously as possible may eliminate some of the institutional obstacles to reducing students’ costs. We identified various strategies states and schools were using to help students move more quickly through their undergraduate work: limiting degree requirements or program length, working with high school students to guide them in taking the right preparatory courses, letting high school students earn college credit through accelerated courses and other means, facilitating the transfer of courses taken at community colleges, and improving academic advising. Although some of these efforts have been in place for a number of years, none of the studies we reviewed determined the effectiveness of the programs in shortening the time students take or reducing the cost they incur to obtain their undergraduate degrees. Reducing the amount of time required for students to complete a college degree by limiting the number of required credits is one way schools are lowering their students’ costs. Eight of the 21 states responding to our call for information through the State Higher Education Executive Officers’ electronic network said they had made an effort to limit the number of credits students needed to complete their degree requirements. And we identified efforts by other states to reduce maximum degree requirements. Arizona’s three state universities, for example, are reducing the required number of hours in 261 undergraduate degree programs from 125 or 126 (and as many as 144) to 120, effective December 1996. A Board of Regents official said this change is designed to make it easier for students to complete a degree in 4 years. Eighty-five percent of the three universities’ undergraduates were in these programs in school year 1995-96. Another effort to reduce the time needed to obtain a degree takes the form of schools’ programs to provide 3- and 4-year degree programs. We identified several programs that guarantee students can complete their requirements for a baccalaureate degree in 4 years—and, in some cases, in less time. One such 4-year degree completion program, at the University of Iowa, is described below. A University of Iowa publication advises that resident students can save $9,518 by graduating in 4 years instead 5 years, which is closer to the current average. An additional value of these programs is derived from the message they can convey to parents and school staff about the importance of timely degree completion. For example, a Colorado official told us an important benefit of the 4-year program at the University of Colorado Boulder campus is that it notifies parents of the feasibility of completing the degree in 4 years and puts departments on notice that they must ensure course availability. University of Iowa’s 4-Year Graduation Plan: Established in 1995, the University of Iowa’s 4-Year Graduation Plan is available to students in all except a small proportion of its programs. Among its requirements are that the student begin at the university as a freshman, choose and be adequately prepared for a qualified major at entry (or at specified later times for certain majors), complete the necessary number of courses each year, and not change majors in a way that will undermine completion in 4 years. In return, the university agrees to help students graduate in 4 years by waiving or making substitutions for any unavailable required courses or by paying for students to take unavailable courses later. Students meet with their adviser every semester to review their 4-year plan, ensure they are still on track, and incorporate any changes that are appropriate. When first offered in the 1995-96 school year, the program enrolled about 50 percent of the fall 1995 entering freshmen. Because all participants are still freshmen, it will take 4 years to determine the program’s success in shortening time to graduation. We found a few instances in which states’ schools are offering even shorter degree programs or permitting students to pursue advanced degrees as undergraduates. One of these programs, at SUNY Brockport, is described below. SUNY Brockport’s 3-Year Delta Program: The Delta College Program at SUNY Brockport provides two academic options for students to complete a baccalaureate degree with a total of 99 credits in six semesters (program duration may be prolonged by requirements for certain majors or by courses required to gain the language, statistics, or computer competencies). The shorter completion time is achieved in part by “deleting duplication of content from advanced secondary courses and in part by students having the necessary prerequisites to complete the program in six semesters.” All students must complete (1) a common 42-credit core studies curriculum,(2) 36 hours in a major or global studies curriculum, and (3) 21 credits of experiential integrative learning experiences. The integrative learning credits, which include a 15-week international experience, are achieved off campus, partly in summer, and may be for pay. Students may meet required language, statistics, and computer competency requirements either through courses or examinations. The program, started in this form in 1995, has a first-year enrollment of 199 students, of whom 32 are freshmen. Officials expect the freshman enrollment to double in the second year. At other schools, students may be able to complete a degree in less than 4 years by squeezing 4 years of course work into a shorter time. Students may shorten the time to obtain their degrees by taking a heavier course load, passing proficiency tests, attending summer school, applying college credits achieved before starting their college education, or some combination of these. Emphasis on shortened degree programs has met with some skepticism in the academic community. For example, the Virginia Council on Higher Education’s 1993 report, The Continuum of Education, contains a comprehensive discussion of how students move through the Virginia educational system and questions the applicability of formal 3-year degree programs in the U.S. educational setting. The report maintains that the usual senior year in American high schools is not a rigorous academic experience and concludes that students may not have adequate preparation to complete college in 3 years or even 4 years unless they take advantage of options for achieving college credits during their senior year. However, those who take advantage of such options can complete most 120-hour degree programs in 3 years. Responding to concerns about students’ inadequate preparation for college, some schools have implemented programs to minimize the number of remedial classes students take at 4-year schools. In Oregon, for example, nearly 40 percent of all first-time freshmen at state schools require remedial education in mathematics. Students pay for courses such as these but usually do not receive college credit for them. In aggregate, students attending Oregon schools spend an estimated $300,000 annually for remedial education in mathematics, and $125,000 for remedial writing courses. Some states or institutions have developed programs to give high school students a clearer idea of courses they need to take while in high school to better prepare themselves for college-level work and to allow them to appropriately adjust their high school curriculum. An example of a program that has been operating for some time is Ohio’s Early College Mathematics Placement Testing Program. According to an Ohio official, five states now have similar programs in place. Ohio’s Early College Mathematics Placement Testing Program: Based on the premise that if high school juniors were aware of the negative consequences of needing remedial math in college, they would schedule appropriate courses in their high school senior year, Ohio’s Early College Mathematics Placement Testing Program was designed to provide feedback to high school juniors. As of 1994, the program included 42 colleges and universities, including all 13 state-supported universities as well as 2-year and private schools. The program, which began in 1978, is administered by Ohio State University. The program provides optional testing to college-bound high school juniors and provides them information on which to base senior-year scheduling in preparation for their intended college majors. As of 1994, about 75 percent of Ohio high schools participated in the program. From the start, the program was followed by a dramatic increase in the number of high school seniors enrolling in mathematics, and by improvement in the college mathematics placement test scores of students entering Ohio State University. The university reported, for example, that remedial mathematics placements were down 50 percent (from a high of 43 percent of students). Moreover, a 1994 report cited strong evidence that students from high schools participating in the program for several years needed fewer remedial courses than would otherwise have been expected. The report suggested that the program is positively affecting the quality of instruction at participating high schools. Ohio has since developed a similar program for assessing English composition. Programs at some high schools, community colleges, and 4-year schools provide qualified high school students college credits, which can accelerate students’ progress to a baccalaureate degree. Acceleration programs include such approaches as advanced placement (AP), dual enrollment options and early admissions, the International Baccalaureate (IB) Program, and achieving college credits through the College-Level Examination Program. Table 5.1 describes these programs. Though such programs are widely available, colleges and universities vary in their acceptance of the credits that students earn. According to the College Board, for example, about 50 percent of colleges and universities offer sophomore standing for students with qualifying grades on advanced placement examinations. But the schools use different formulas for translating those credits to college credits. Similarly, schools differ in their acceptance of dual enrollment and IB Program credits. There have been a number of variations of these programs. One that involves a fundamental change is the proposed system, currently under development, for admitting students to Oregon’s state colleges and universities on the basis of demonstrated proficiencies. Oregon’s Proficiency-Based Admissions Standard System (PASS): Oregon’s PASS is a new system of college admission that substitutes proficiency requirements for traditional time-based proxies for learning, such as the number of courses completed with a passing grade. Among reasons given for the change are lack of uniformity in preparation students receive in high school even when they take the same courses, and the large proportion of college students requiring remedial courses in college. PASS requires that students demonstrate specific levels of knowledge and skill in six major content areas (such as mathematics, science, and the humanities) and nine processes (reading, writing, communication competence, critical/analytic thinking, problem solving, technology as a learning tool, teamwork, systems/integrative thinking, and quality work). Assessment tools include tests, tasks such as research papers and speeches, and teacher verification of proficiency through documented scoring and common criteria. PASS is scheduled for implementation in 2001. Oregon teachers piloted PASS proficiencies and integrated the PASS assessment standards with existing high school performance standards in school year 1995-96. When PASS is fully implemented in 2001, the Oregon State System of Higher Education expects to significantly curtail remedial programs and introductory level courses, and to create opportunities for students to move more quickly to graduation. Community colleges have been designed, in part, to provide affordable educational access both through their relatively low tuition costs and their location within commuting distance. But when students transfer from community colleges to 4-year schools, their academic progress may be slowed because their credits do not always fully satisfy the 4-year schools’ requirements. Sometimes this means that students must take courses that are similar to ones they have already completed. For example, a transfer student’s completed courses may give too few credits or may lack a laboratory component required to meet the receiving school’s requirements. To the extent that states are successful in facilitating transfer of credits, students will be able to achieve an increased portion of their requirements in lower-cost settings. Many states and schools reported that they were working to improve the transfer of community college credits to 4-year schools. Examples of steps taken to improve the transfer of credits included agreements between colleges and community colleges as well as better coordination between colleges and high schools on high school curricula. Other initiatives to facilitate credit transfer include written or computerized transfer guides to inform students regarding course equivalencies and common course numbering systems. These steps are part of a comprehensive approach to expediting students’ degree completion included in a Florida statute, as described below. Florida’s Provisions to Facilitate Transfer of Credits: Florida law requires that the state’s postsecondary institutions use a common course designation and numbering system for community colleges and state universities and colleges, and common course prerequisites and substitutions except for unique program prerequisites approved by the Board of Regents. Further, postsecondary institutions are required to work with school districts to coordinate high school curricula with college core courses to prepare high school students for college-level work. The Florida law also calls for state colleges and universities (with the exception of specified programs) to give upper-division status to any Florida student with an associate in arts degree or with 60 completed community college credits that include 36 general education credits. For most degree programs, at least half of the required credits must be achievable through courses designated as lower-division courses offered by Florida community colleges. Colleges, universities, and community colleges must also enable students to earn general education course credits through nationally standardized or institutionally developed examinations. In addition, the law calls for developing a single, statewide computer-assisted student advising system, accessible by state 4-and 2-year postsecondary school students as an integral part of the process of advising and registering students and certifying them for graduation. Many of these provisions were contained in a 1995 amendment and are targeted for completion by the fall semester of 1996. An official said that, for the most part, efforts are on track to meet targeted dates. To avoid delays in students’ completing degree requirements, it is important that they have the information they need to select a major and to efficiently schedule course work. Good academic advising can help students by providing guidance in selecting a major and properly sequencing courses and by making students aware of necessary but infrequently offered courses or of courses that tend to be difficult to schedule. A 1992 study of student progress by the Virginia Polytechnic Institute found that students’ most common recommendation for shortening the time needed to graduate was to improve advising; one-third of students who were delayed in completing their degree programs attributed the delay to some extent to the advice they received. Similarly, an Illinois Board of Higher Education report attributed students’ delayed degree completion to a lack of guidance and information on how to achieve their educational goals. University officials in two other states commented that bottlenecks to degree completion often reflect improper course sequencing or student unawareness that certain courses are not always available. To strengthen their academic advising activities, some states are developing computerized systems that provide students and/or advisers a list of unmet degree requirements for each student. According to a University of Colorado official, the school plans to make its computerized transcript system, now accessible only to advisers, accessible to students. The eventual plan is to develop software that will calculate a student’s remaining course work needs in response to “what if?” scenarios that users enter into the computer. Alternative payment and savings plans, for those who choose to participate, offer several different approaches to easing the burden of paying for college. These arrangements do not focus on lowering tuition costs; rather, they are intended to offer parents alternative ways of paying these costs, such as spreading them out over a longer time frame. However, these arrangements pose risks to states and families that participate. In a prepaid tuition program, for example, the state or school may be responsible for the difference between amounts families paid into the plan and actual tuition costs. Also, these plans’ benefits typically accrue principally to middle- and upper-income families, which have more discretionary income to use in such ways, and provide little assistance to students from low-income families. Three principal types of currently available alternative payment programs came to our attention—tuition prepayment programs, college savings plans, and monthly payment plans. The three main kinds of tuition prepayment plans—contract, tuition credit, and certificate—have some characteristics in common. Table 5.2 describes examples of each. In all three, the purchaser pays in advance for educational benefits that a designated beneficiary will use in the future. The program charges roughly the current cost of the tuition and of other educational benefits. Purchasers pay either in a lump sum or in a series of payments. Some states are reluctant to risk the possibility that income from investing the premiums that participants pay into these plans will not keep pace with the rising cost of education. We identified two state programs (Michigan and Wyoming) that have experienced the effects of this risk. In Michigan, according to state officials, the original program was suspended because it proved actuarially unsound. A major concern was uncertainty surrounding federal tax liability, on which a court has since ruled in the state’s favor. After being suspended for a period, the program was reinstated in response to the public’s interest. However, the new program is priced considerably higher and, unlike the earlier program, subject to liquidation if it becomes actuarially unsound. Wyoming operates a contract-type program that is also experiencing actuarial difficulties. When participants begin to redeem their $5,000 unit contracts next year, the accounts’ principal plus accumulated interest will fall considerably short of covering the cost of tuition, according to a University of Wyoming official. The state, in paying the difference, will subsidize these contracts. Among other available savings options, some states have developed tax-advantaged debt instruments they identify as college savings bonds. These bonds are generally zero-coupon bonds, sold at a discount, with the difference between face value and purchase price representing interest. Interest on the bonds is exempt from federal taxes and, for purchasers who reside in the issuing state, from state taxes. Many states see these bond programs as less financially risky and easier to administer than prepaid tuition programs. Unlike prepaid tuition programs, state savings bond programs do not require that the funds be spent on college expenses. Illinois, however, pays a bonus on redemption if the funds are spent at an institution of higher education. Other states have programs that enable participants to save money in special college savings accounts. Kentucky, for example, has a Savings Plan Trust that is administered by the Kentucky Higher Education Assistance Authority. Earnings depend on investments the Trust’s fund manager selects and the timing of the investment and have a guaranteed minimum interest rate of 4 percent. Students who use the proceeds of their Trust investments to attend Kentucky schools receive an additional boost: Kentucky allows the savings in the Trust to be excluded from the schools’ calculation of state student aid eligibility. Most schools require tuition payments, including room and board, to be paid either before or at the time students enroll in school. Some states have arrangements for students and their families to spread out their college payments over the enrollment period rather than paying them at the beginning of each semester or quarter. In Connecticut, for example, a state official said that most 4-year schools have programs allowing students to spread their payments over the year. Eastern Washington University, according to a school official, contracts with an outside vendor to collect payments over 12 months. Although the vendor does not charge interest for this service, it does charge a small fee. A public college education has become less affordable in the last 15 years as tuition has risen nearly three times as fast as household income. As a result, the portion of a household’s income needed to pay for college tuition nearly doubled during the period. The rapid rise in tuition reflects two key trends over the last 15 years: public colleges’ expenditures per student rose over 120 percent and the portion of those costs paid for by tuition rose from 16 to 23 percent. Students and their families have responded to this “affordability gap” by drawing more heavily on their own financial resources and greatly increasing their borrowing. On a more positive note, public college tuition is still a “bargain” in that it pays less than a quarter of the costs colleges incur and, at an average of $2,865 in 1995-96, it is only a fraction of the $20,000-a-year tuition charged by some private colleges. Also, although federal grant aid has been stagnant in real terms, the Congress has increased the borrowing limits and expanded the eligibility for federally guaranteed student and parental loans. In addition, many states have made efforts to freeze or hold down the rate of increase in tuition levels, created college savings and prepayment programs, or undertaken initiatives to expedite students’ completion of the college degree requirements. College could become more affordable in the future if (1) colleges’ expenditures per student declined or grew at a slower rate, (2) a smaller portion of colleges’ expenditures were paid for by tuition, (3) household incomes increased at a faster rate than that for tuition charges, or (4) grants became a larger portion of federal student aid. However, if none of these changes occur, rising tuition levels may deter many students from attending college. For those that do attend, the debt loads many students and their families assume may increasingly affect students’ career decisions, their parents’ life styles while their children attend college, and students’ life styles after they complete college. | Pursuant to congressional requests, GAO provided information on: (1) changes in college tuition levels relative to increases in consumer prices and families' ability to pay; (2) the extent that increased expenditures for instruction, administration, research, and other services have contributed to the increase in colleges' overall expenditures; (3) how tuition levels at public colleges and universities vary among the states and the factors that account for the differences; and (4) what actions states and institutions have taken to deal with affordability issues. GAO found that: (1) between 1980 and 1995, average tuition at 4-year public colleges for in-state, full-time students increased 234 percent, while median household income increased 82 percent and the Consumer Price Index increased 74 percent; (2) the increase in colleges' expenditures and a greater dependency on tuition as a revenue source were the two factors most responsible for the tuition increase; (3) tuition revenues increased from 16 percent to 23 percent during this period, mainly because the revenue share provided by states decreased 14 percent; (4) student grant aid has not kept pace with tuition levels, so students and their families are relying more heavily on loans and personal finances; (5) increases in instruction, administrative, and research costs accounted for more than two-thirds of the 121 percent increase in total college expenditures; (6) expenditures for scholarships and fellowships, student services, and plant operations and maintenance, which also rose faster than inflation, accounted for about one-fourth of the increase; (7) for school year 1995-96, in-state student tuition at 4-year public colleges ranged from $1,524 to $5,521, with a nationwide average of $2,865; (8) states' level of financial support to colleges accounted for most of the variation in tuition levels, but there was a strong correlation between state and local tax rates, median household income, and colleges' expenditures per student and state tuition levels; and (9) states and colleges are taking actions to address college affordability issues, such as limiting tuition increases, providing payment alternatives, and speeding academic progress. |
As a result of a 1995 Defense Base Closure and Realignment Commission decision, Kelly Air Force Base, Texas, is to be realigned and the San Antonio Air Logistics Center, including the Air Force maintenance depot, is to be closed by 2001. Additionally, McClellan Air Force Base, California, and the Sacramento Air Logistics Center, including the Air Force maintenance depot, is to be closed by July 2001. To mitigate the impact of the closures on the local communities and center employees, in 1995 the administration announced its decision to maintain certain employment levels at these locations. Privatization-in-place was one initiative for retaining these employment goals. Since that decision, Congress and the administration have debated the process and procedures for deciding where and by whom the workloads at the closing depots should be performed. Central to this debate are concerns about the excess facility capacity at the Air Force’s three remaining maintenance depots and the legislative requirement— 10 U.S.C. 2469—that for workloads exceeding $3 million in value, a public-private competition must be held before the workloads can be moved from a public depot to a private sector company. Because of congressional concerns raised in 1996, the Air Force revised its privatization-in-place plans to provide for competitions between the public and private sectors as a means to decide where the depot maintenance workloads would be performed. The first competition was for the C-5 aircraft depot maintenance workload, which the Air Force awarded to the Warner Robins depot in Georgia on September 4, 1997. During 1997, Congress continued to oversee DOD’s strategy for allocating workloads currently performed at the closing depots. The 1998 Defense Authorization Act required that we and DOD analyze various issues related to the competitions at the closing depots and report to Congress concerning several areas. First, within 60 days of its enactment, the Defense Authorization Act requires us to review the C-5 aircraft workload competition and subsequent award to the Warner Robins Air Logistics Center and report to Congress on whether (1) the procedures used provided an equal opportunity for offerors without regard to performance location; (2) are in compliance with applicable law and the FAR; and (3) whether the award results in the lowest total cost to DOD. Second, the act provides that a solicitation may be issued for a single contract for the performance of multiple depot-level maintenance or repair workloads. However, the Secretary of Defense must first (1) determine in writing that the individual workloads cannot as logically and economically be performed without combination by sources that are potentially qualified to submit an offer and to be awarded a contract to perform those individual workloads and (2) submit a report to Congress setting forth the reasons for the determination. Further, the Air Force cannot issue a solicitation for combined workloads until at least 60 days after the Secretary submits the required report. Third, the authorization act also provides special procedures for the public-private competitions for the San Antonio and Sacramento workloads. For example, total estimated direct and indirect cost and savings to DOD must be considered in any evaluation. Further, no offeror may be given preferential consideration for, or be limited to, performing the workload at a particular location. As previously stated, the act also requires that we review the solicitations and the competitions to determine if DOD has complied with the act and applicable law. We must provide a status report on the Sacramento and San Antonio competitions within 45 days after the Air Force issues the solicitations, and our evaluations of the completed competitions are due 45 days after the award for each workload. Finally, the act requires that DOD report on the procedures established for the Sacramento and San Antonio competitions and on the Department’s planned allocation of workloads performed at the closing depots as of July 1, 1995. DOD issued these reports on February 3, 1998. We have had problems in gaining access to information required to respond to reporting requirements under the 1998 National Defense Authorization Act. Our lack of access to information is seriously impairing our ability to carry out our reporting responsibilities under this act. We experienced this problem in doing our work for our recent report to Congress concerning DOD’s determination to combine individual workloads at the two closing logistics centers into a single solicitation. We originally requested access to and copies of contractor-prepared studies involving depot workloads at the Sacramento Air Logistics Center on December 18, 1997. The Air Force denied our request, citing concerns regarding the release of proprietary and competition-sensitive data. It was not until January 14, 1998, and only after we had sent a formal demand letter to the Secretary of Defense on January 8, 1998, that the Air Force agreed to allow us to review the studies. Even then, however, the Air Force limited our review to reading the documents in Air Force offices and required that without further permission, no notes, copies, or other materials could leave those premises. The limited access provided came so late that we were unable to review the documents adequately and still meet our statutorily mandated reporting deadline of January 20. As of this date, we have been provided only heavily redacted pages from two studies. These pages do not contain the information we need. Further, the Air Force did not provide us even limited access to the final phase of the studies, which were dated December 15, 1997. Although we were able, with difficulty, to complete our report, we simply cannot fulfill our responsibilities adequately and in a timely manner unless we receive full cooperation of the Department. To meet our remaining statutory requirements, we have requested several documents and other information related to the upcoming competitions for the closing depots’ workloads. Air Force officials said they would not provide this information until the competitions are completed. However, we will need to review solicitation, proposal, evaluation, and selection documents as they become available. For example, we will need such things as the acquisition and source selection plans, the proposals from each of the competing entities, and documents relating to the evaluation of the proposals and to the selection decision. Appendix I to this statement contains our letter to this subcommittee detailing our access problems. Our basic authority to access records is contained in 31 U.S.C. 716. This statute gives us a very broad right of access to agency records, including the procurement records that we are requiring here, for the purpose of conducting audits and evaluations. Moreover, the procurement integrity provision in 41 U.S.C. 423 that prohibits the disclosure of competition-sensitive information before the award of a government contract specifies at subsection (h) that it does not authorize withholding information from Congress or the Comptroller General. We have told the Air Force that we appreciate the sensitivity of agency procurement records and have established procedures for safeguarding them. As required by 31 U.S.C. 716(e)(1), we maintain the same level of confidentiality for a record as the head of the agency from which it is obtained. Further, our managers and employees, like all federal officers and employees, are precluded by 18 U.S.C. 1905 from disclosing proprietary or business-confidential information to the extent not authorized by law. Finally, we do not presume to have a role in the selection of the successful offeror. We recognize the need for Air Force officials to make their selection with minimal interference. Thus, we are prepared to discuss with the Air Force steps for safeguarding the information and facilitating the Air Force’s selection process while allowing us to meet statutory reporting responsibilities. In response to congressional concerns regarding the appropriateness of its plans to privatize-in-place the Sacramento and San Antonio maintenance depot workloads, the Air Force revised its strategy to allow the public depots to participate in public-private competitions for the workloads. In the 1998 Defense Authorization Act, Congress required us to review and report on the procedures and results of these competitions. The C-5 aircraft workload was the first such competition. We issued our required report evaluating the C-5 competition and award on January 20, 1998. After assessing the issues required under the act relating to the C-5 aircraft competition, we concluded that (1) the Air Force provided public and private offerors an equal opportunity to compete without regard to where work would be performed; (2) the procedures did not appear to deviate materially from applicable laws or the FAR; and (3) the award resulted in the lowest total cost to the government, based on Air Force assumptions and conditions at the time of award. Nonetheless, public and private offerors raised issues during and after the award regarding the fairness of the competition. First, the private sector participants noted that public and private depot competitions awarded on a fixed-price basis are inequitable because the government often pays from public funds for any cost overruns it incurs. Private sector participants also questioned the public depot’s ability to accurately control costs for the C-5 workload. In our view, the procedures used in the C-5 competition reasonably addressed the issue of public sector cost accountability. Further, private sector participants viewed the $153-million overhead cost savings credit given to Warner Robins as unrealistically high and argued that the selection did not account for, or put a dollar value on, certain identified risks or weaknesses in the respective proposals. We found that the Air Force followed its evaluation scheme in making its overhead savings adjustment to the Warner Robins proposal and that the Air Force’s treatment of risk and weaknesses represented a reasonable exercise of its discretion under the solicitation. Although the public sector source was selected to perform the C-5 workload, it questioned some aspects of the competition. Warner Robins officials stated that they were not allowed to include private sector firms as part of their proposal. Additionally, the officials questioned the Air Force requirement to use a depreciation method that resulted in a higher charge than the depreciation method private sector participants were permitted to use. Finally, they questioned a $20-million downward adjustment to its overhead cost, contending that it was erroneous and might limit the Air Force’s ability to accurately measure the depot’s cost performance. While the issues raised by the Warner Robins depot did not have an impact on the award decision, the $20-million adjustment, if finalized, may cause the depot problems meeting its cost objectives in performing the contract. The Air Force maintains that the adjustment was necessary based on its interpretation of the Warner Robins proposal. Depot officials disagree. At this time, the Air Force has not made a final determination as to how to resolve this dispute. DOD decided to issue a single solicitation combining multi-aircraft and commodity workloads at the Sacramento depot and a single solicitation for multi-engine workloads at the San Antonio depot. Under the 1998 Defense Authorization Act, DOD issued the required determinations that the workloads at these two depots “cannot as logically and economically be performed without combination by sources that are potentially qualified to submit an offer and to be awarded a contract to perform those individual workloads.” As required, we reviewed the DOD reports and supporting data and issued our report to Congress on January 20, 1998.We found that the accompanying DOD reports and supporting data do not provide adequate information supporting the determinations. First, the Air Force provided no analysis of the logic and economies associated with having the workload performed individually by potentially qualified offerors. Consequently, there was no support for the Department’s determination that the individual workloads cannot as logically and economically be performed without combination. Air Force officials stated that they were uncertain as to how they would do an analysis of performing the workloads on an individual basis. However, Air Force studies indicate that the information to make such an analysis is available. For example, in 1996 the Air Force performed six individual analyses of depot-level workloads performed by the Sacramento depot to identify industry capabilities and capacity. The workloads were hydraulics, software electrical accessories, flight instruments, A-10 aircraft, and KC-135 aircraft. As a part of the analyses, the Air Force identified sufficient numbers of qualified contractors interested in various segments of the Sacramento workload to support a conclusion that it could rely on the private sector to handle these workloads. Second, the reports and available supporting data did not adequately support DOD’s determination. For example, DOD’s determination relating to the Sacramento Air Logistics Center states that all competitors indicated throughout their workload studies that consolidating workloads offered the most logical and economical performance possibilities. This statement was based on studies performed by the offerors as part of the competition process. However, one offeror’s study states that the present competition format is not in the best interest of the government and recommends that the workload be separated into two competitive packages. After DOD issued its determination and we completed our mandated review, the Air Force did additional analyses to support its determinations to combine the workloads at Sacramento and San Antonio. The Air Force briefed congressional staff on the interim results of these analyses on February 13, 1998, and at that time provided us copies of the briefing charts. Examples of the Air Force’s analysis regarding the combination of the San Antonio engine workloads include the level of common backshop support for the F100, T56, and TF39 aircraft engines; the results of a market survey of potential offerors that shows more offerors would be attracted to a competition of combined workloads; and the potential delay in transition if the competition were restructured to compete individual engine workloads. Examples of the Air Force’s analysis regarding the combination of the Sacramento workloads include the common skills among commodity and aircraft workers, which allows for increased staffing flexibility with combined workloads; the estimated delay resulting from competing the workload in five separate packages; and the added cost of conducting five competitions rather than one. The Air Force has not provided us the information supporting its briefing charts. Therefore, we cannot comment on the specific points. However, in general, this information still does not provide an adequate basis for DOD’s determination that the depot maintenance workloads cannot as logically and economically be performed without combination. For example, the Air Force did not provide a comparative analysis considering other feasible workload combination alternatives. As part of our mandated review of the solicitations and awards for the Sacramento and San Antonio engine workloads, we reviewed DOD reports to Congress in connection with the workloads, draft requests for proposals, and other competition-related information. Further, we discussed competition issues with potential public and private sector participants. These participants raised several concerns that they believe may affect the competitions. Much remains uncertain about these competitions, and we have not had the opportunity to evaluate these issues, but I will present them to the Subcommittee. The 1998 Defense Authorization Act modifies 10 U.S.C. 2466 to allow the services to use up to 50 percent of their depot maintenance and repair funds for private sector work. However, the act also provides for a new section (2460) in title 10 to establish a statutory definition of depot-level maintenance and repair work, including work done under interim and contractor logistic support arrangements and other contract depot maintenance work and requires under 10 U.S.C. 2466, that DOD report to Congress on its public and private sector workload allocations and that we review and evaluate DOD’s report. These changes, which will affect the assessment of public and private sector mix, are in effect for the fiscal year 1998 workload comparison, and DOD must submit its report to Congress for that period by February 1, 1999. Determining the current and future public-private sector mix using the revised criteria is essential before awards are made for the Sacramento and San Antonio workloads. Preliminary data indicates that using the revised criteria, about 47 to 49 percent of the Air Force’s depot maintenance workload is currently performed by the private sector. However, the Air Force is still in the process of analyzing workload data to determine how much additional workload can be contracted out without exceeding the 50 percent statutory ceiling. In December 1996, we reported that consolidating the Sacramento and San Antonio depot maintenance workloads with existing workloads in remaining Air Force depots could produce savings of as much as $182 million annually. Our estimate was based on a workload redistribution plan that would relocate 78 percent of the available depot maintenance work to Air Force depots. We recommended that DOD consider the savings potential achievable on existing workloads by transferring workload from closing depots to the remaining depots, thereby reducing overhead rates through more efficient use of the depots. The Air Force revised its planned acquisition strategy for privatizing the workloads in place and adopted competitive procedures that included incorporation of an overhead savings factor in the evaluation. During the recent C-5 workload competition evaluation, the Air Force included a $153-million overhead savings estimate for the impact that the added C-5 workload would have on reducing the cost of DOD workload already performed at the military depot’s facilities. The overhead savings adjustment, which represented estimated savings over the 7-year contract performance period, was a material factor in the decision to award the C-5 workload to Warner Robins. The private sector offerors questioned the military depot’s ability to achieve these savings. In response to private sector concerns, the Air Force is considering limiting the credit given for overhead savings in the Sacramento and San Antonio competitions. For example, in the draft Sacramento depot workload solicitation, the Air Force states, “The first year savings, if reasonable, will be allowed. The second year savings, if reasonable, will be allowed but discounted. For years three and beyond, the savings, if defensible, will be subject to a risk assessment and considered under the best value analysis.” Questions have been raised about the structure of the draft solicitations. One concerns the proposed use of best-value evaluation criteria. The draft solicitations contain selection criteria that differ from those used in the recent competition for the C-5 workload. They provide that a contract will be awarded to the public or private offeror whose proposal conforms to the solicitation and is judged to represent the best value to the government under the evaluation criteria. The evaluation scheme provides that the selection will be based on an integrated assessment of the cost and technical factors, including risk assessments. Thus, the selection may not be based on lowest total evaluated cost. For the C-5 solicitation, the public offeror would receive the workload if its offer conformed with the solicitation requirements and represented the lowest total evaluated cost. The questions concern the propriety of a selection between a public or private source on a basis other than cost. Other questions concern whether multiple workloads should be packaged in a single solicitation and whether the inclusion of multiple workloads could prevent some otherwise qualified sources from competing. As noted, the solicitations are still in draft form. As required by the 1998 act, we will evaluate the solicitations once issued, in the context of the views of the relevant parties to determine whether they are in compliance with applicable laws and regulations. Mr. Chairman, we are working diligently to meet the Committee’s mandates and to safeguard sensitive Air Force information that is necessary to accomplish this work. We are prepared to discuss with the Air Force the steps that can be taken to safeguard the material and facilitate the source selection process while allowing us to carry out our statutory responsibility. However, we simply will be unable to meet our mandated reporting requirements unless we are provided timely access to this information. This concludes my prepared remarks. I will be happy to answer your questions at this time. 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 discussed the public-private competitions for workloads at two maintenance depots identified for closure, focusing on: (1) the problems GAO is having in obtaining access to Department of Defense (DOD) information; (2) the recent competition for C-5 aircraft workload and GAO's assessment of it; (3) the adequacy of DOD's support for its determination that competing combined, rather than individual workloads of each maintenance depot is more logical and economical; and (4) concerns participants have raised about the upcoming competitions for the workloads at the air logistics centers in Sacramento, California, and San Antonio, Texas. GAO noted that: (1) its lack of access to information within DOD is seriously impairing its ability to carry out its reporting requirements; (2) GAO completed, with difficulty, its required report to Congress concerning DOD's determination to combine individual workloads at two closing logistics centers into a single solicitation at each location; (3) if DOD continues to delay and restrict GAO's access to information it needs to do its work, GAO will be unable to provide Congress timely and thorough responses regarding the competitions for Sacramento and San Antonio depot maintenance workloads; (4) in assessing the competition for the C-5 aircraft workloads, GAO found that: (a) the Air Force provided public and private sources an equal opportunity to compete for the workloads without regard to where the work could be done; (b) the Air Force's procedures for competing the workloads did not appear to deviate materially from applicable laws or the Federal Acquisition Regulation; and (c) the award resulted in the lowest total cost to the government, based on Air Force assumptions at the time; (5) much remains uncertain about the upcoming competitions for the Sacramento and San Antonio depot maintenance workloads; (6) potential participants have raised several concerns that they believe may affect the conduct of the competitions ; (7) one concern is the impact of the statutory limit on the amount of depot maintenance work that can be done by non-DOD personnel; (8) the Air Force has not yet determined the current and projected public-private sector workload mix using criteria provided in the 1998 Defense Authorization Act, but is working on it; (9) nonetheless, preliminary data indicates there is little opportunity to contract out additional depot maintenance workloads to the private sector; (10) another concern is the Air Force's proposed change in the overhead savings the Department may factor into the cost evaluations; (11) for the C-5 workload competition, overhead savings were considered for the duration of the performance period; and (12) however, for the Sacramento and San Antonio competitions, the Air Force is considering limiting overhead savings to the first year and possibly reducing the savings for the second year. |
In May 2001, the Subcommittee’s predecessor held a hearing on USAID financial management. Using that hearing as a baseline, we evaluated, using primarily USAID IG reports, the progress made to improve USAID’s financial management systems, processes, and human capital (people) in the past 2 years. At the time of the May 2001 hearing, USAID was one of three federal agencies subject to the CFO Act that had such significant problems that they were unable to produce financial statements that auditors could express an opinion on. The hearing focused on actions needed to resolve USAID’s financial management issues. At that time, the Acting Assistant Administrator for the Bureau of Management told the Subcommittee that actions to correct reported material weaknesses in financial management were completed or in process and that all reported weaknesses would be resolved by 2002. While USAID has made progress in its financial management since that hearing, it has not achieved the success that it had expected. Rather, its progress relates primarily to improved opinions on USAID’s financial statements. Table 1 below shows that USAID has been able to achieve improved opinions on its financial statements over the past 3 years. Fiscal year 2001 marked the first time that the USAID IG was able to express an opinion on three of USAID’s financial statements—the Balance Sheet, Statement of Changes in Net Position, and Statement of Budgetary Resources. However, as noted above, the opinions were qualified and achieved through extensive efforts to overcome material internal control weaknesses. Further, the IG remained unable to express an opinion on USAID’s Statement of Net Cost and Statement of Financing. Fiscal year 2002 marked additional improvements in the opinions on USAID’s financial statements. All but one of USAID’s financial statements received unqualified opinions. The Statement of Net Cost received a qualified opinion. The IG reported that “…on the Statement of Net Cost, the opinion was achieved only through extensive effort to overcome material weaknesses in internal control” and “lthough these efforts resulted in auditable information, did not provide timely information to USAID management to make cost and budgetary decisions throughout the year.” Compounding USAID’s systems difficulties has been the lack of adequate financial management personnel. Since the early 1990s, we have reported that USAID has made limited progress in addressing its human capital management issues. A major concern is that USAID has not established a comprehensive workforce plan that is integrated with the agency’s strategic objectives and ensures that the agency has skills and competencies necessary to meet its emerging foreign assistance challenges. While a viable financial management system is needed, and offers the capacity to achieve reliable data, it is not the entire answer for improving USAID’s financial management information. Qualified personnel must be in place to implement and operate these systems. In addition to the improved opinions for fiscal year 2002, the IG reported that while USAID had made improvements in its processes and procedures, a substantial number of material weaknesses, reportable conditions, and noncompliance with laws and regulations remain. The report also noted that USAID’s financial management systems do not meet federal financial system requirements. Table 2 shows that while USAID’s opinions on its financial statements improved, reported material weaknesses, reportable conditions, and noncompliance increased. The increase in reported material weaknesses, reportable conditions, and noncompliance is, in part, due to the full scope audits that were not possible in prior years. As financial information improved over the years, it has assisted the USAID IG in identifying additional internal control and system weaknesses. Identifying these additional weaknesses is constructive in that they highlight areas that management needs to address in order to improve the overall operations of the agency and provide accurate, timely, and reliable information to management and the Congress. Several of the weaknesses reported by the USAID IG are chronic in nature and resolution has been a challenge. For example, similar to the USAID fiscal year 2002 material weakness, in 1993 we reported that USAID did not promptly and accurately report disbursements. At that time, USAID could not ensure that disbursements were made only against valid, preestablished obligations and that its recorded unliquidated obligations balances were valid. Additionally, we reported USAID did not have effective control and accountability over its property. The chronic nature of the reported weaknesses at USAID reflect challenges with people (human capital), processes, and financial management systems. USAID management represented to us that, over time, they have lost a significant number of staff in this area and face challenges recruiting and retaining financial management staff. Further, according to IG representatives, many of the individuals that financial managers must depend on to provide the data that are used for financial reports are not answerable to the financial managers and often do not have the background or training necessary to report the data accurately. Also contributing to the challenge are USAID’s nonintegrated systems that require data reentry, supplementary accounting records, and lengthy and burdensome reconciliation processes. Transforming USAID’s financial and business management environment into an efficient and effective operation that is capable of providing management and the Congress with relevant, timely, and accurate information on the results of operation will require a sustained effort. Improved financial systems and properly trained financial management personnel are key elements of this transformation. While these challenges are difficult, they are not insurmountable. Without sustained leadership and oversight by senior management, the likelihood of success is diminished. In its fiscal year 2002 Performance and Accountability Report, USAID noted that it was in the process of implementing an agencywide financial management system. USAID reported that the system has been successfully implemented in Washington. In June 2003, USAID awarded a contract for the implementation of the system overseas. According to USAID officials, they anticipate this effort to be completed by fiscal year 2006. While we are encouraged by USAID’s progress toward implementing an integrated system, it should be noted that this is the second attempt in the past 10 years to implement an agencywide integrated financial management system. To provide reasonable assurance that the current effort is successful, top management must be actively involved in the oversight of the current project. Management must have performance metrics in place to ensure the modernization effort is accomplished on time, within budget, and provides the planned and needed capabilities. In this regard, in fiscal year 2002, USAID redesigned its overall governance structure for the acquisition and management of information technology. Specifically, USAID created the Business Transformation Executive Committee, chaired by the Deputy Administrator and with membership including key senior management. The committee’s purpose is to provide USAID-wide leadership for initiatives and investments to transform USAID business systems and organizational performance. The committee’s roles and responsibilities include: Guiding business transformation efforts and ensuring broad-based cooperation, ownership, and accountability for results. Initiating, reviewing, approving, monitoring, coordinating, and evaluating projects and investments. Ensuring that investments are focused on highest pay-off performance improvement opportunities aligned with USAID’s programmatic and budget priorities. Active, substantive oversight by this committee over USAID’s information technology investments, including its agencywide integrated financial management system initiative, will be needed for business reform efforts to succeed. In addition to improved business systems, it is critical that USAID have sustained financial management leadership and the requisite personnel and skill set to operate the system in an efficient and effective manner once it is in place. We have reported for years and USAID acknowledges that human capital is one of the management challenges that must be overcome. As previously noted, since the early 1990s we have reported that USAID has made limited progress in addressing its human capital management issues. Within the area of financial management, progress in this area has also been slow, with no specific plan of action on how to address shortages of trained financial managers. USAID represented to us that as part of its agencywide human capital strategy, it plans to specifically address its financial management personnel challenges. In addition to addressing systems and human capital challenges, USAID is working to improve its processes and internal controls. Effective processes and internal controls are necessary to ensure that whatever systems are in place are fully utilized and that its operations are as efficient and effective as possible. USAID is working to eliminate the material weaknesses, reportable conditions, and noncompliance reported by the USAID IG in fiscal year 2002. For fiscal year 2003, the Administrator of USAID and the IG agreed to work together to provide for the issuance of audited financial statements by November 15, 2003, in line with the Office of Management and Budget’s accelerated timetable for reporting. To meet this tight timeframe, the CFO must provide timely and reliable information that can withstand the test of audit with little to no needed adjustment. However, given the continued financial management system, process, and human capital challenges, meeting this goal will be difficult. USAID appears to be making a serious attempt to reform its financial management, as evidenced by initiatives to improve its human capital, internal controls, and business systems. However, progress to date is most evident in the improvement in the opinions on its financial statements, which reflect USAID’s ability to generate reliable information one time a year, rather than routinely for purposes of management decision making. Through fiscal year 2002 these improved opinions reflect a significant “heroic” effort to overcome human capital, internal control, and systems problems. Although these improved opinions represent progress, the measures of fundamental reform will be the ability of USAID to provide relevant, timely, reliable financial information and sound internal controls to enable it to operate in an efficient and effective manner. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions you or other members of the Subcommittee may have at this time. For further information about this testimony, please contact Gregory D. Kutz at (202) 512-9095 or [email protected] or John Kelly at (202) 512-6926 or [email protected]. Other key contributors to this testimony include Stephen Donahue, Dianne Guensberg, and Darby Smith. 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. | GAO has long reported that the U.S. Agency for International Development (USAID) faces a number of performance and accountability challenges that affect its ability to implement its foreign economic and humanitarian assistance programs. These major challenges include human capital, performance measurement, information technology, and financial management. Effective financial management as envisioned by the Chief Financial Officers Act of 1990 (CFO Act) and other financial management reform laws is an important factor to the achievement of USAID's mission. USAID is one of the federal agencies subject to the CFO Act. In light of these circumstances, the Subcommittee on Government Efficiency and Financial Management, House Committee Government Reform asked GAO to testify on the financial management challenges facing USAID, as well as the keys to reforming USAID's financial management and business practices and the status of ongoing improvement efforts. USAID has made some progress to improve financial management, primarily in achieving audit opinions on its financial statements. Through the rigors of the financial statement audit process and the requirements of the Federal Financial Management Improvement Act of 1996 (FFMIA), USAID has gained a better understanding of its financial management weaknesses. However, pervasive internal control weaknesses continue to prevent USAID management from achieving the objective of the CFO Act, which is to have timely, accurate financial information for day-to-day decision making. USAID's inadequate accounting systems make it difficult for the agency to accurately account for activity costs and measure its program results. Compounding USAID's systems difficulties has been the lack of adequate financial management personnel. Since the early 1990s, we have reported that USAID has made limited progress in addressing its human capital management issues. While some improvements have been made over the past several years, significant challenges remain. Transforming USAID's financial and business environment into an efficient and effective operation that is capable of providing timely and accurate information will require a sustained effort. USAID has acknowledged the challenges it faces to reform its financial management problems and has initiatives underway to improve its systems, processes, and internal controls. USAID has also recognized the need for a specific human capital action plan that addresses financial management personnel shortfalls. |
The financial regulatory framework in the United States was built over more than a century, largely in response to crises and significant market developments. As a result, the regulatory system is complex and fragmented. While the Dodd-Frank Act has brought additional changes, including the creation of new regulatory entities and the consolidation of some regulatory responsibilities that had been shared by multiple agencies, the U.S. financial regulatory structure largely remains the same. It is a complex system of multiple federal and state regulators, as well as self-regulatory organizations, that operates largely along functional lines. The U.S. regulatory system is described as “functional” in that financial products or activities are generally regulated according to their function, no matter who offers the product or participates in the activity. In the banking industry, the specific regulatory configuration depends on the type of charter the banking institution chooses. Depository institution charter types include commercial banks, which originally focused on the banking needs of businesses but over time have broadened their services; thrifts, which include savings banks, savings associations, and savings and loans and were originally created to serve the needs— particularly the mortgage needs—of those not served by commercial banks; and credit unions, which are member-owned cooperatives run by member- elected boards with an historical emphasis on serving people of modest means. These charters may be obtained at the state or federal level. State regulators charter institutions and participate in their oversight, but all institutions that have federal deposit insurance have a federal prudential regulator. The federal prudential regulators—which generally may issue regulations and take enforcement actions against industry participants within their jurisdiction—are identified in table 1. The act eliminated the Office of Thrift Supervision (OTS) and transferred its regulatory responsibilities to OCC, the Federal Reserve, and FDIC. To achieve their safety and soundness goals, bank regulators establish capital requirements, conduct onsite examinations and off-site monitoring to assess a bank’s financial condition, and monitor compliance with banking laws. Regulators also issue regulations, take enforcement actions, and close banks they determine to be insolvent. Holding companies that own or control a bank or thrift are subject to supervision by the Federal Reserve. The Bank Holding Company Act of 1956 and the Home Owners’ Loan Act set forth the regulatory frameworks for bank holding companies and savings and loan (S&L) holding companies, respectively. Before the Dodd-Frank Act, S&L holding companies had been subject to supervision by OTS and a different set of regulatory requirements from those of bank holding companies. The Dodd-Frank Act made the Federal Reserve the regulator of S&L holding companies and amended the Home Owners’ Loan Act and the Bank Holding Company Act to create certain similar requirements for both bank holding companies and S&L holding companies. The Dodd-Frank Act also grants new authorities to FSOC to designate nonbank financial companies for supervision by the Federal Reserve. The securities and futures markets are regulated under a combination of self-regulation (subject to oversight by the appropriate federal regulator) and direct oversight by SEC and CFTC, respectively. SEC regulates the securities markets, including participants such as securities exchanges, broker-dealers, investment companies, and investment advisers. SEC’s mission is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. In the securities industry, certain self-regulatory organizations—including the securities exchanges and the Financial Industry Regulatory Authority—have responsibility for overseeing the securities markets and their members; establishing the standards under which their members conduct business; monitoring business conduct; and bringing disciplinary actions against members for violating applicable federal statutes, SEC’s rules, and their own rules. CFTC is the primary regulator of futures markets, including futures exchanges and intermediaries, such as futures commission merchants. CFTC’s mission is to protect market users and the public from fraud, manipulation, abusive practices, and systemic risk related to derivatives that are subject to the Commodity Exchange Act, and to foster open, competitive, and financially sound futures markets. Like SEC, CFTC oversees the registration of intermediaries and relies on self-regulatory organizations, including the futures exchanges and the National Futures Association, to establish and enforce rules governing member behavior. In addition, Title VII of the Dodd-Frank Act expands regulatory responsibilities for CFTC and SEC by establishing a new regulatory framework for swaps. The act authorizes CFTC to regulate “swaps” and SEC to regulate “security-based swaps” with the goals of reducing risk, increasing transparency, and promoting market integrity in the financial system. The Dodd-Frank Act established CFPB as an independent bureau within the Federal Reserve System and provided it with rule-making, enforcement, supervisory, and other powers over many consumer financial products and services and many of the entities that sell them. Certain consumer financial protection functions from seven existing federal agencies were transferred to CFPB. Consumer financial products and services over which CFPB has primary authority include deposit taking, mortgages, credit cards and other extensions of credit, loan servicing, debt collection, and others. CFPB is authorized to supervise certain nonbank financial companies and large banks and credit unions with over $10 billion in assets and their affiliates for consumer protection purposes. CFPB does not have authority over most insurance activities or most activities conducted by firms regulated by SEC or CFTC. The Housing and Economic Recovery Act of 2008 (HERA) created FHFA to oversee the government-sponsored enterprises (GSE): Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. Fannie Mae and Freddie Mac were created by Congress as private, federally chartered companies to provide, among other things, liquidity to home mortgage markets by purchasing mortgage loans, thus enabling lenders to make additional loans. The system of 12 Federal Home Loan Banks provides funding to support housing finance and economic development. Until enactment of HERA, Fannie Mae and Freddie Mac had been overseen since 1992 by the Office of Federal Housing Enterprise Oversight (OFHEO), an agency within the Department of Housing and Urban Development (HUD), and the Federal Home Loan Banks were subject to supervision by the Federal Housing Finance Board (FHFB), an independent regulatory agency. In July 2008, HERA created FHFA to establish more effective and more consistent oversight of the three housing GSEs. Given their precarious financial condition, Fannie Mae and Freddie Mac were placed in conservatorship in September 2008, with FHFA serving as the conservator under powers provided in HERA. While insurance activities are primarily regulated at the state level, the Dodd-Frank Act created the Federal Insurance Office within Treasury to monitor issues related to regulation of the insurance industry. The Federal Insurance Office is not a regulator or supervisor, and its responsibilities include identifying issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry or the U.S. financial system. The Dodd-Frank Act established FSOC to identify risks to the financial stability of the United States, promote market discipline, and respond to emerging threats to the stability of the U.S. financial system. The Dodd- Frank Act also established OFR within Treasury to serve FSOC and its member agencies by improving the quality, transparency, and accessibility of financial data and information; conducting and sponsoring research related to financial stability; and promoting best practices in risk management. FSOC’s membership consists of the Secretary of the Treasury, who chairs the council, and the heads of CFPB, CFTC, FDIC, the Federal Reserve, FHFA, the National Credit Union Administration, OCC, SEC, the directors of OFR and the Federal Insurance Office, representatives from state-level financial regulators, and an independent member with insurance experience. There is no universally accepted definition of a financial crisis. Some academic studies identify three major types of financial crises: banking crises, public debt crises, and currency crises. The most recent financial crisis in the United States is widely considered to have been a banking crisis. While researchers have defined banking crises in different ways, their definitions generally focus on indicators of severe stress on the financial system, such as runs on financial institutions or large-scale government assistance to the financial sector. The large increases in public debt that tend to follow the onset of a banking crisis can make a country more susceptible to a public debt crisis. Studies reviewing historical banking crises in the United States and other countries found that such crises were associated with large losses in output (the value of goods and services produced in the economy) and employment that can persist for years. A disruption to the financial system can have a ripple effect through the economy, harming the broader economy through several channels. For example, some studies identify ways that strains in the financial system can negatively impact the cost and availability of credit and, in turn, reduce total output. During the recent crisis, certain securitization markets collapsed and households and businesses faced tightened credit conditions. Higher funding costs for firms in the form of higher interest rates and lower equity prices can contribute to declines in investment. Furthermore, as asset prices fall, declines in the wealth and confidence of consumers, businesses, and investors also can contribute to output declines. Historically, governments have provided substantial assistance to financial institutions during banking crises to avert more severe disruptions to the key functions performed by the financial system. The causes of the 2007-2009 crisis are complex and remain subject to debate and ongoing research. According to many researchers, around mid-2007, losses in the mortgage market triggered a reassessment of financial risk in other debt instruments and sparked the financial crisis. Uncertainty about the financial condition and solvency of financial entities resulted in a liquidity and credit crunch that made the financing on which many businesses and individuals depend increasingly difficult to obtain. By late summer of 2008, the ramifications of the financial crisis ranged from the failure of financial institutions to increased losses of individual savings and corporate investments. Academics and others have identified a number of factors that may have helped set the stage for problems in the mortgage market and the broader financial system. These factors, in no particular order, include financial innovation in the form of asset securitization, which reduced mortgage originators’ incentives to be prudent in underwriting loans and made it difficult to understand the size and distribution of loss exposures throughout the system; imprudent business and risk management decisions based on the expectation of continued housing price appreciation; faulty assumptions in the models used by credit rating agencies to rate mortgage-related securities; gaps and weaknesses in regulatory oversight, which allowed financial institutions to take excessive risks by exploiting loopholes in capital rules and funding themselves increasingly with short-term liabilities; government policies to increase homeownership, including the role of Fannie Mae and Freddie Mac in supporting lending to higher-risk borrowers; and economic conditions, characterized by accommodative monetary policies, ample liquidity and availability of credit, and low interest rates that spurred housing investment. The United States periodically has experienced banking crises of varying severity. The financial crisis that began in 2007 was the most severe banking crisis experienced by the United States since the 1930s. While this most recent financial crisis may have had some new elements—such as the role of asset securitization in spreading risks across the financial system—studies have found that it followed patterns common to past crises in the United States and other countries. For example, experts have noted that the recent crisis, like many past crises, was preceded by an asset price boom that was accompanied by an excessive buildup in leverage. Another common pattern between the recent and past crises has been the buildup of risks and leverage in unregulated or less regulated financial institutions. While academic studies have used different criteria to identify and date banking crises, studies we reviewed identify the following episodes as U.S. banking crises since the Civil War: the banking panics of 1873, 1893, 1907, and the 1930s; the Savings and Loan Crisis that began in the1980s; and the 2007-2009 crisis. The studies do not consider the stock market crash of 1987 or the bursting of the technology bubble during 2000-2001 to be banking crises, because neither placed severe strains on the financial system that threatened the economy. Several studies measure the overall economic costs associated with past financial crises based on the decline in economic output (the value of goods and services produced in the economy) relative to some benchmark, such as the long-term trend in output. While using a variety of methods to quantify these output losses, the studies generally have found the losses from past financial crises to be very large. Some of these studies also analyze changes in unemployment, household wealth, and other economic indicators to show the effects of the crises at a more granular level. In addition, some studies use measures of fiscal costs— such as increases in government debt—to analyze the losses associated with financial crises. In the following section, we review what is known about the losses associated with the recent financial crisis based on these measures. The 2007-2009 financial crisis, like past financial crises, was associated with not only a steep decline in output but also the most severe economic downturn since the Great Depression of the 1930s (see fig. 1). According to a study, in the aftermath of past U.S. and foreign financial crises, output falls (from peak to trough) an average of over 9 percent and the associated recession lasts about 2 years on average. The length and severity of this economic downturn was roughly consistent with the experience of past financial crises. The U.S. economy entered a recession in December 2007, a few months after the start of the financial crisis. Between December 2007 and the end of the recession in June 2009, U.S. real gross domestic product (GDP) fell from $13.3 trillion to $12.7 trillion (in 2005 dollars), or by nearly 5 percent. As shown in figure 1, real GDP did not regain its pre-recession level until the third quarter of 2011. Although the decline in the U.S. economy’s real GDP during the recession may reflect some of the losses associated with the 2007-2009 financial crisis, the decline does not capture the cumulative losses from the crisis. To quantify the overall losses associated with past financial crises, researchers have estimated output losses as the cumulative shortfall between actual GDP and estimates of what GDP would have been if the crisis had not occurred. Measuring the shortfall in GDP in the aftermath of a crisis requires making a number of assumptions, and the measurement will vary depending on what assumptions are used. Figure 2 provides two examples to show how estimates of output losses vary depending on the assumptions used. The output shortfall is shown in the shaded areas of the two examples, with the output shortfall larger in example 2 than in example 1. Important assumptions include the following: Start date of the crisis: The first assumption involves selecting the date when the crisis began. The start date is shown as the vertical line in examples 1 and 2 and is assumed to be the same. However, researchers have used different assumptions to select the start date of the 2007-2009 financial crisis. The path real GDP would have followed if the crisis had not occurred: The second assumption involves estimating the counterfactual for the path of GDP—that is, the path that real GDP would have followed in the absence of a crisis. This counterfactual is not observable. Studies have used different assumptions to estimate this path and one approach is to assume that this path would follow a precrisis trend in real GDP growth. For example, one study estimated trend output paths based on average GDP growth for the three years and ten years before the crisis. In figure 2, example 1 assumes a much lower (or less steep) trend rate of GDP growth than example 2. Assuming a higher growth trend results in a larger estimate of output losses. Projections of actual GDP: The third assumption involves determining when GDP regained or will regain its estimated precrisis trend path. With respect to the recent crisis, some studies find that real GDP remains below the estimated precrisis trend. Researchers reach different conclusions about when or whether GDP will regain its long-term trend from before the crisis. Assumptions about the path of actual GDP and how it compares to the potential trend path can reflect different views on whether the output losses from the crisis are temporary or permanent. In contrast to example 1, where the economy regains its precrisis growth rate and level of output, example 2 assumes the economy regains its precrisis rate of output growth but remains permanently below the level of output projected by extrapolating the precrisis growth trend. As a result, output losses in example 2 extend farther into the future and are considerably larger than in example 1. Some studies describe reasons why financial crises could be associated with permanent output losses. For example, sharp declines in investment during and following the crisis could result in lower capital accumulation in the long-term. In addition, persistent high unemployment could substantially erode the skills of many U.S. workers and reduce the productive capacity of the U.S. economy. Research suggests that U.S. output losses associated with the 2007- 2009 financial crisis could range from several trillion to over $10 trillion. In January 2012, the Congressional Budget Office (CBO) estimated that the cumulative difference between actual GDP and estimated potential GDP following the crisis would amount to $5.7 trillion by 2018. CBO defined potential output as the output level that corresponds to a high rate of use of labor and capital. CBO reported that recessions following financial crises, like the most recent crisis, tend to reduce not only output below what it otherwise would have been but also the economy’s potential to produce output, even after all resources are productively employed. In its estimate, CBO assumed that GDP would recover to its potential level by 2018, noting that it does not attempt to predict business cycle fluctuations so far into the future. Other studies have reported a wide range of estimates for the output losses associated with past financial crises, with some suggesting that output losses from the recent crisis could persist beyond 2018 or be permanent. In an August 2010 study, a working group of the Basel Committee on Banking Supervision reviewed the literature estimating output losses. According to the Basel Committee working group’s review, studies calculating long-term output losses relative to a benchmark (such as an estimated trend in the level of GDP) estimated much larger losses than studies calculating output losses over a shorter time period. In a June 2012 working paper, International Monetary Fund (IMF) economists estimated the cumulative percentage difference between actual and trend real GDP for the 4 years following the start of individual banking crises in many countries. They found a median output loss of 23 percent of trend-level GDP for a historical set of banking crises and a loss of 31 percent for the 2007-2009 U.S. banking crisis. Other researchers who assume more persistent or permanent output losses from past financial crises estimate much larger output losses from these crises, potentially in excess of 100 percent of precrisis GDP. While such findings were based on crisis events before 2007, if losses from the 2007- 2009 crisis were to reach similar levels, the present value of cumulative output losses could exceed $13 trillion. Studies that estimate output losses can be useful in showing the rough magnitude of the overall costs associated with the 2007-2009 financial crisis, but their results have limitations. Importantly, real GDP is an imperfect proxy of overall social welfare. As discussed below, real GDP measures do not reveal the distributional impacts of the crisis, and the costs associated with a financial crisis can fall disproportionately on certain populations. In addition, it is difficult to separate out the economic costs attributable to the crisis from the costs attributable to other factors, such as federal government policy decisions before, during, and after the crisis. While studies often use output losses to measure the overall costs associated with financial crises, many researchers also discuss trends in unemployment, household wealth, and other economic indicators, such as the number of foreclosures, to provide a more granular picture of the effects of financial crises. As with trends in output losses, it is not possible to determine how much of the changes in these measures can be attributed to the financial crisis rather than to other factors. For example, analyzing the peak-to-trough changes in certain measures, such as home prices, can overstate the impacts associated with the crisis, as valuations before the crisis may have been inflated and unsustainable. The effects of the financial crisis have been wide-ranging, and we are not attempting to provide a comprehensive review of all components of the economic harm. Rather, the following highlights some of the most common types of measures used by academics and other researchers. As shown in figure 3, the unemployment rate rose substantially following the onset of the financial crisis and then declined, but it remains above the historical average as of November 2012. The monthly unemployment rate peaked at around 10 percent in October 2009 and remained above 8 percent for over 3 years, making this the longest stretch of unemployment above 8 percent in the United States since the Great Depression. The monthly long-term unemployment rate—measured as the share of the unemployed who have been looking for work for more than 27 weeks— increased above 40 percent in December 2009 and remained above 40 percent as of November 2012. Persistent, high unemployment has a range of negative consequences for individuals and the economy. First, displaced workers—those who permanently lose their jobs through no fault of their own—often suffer an initial decline in earnings and also can suffer longer-term losses in earnings. For example, one study found that workers displaced during the 1982 recession earned 20 percent less, on average, than their nondisplaced peers 15 to 20 years later. Reasons that unemployment can reduce future employment and earnings prospects for individuals include the stigma that some employers attach to long-term unemployment and the skill erosion that can occur as individuals lose familiarity with technical aspects of their occupation. Second, research suggests that the unemployed tend to be physically and psychologically worse off than their employed counterparts. For example, a review of 104 empirical studies assessing the impact of unemployment found that people who lost their job were more likely than other workers to report having stress-related health conditions, such as depression, stroke, heart disease, or heart attacks. Third, some studies find negative outcomes for health, earnings, and educational opportunities for the children of the unemployed. Fourth, periods of high unemployment can impact the lifetime earnings of people entering the workforce for the first time. For example, one study found that young people who graduate in a severe recession have lower lifetime earnings, on average, than those who graduate in normal economic conditions. In prior work, we reported that long-term unemployment can have particularly serious consequences for older Americans (age 55 and over) as their job loss threatens not only their immediate financial security but also their ability to support themselves during retirement. Persistent high unemployment can also increase budgetary pressures on federal, state, and local governments as expenditures on social welfare programs increase and individuals with reduced earnings pay less in taxes. According to the Federal Reserve’s Survey of Consumer Finances, median household net worth fell by $49,100 per family, or by nearly 39 percent, between 2007 and 2010. The survey found that this decline appeared to be driven most strongly by a broad collapse in home prices. Another major component of net worth that declined was the value of household financial assets, such as stocks and mutual funds. Economists we spoke with noted that precrisis asset prices may have reflected unsustainably high (or “bubble”) valuations and it may not be appropriate to consider the full amount of the overall decline in net worth as a loss associated with the crisis. Nevertheless, dramatic declines in net worth, combined with an uncertain economic outlook and reduced job security, can cause consumers to reduce spending. Reduced consumption, all else equal, further reduces aggregate demand and real GDP. As we reported in June 2012, decreases in home prices played a central role in the crisis and home prices continue to be well below their peak nationwide. According to CoreLogic’s Home Price Index, home prices across the country fell nearly 29 percent between their peak in April 2006 and the end of the recession in June 2009 (see fig. 4). This decline followed a 10-year period of significant home price growth, with the index more than doubling between April 1996 and 2006. Since 2009, home prices have fluctuated. Similarly, we also reported that homeowners have lost substantial equity in their homes, because home values have declined faster than home mortgage debt. As shown in figure 5, households collectively lost about $9.1 trillion (in constant 2011 dollars) in national home equity between 2005 and 2011, in part because of the decline in home prices. Figure 5 also shows that between 2006 and 2007, the steep decline in home values left homeowners collectively holding home mortgage debt in excess of the equity in their homes. This is the first time that aggregate home mortgage debt exceeded home equity since the data were kept in 1945. As of December 2011, national home equity was approximately $3.7 trillion less than total home mortgage debt. Declines in the value of household investments in stocks and mutual funds also contributed to significant declines in household wealth after the crisis began. In addition to experiencing a decline in the value of their stock and mutual fund investments, households also experienced a decline in their retirement funds. As shown in figure 6, the value of corporate equities held in retirement funds dropped sharply in late 2008. While equity prices and the value of retirement fund assets generally have recovered since 2009, investors and pension funds that sold assets at depressed prices experienced losses. For example, officials from a large pension fund told us that they were forced to sell equity securities at depressed prices during the crisis to meet their liquidity needs. Experts have different views on how the crisis may have changed investors’ attitudes towards risk-taking. To the extent that investors are more risk averse and demand higher returns for the risks associated with certain investments, businesses could face increased funding costs that could contribute to slower growth. In 2006, the percentage of loans in default or in foreclosure began to increase (see fig. 7). As we previously reported, a number of factors contributed to the increase in loan defaults and foreclosures, including a rapid decline in home prices throughout much of the nation and weak regional labor market conditions in some states where foreclosure rates were already elevated. During the 2007-2009 recession, the elevated unemployment rate and declining home prices worsened the financial circumstances for many families, along with their ability to make their mortgage payments. Foreclosures have been associated with a number of adverse effects on homeowners, communities, the housing market, and the overall economy. Homeowners involved in a foreclosure often are forced to move out and may see their credit ratings plummet, making it difficult to purchase another home. A large number of foreclosures can have serious consequences for neighborhoods. For example, research has shown that foreclosures depress the values of nearby properties in the local neighborhood. Creditors, investors, and servicers can incur a number of costs during the foreclosure process (e.g., maintenance and local taxes) and a net loss, if there is a shortfall between the ultimate sales price and the mortgage balance and carrying costs. Large numbers of foreclosures can significantly worsen cities’ fiscal circumstances, both by reducing property tax revenues and by raising costs to the local government associated with maintaining vacant and abandoned properties. Some studies consider measures of fiscal costs—such as increases in federal government debt—when analyzing the losses associated with financial crises. Like past financial crises, the 2007-2009 financial crisis has been associated with large increases in the federal government’s debt and heightened fiscal challenges for many state and local governments. Factors contributing to these challenges include decreased tax revenues from reduced economic activity and increased spending associated with government efforts to mitigate the effects of the recession. In prior work, we have reported that the economic downturn and the federal government’s response caused budget deficits to rise in recent years to levels not seen since World War II. While the structural imbalance between spending and revenue paths in the federal budget predated the financial crisis, the size and urgency of the federal government’s long-term fiscal challenges increased significantly following the crisis’s onset. From the end of 2007 to the end of 2010, federal debt held by the public increased from roughly 36 percent of GDP to roughly 62 percent. Key factors contributing to increased deficit and debt levels following the crisis included (1) reduced tax revenues, in part driven by declines in taxable income for consumers and businesses; (2) increased spending on unemployment insurance and other nondiscretionary programs that provide assistance to individuals impacted by the recession; (3) fiscal stimulus programs enacted by Congress to mitigate the recession, such as the American Recovery and Reinvestment Act of 2009 (Recovery Act); and (4) increased government assistance to stabilize financial institutions and markets. While deficits during or shortly after a recession can support an economic recovery, increased deficit and debt levels could have negative effects on economic growth. For example, rising federal debt can “crowd out” private investment in productive capital as the portion of savings that is used to buy government debt securities is not available to fund such investment. Lower levels of private investment can reduce future economic growth. In addition, increased debt increases the amount of interest the government pays to its lenders, all else equal. Policy alternatives to offsetting increased interest payments include increasing tax rates and reducing government benefits and services, which also can reduce economic growth. Moreover, increased fiscal challenges could make the United States more vulnerable to a fiscal crisis should investors lose confidence in the ability of the U.S. government to repay its debts. Such a crisis could carry enormous costs because the federal government would face a sharp increase in its borrowing costs. The following discussion focuses on the costs associated with the federal government’s actions to assist the financial sector. Fiscal stimulus programs, such as the Recovery Act, and the Federal Reserve’s monetary policy operations were major components of the federal government’s efforts to mitigate the recession that coincided with the 2007-2009 financial crisis. However, given our focus on the Dodd-Frank Act reforms, the potential short-term and long-term impacts of these efforts are beyond the scope of this report. Furthermore, our review did not consider the benefits or costs of government policy interventions relative to alternatives that were not implemented. With respect to the most significant government programs and other actions to assist the financial sector, the following discussion reviews (1) expert perspectives on how these policy responses could have reduced or increased the severity of the financial crisis and the associated economic losses; (2) the potential costs associated with increased moral hazard; and (3) the financial performance (including income and losses) of the largest of these policy interventions. Federal financial regulators and several academics and other experts we spoke with highlighted several interventions that they maintain likely helped to mitigate the severity of the 2007-2009 financial crisis. These interventions included providing emergency funding to support several key credit markets through the Federal Reserve’s emergency credit and liquidity programs; extending federal government guarantees to a broader range of private sector liabilities through FDIC’s Temporary Liquidity Guarantee Program (TLGP) and Treasury’s Money Market Fund Guarantee Program; recapitalizing financial firms through Treasury’s Troubled Asset Relief Program’s Capital Purchase Program; and taking actions with respect to individual firms, such as Fannie Mae, Freddie Mac, American International Group (AIG), Citigroup, and Bank of America, to avert further destabilization of financial markets. Many experts maintain that these large-scale interventions, in combination with other government actions, such as the stress tests, helped to restore confidence in the financial system and bring about a recovery in certain private credit markets in 2009. In contrast, other experts argue that certain federal government actions worsened, rather than mitigated, the severity of the financial crisis. For example, some experts maintain that the federal government’s rescue of Bear Stearns but not Lehman Brothers sent a conflicting signal to the market and contributed to a more severe panic. Some experts also have commented that government assistance to the financial and housing sectors may have slowed the economic recovery by preventing a full correction of asset prices. Many experts agree that several (if not all) of the federal government’s policy interventions likely averted a more severe crisis in the short-run and that the long-term implications of these interventions remain to be seen. Experts generally agree that the government actions to assist the financial sector may have increased moral hazard—that is, such actions may have encouraged market participants to expect similar emergency actions in the future, thus weakening private incentives to properly manage risks and creating the perception that some firms are too big to fail. Increased moral hazard could result in future costs for the government if reduced private sector incentives to manage risks contribute to a future financial crisis. Although the financial performance of the federal government’s assistance to the financial sector can be measured in different ways, most of the federal government’s major programs earned accounting income in excess of accounting losses and the net losses for some interventions are expected to be small relative to the overall increase in the federal debt. For example, the Federal Reserve reported that all loans made under its emergency programs that have closed were repaid with interest and does not project any losses on remaining loans outstanding. Under FDIC’s TLGP, program participants, which included insured depository institutions and their holding companies, paid fees on debt and deposits guaranteed by the program; these fees created a pool of funds to absorb losses. According to FDIC data, as of November 30, 2012, FDIC had collected $11.5 billion in TLGP fees and surcharges, and this amount is expected to exceed the losses from the program. In contrast, Treasury’s investments in Fannie Mae and Freddie Mac under the Senior Preferred Stock Purchase Agreements program represent the federal government’s single largest risk exposure remaining from its emergency actions to assist the financial sector. Cumulative cash draws by the GSEs under this program totaled $187.4 billion as of September 30, 2012, and Treasury reported a contingent liability of $316.2 billion for this program as of September 30, 2011. As of September 30, 2012, Fannie Mae and Freddie Mac had paid Treasury a total of $50.4 billion in dividends on these investments. The amount that Treasury will recoup from these investments is uncertain. Table 2 provides an overview of income and losses from selected federal government interventions to assist the financial sector. In our prior work, we have described how the national recession that coincided with the 2007-2009 financial crisis added to the fiscal challenges facing the state and local sectors. Declines in output, income, and employment caused state and local governments to collect less revenue at the same time that demand for social welfare services they provide was increasing. During the most recent recession, state and local governments experienced more severe and long-lasting declines in revenue than in past recessions. Because state governments typically face balanced budget requirements and other constraints, they adjust to this situation by raising taxes, cutting programs and services, or drawing down reserve funds, all but the last of which amplify short-term recessionary pressure on households and businesses. Local governments may make similar adjustments, unless they can borrow to make up for reduced revenue. The extent to which state and local governments took such actions was impacted by the federal government’s policy responses to moderate the downturn and restore economic growth. Under the Recovery Act, the federal government provided $282 billion in direct assistance to state and local governments to help offset significant declines in tax revenues. States have been affected differently by the 2007-2009 recession. For example, the unemployment rate in individual states increased by between 1.4 and 6.8 percentage points during the recession. Recent economic research suggests that while economic downturns within states generally occur around the same time as national recessions, their timing and duration vary. States’ differing characteristics, such as industrial structure, contribute to these differences in economic activity. Declines in state and local pension asset values stemming from the 2007- 2009 recession also could affect the sector’s long-term fiscal position. In March 2012, we reported that while most state and local government pension plans had assets sufficient to cover benefit payments to retirees for a decade or more, plans have experienced a growing gap between assets and liabilities. In response, state and local governments have begun taking a number of steps to manage their pension obligations, including reducing benefits and increasing member contributions. The Dodd-Frank Act contains several provisions that may benefit the financial system and the broader economy, but the realization of such benefits depends on a number of factors. Our review of the literature and discussions with a broad range of financial market regulators, participants, and observers revealed no clear consensus on the extent to which, if at all, the Dodd-Frank Act will help reduce the probability or severity of a future crisis. Nevertheless, many of these experts identified a number of the same reforms that they expect to enhance financial stability, at least in principle, and help reduce the probability or severity of a future crisis. At the same time, such experts generally noted that the benefits are not assured and depend on, among other things, how regulators implement the provisions and whether the additional regulations result in financial activity moving to less regulated institutions or markets. Several experts also commented that the act also could enhance consumer and investor protections. While estimating the extent to which the act may reduce the probability of a future crisis is difficult and subject to limitations, studies have found statistical evidence suggesting that certain reforms are associated with a reduction in the probability of a crisis. Through our review of the literature and discussions with a broad range of financial market regulators, academics, and industry and public interest group experts, we found no clear consensus on the extent to which, if at all, the Dodd-Frank Act will help reduce the probability or severity of a future financial crisis. However, representatives of these groups identified many of the same provisions in the act that they expect to enhance financial stability, at least in principle, and help reduce the probability or severity of a future crisis. These provisions include the following: Creation of FSOC and OFR: The act created FSOC and OFR to monitor and address threats to financial stability. Heightened prudential standards for systemically important financial institutions (SIFI): The act requires that all SIFIs be subjected to Federal Reserve supervision and enhanced capital and other prudential standards. SIFIs include bank holding companies with $50 billion or more in total consolidated assets and nonbank financial companies designated by FSOC for such supervision. Orderly Liquidation Authority: The act provides regulators with new authorities and tools to manage the failure of a large financial company in a way designed to avoid taxpayer-funded bailouts and mitigate the potential for such failures to threaten the stability of the financial system. Regulation of swaps: The act establishes a comprehensive regulatory framework for swaps. Mortgage-related and other reforms: The act includes provisions to modify certain mortgage lending practices, increase regulation of asset-backed securitizations, and restrict proprietary trading by large depository institutions. Experts had differing views on these provisions, but many expect some or all of the provisions to improve the financial system’s resilience to shocks and reduce incentives for financial institutions to take excessive risks that could threaten the broader economy. While acknowledging these potential financial stability benefits, experts generally were cautious in their assessments for several reasons. Specifically, the effectiveness of certain provisions will depend not only on how regulators implement the provisions through rulemaking or exercise their new authorities but also on how financial firms react to the new rules, including whether currently regulated financial activity migrates to less regulated institutions or markets. In addition, a few experts with whom we spoke said that some of the act’s provisions could increase systemic risk and, thus, have adverse effects on financial stability. Further, it may be neither possible nor necessarily desirable for the Dodd-Frank Act or any other legislation to prevent all future financial crises, in part because of the tradeoff inherent between financial stability and economic growth. The 2007-2009 financial crisis highlighted the lack of an agency or mechanism responsible for monitoring and addressing risks across the financial system and a shortage of readily available information to facilitate that oversight. We reported in July 2009 that creating a new body or designating one or more existing regulators with the responsibility to oversee systemic risk could serve to address a significant gap in the current U.S. regulatory system. Before the Dodd-Frank Act’s passage, federal financial regulators focused their oversight more on individual financial firms (called microprudential regulation) and less on market stability and systemic risk (called macroprudential regulation). However, the recent crisis illustrated the potential for one financial firm’s distress to spill over into the broader financial system and economy. For example, the failures and near-failures of Lehman Brothers, AIG, Fannie Mae, Freddie Mac, and other large financial institutions contributed to the instability experienced in the financial system during the crisis. The crisis also illustrated the potential for systemic risk to be generated and propagated outside of the largest financial firms (such as by money market mutual funds), in part because of interconnections not only between firms but also between markets. According to some academics and other market observers, a significant market failure revealed by the recent crisis was that the market did not discourage individual financial firms from taking excessive risks that could impose costs on others, including the public. Such spillover costs imposed on others are known as negative externalities, and government intervention may be appropriate to address such externalities. The Dodd-Frank Act established FSOC to provide, for the first time, an entity charged with the responsibility for monitoring and addressing sources of systemic risk. The act also created OFR to support FSOC and Congress by providing financial research and data. FSOC is authorized, among other things, to collect information across the financial system from member agencies and other government agencies, so that regulators will be better prepared to address emerging threats; designate certain nonbank financial companies for supervision by the Federal Reserve and subject them to enhanced prudential standards; designate as systemically important certain financial market utilities and payment, clearing, or settlement activities, and subject them to enhanced regulatory oversight; recommend stricter standards for the large, interconnected bank holding companies and nonbank financial companies designated for enhanced supervision; vote on any determination by the Federal Reserve that action should be taken to break up a SIFI that poses a “grave threat” to U.S. financial stability; facilitate information sharing and coordination among the member agencies to eliminate gaps in the regulatory structure; and make recommendations to enhance the integrity, efficiency, competitiveness, and stability of U.S. financial markets, promote market discipline, and maintain investor confidence. Financial market regulators, academics, and industry and public interest groups with whom we spoke generally view the creation of FSOC and OFR as positive steps, in principle, to address systemic risk and help identify or mitigate a future crisis for several reasons. First, FSOC and its member agencies now have explicit responsibility for taking a macroprudential approach to regulation, along with tools and authority to help identify and address threats to the financial stability of the United States. For example, certain nonbank financial companies posed systemic risk during the crisis but were subject to less regulation than bank holding companies. To close this regulatory gap, FSOC has the authority to designate a nonbank financial company for supervision by the Federal Reserve and subject it to enhanced prudential standards, if the material distress of that firm could pose a risk to U.S. financial stability. In addition, although the Dodd-Frank Act does not address all sources of systemic risk, the act authorizes FSOC to make recommendations to address regulatory gaps or other issues that threaten U.S. financial stability. For example, FSOC’s 2011 and 2012 annual reports discuss financial stability threats not directly addressed by the Dodd-Frank Act (e.g., money market mutual funds, tri-party repurchase agreements, and the GSEs) and make recommendations to address some of them. Finally, OFR may play an important role in gathering and analyzing data that FSOC and its members will be able to use to identify and address emerging risks to the financial system. OFR may also facilitate data sharing among the regulators, which may enable regulators to identify risks in areas emerging from beyond their immediate jurisdictions. Market participants also may benefit from the ability to use OFR data to analyze risks. Experts also identified a number of factors that could limit FSOC’s or OFR’s effectiveness. First, it is inherently challenging for a regulator to identify and address certain sources of systemic risk. For example, while asset price bubbles often become clear in hindsight, when such risks appear to be building, policymakers may disagree over whether any intervention is warranted. Second, FSOC’s committee structure cannot fully resolve the difficulties inherent in the existing, fragmented regulatory structure. For example, FSOC could encounter difficulties coming to decisions or advancing a reform if it faces resistance from one or more of its members. In addition, FSOC’s committee structure, including the Treasury Secretary’s role as FSOC chair, could subject FSOC’s decision making to political influence. According to a number of experts, establishing FSOC and OFR as independent entities could have better insulated them from political pressures that could dissuade them from recommending or taking actions to promote long-term financial stability, if such actions imposed short-term political costs. On the other hand, the selection of the Treasury Secretary as FSOC chair reflects the Treasury Secretary’s traditional role in financial policy decisions. In a recent report, we identified a number of potential challenges for FSOC, some of which are similar to those discussed above. Specifically, we noted that key components of FSOC’s mission—to identify risks to U.S. financial stability and respond to emerging threats to stability—are inherently challenging. Risks to the stability of the U.S. financial system are difficult to identify because commonly used indicators, such as market prices, often do not reflect these risks and threats may not develop in precisely the same way as they did in past crises. Although the act created FSOC to provide for a more comprehensive view of threats to U.S. financial stability, it left most of the pre-existing fragmented and complex arrangement of independent federal and state regulators in place and generally preserved their statutory responsibilities. Further, we noted that FSOC does not have the authority to force agencies to coordinate or adopt compatible policies and procedures. However, we also reported that FSOC and OFR have made progress in establishing their operations and approaches for monitoring threats to financial stability, but these efforts could be strengthened. We made recommendations to strengthen the accountability and transparency of FSOC’s and OFR’s decisions and activities as well as to enhance collaboration among FSOC members and with external stakeholders. In response to our recommendations, Treasury emphasized the progress that FSOC and OFR have made since their creation and noted that more work remains, as they are relatively new organizations. The 2007-2009 financial crisis also revealed weaknesses in the existing regulatory framework for overseeing large, interconnected, and highly leveraged financial institutions. Such financial firms were subject to some form of federal supervision and regulation, but these forms of supervision and regulation proved inadequate and inconsistent. For example, fragmentation of supervisory responsibility allowed owners of banks and other insured depository institutions to choose their own regulator. In addition, regulators did not require firms to hold sufficient capital to cover their trading and other losses or to plan for a scenario in which liquidity was sharply curtailed. Moreover, the regulatory framework did not ensure that banks fully internalized the costs of the risks that their failure could impose on the financial system and broader economy. The Dodd-Frank Act requires the Federal Reserve to supervise and develop enhanced capital and other prudential standards for SIFIs, which include bank holding companies with $50 billion or more in consolidated assets and any nonbank financial company that FSOC designates. The act requires the enhanced prudential standards to be more stringent than standards applicable to other bank holding companies and financial firms that do not present similar risks to U.S. financial stability. The act further allows the enhanced standards to increase in stringency based on the systemic footprint and risk characteristics of each firm. The Federal Reserve plans to implement some of its enhanced standards in conjunction with its implementation of Basel III, a new capital regime developed by the Basel Committee on Banking Supervision. The act’s provisions related to SIFIs include the following: Risk-based capital requirements and leverage limits: The Federal Reserve must establish capital and leverage standards, which as proposed would include a requirement for SIFIs to develop capital plans to help ensure that they maintain capital ratios above specified standards, under both normal and adverse conditions. In addition, the Federal Reserve has announced its intention to apply capital surcharges to some or all SIFIs based on the risks SIFIs pose to the financial system. Liquidity requirements: The Federal Reserve must establish SIFI liquidity standards, which as proposed would include requirements for SIFIs to hold liquid assets that can be used to cover their cash outflows over short time periods. Single-counterparty credit limits: The Federal Reserve must propose rules that, in general, limit the total net credit exposure of a SIFI to any single unaffiliated company to 25 percent of its total capital stock and surplus. Risk management requirements: Publicly traded SIFIs must establish a risk committee and be subject to enhanced risk management standards. Stress testing requirements: The Federal Reserve is required to conduct an annual evaluation of whether SIFIs have sufficient capital to absorb losses that could arise from adverse economic conditions. Debt-to-equity limits: Certain SIFIs may be required to maintain a debt-to-equity ratio of no more than 15-to-1. Early remediation: The Federal Reserve is required to establish a regulatory framework for the early remediation of financial weaknesses of SIFIs in order to minimize the probability that such companies will become insolvent and the potential harm of such insolvencies to the financial stability of the United States. A broad range of financial market regulators, academics, and industry and public interest group experts generally expect the enhanced prudential standards to help increase the resilience of SIFIs and reduce the potential for a SIFI’s financial distress to spill over to the financial system and broader economy. Higher capital levels increase a firm’s resilience during times of financial stress because more capital is available to absorb unexpected losses. Similarly, increased liquidity (e.g., holding more liquid assets and reducing reliance on short-term funding sources) can reduce the likelihood that a firm will have to respond to temporary strains in credit markets by cutting back on new lending or selling assets at depressed prices. Increased capital and liquidity levels together can limit the potential for large, unexpected losses in the financial system to disrupt the provision of credit and other financial services to households and businesses, which occurred in the most recent financial crisis. Finally, limiting counterparty credit exposures also can help to minimize spillover effects. A number of experts viewed the act’s enhanced prudential standards for SIFIs as particularly beneficial, because such institutions pose greater risks to the orderly functioning of financial markets than less systemically significant institutions, and subjecting SIFIs to stricter standards can cause them to internalize the costs of the risks they pose to the system. For example, the Federal Reserve intends to issue a proposal that would impose capital surcharges on SIFIs based on a regulatory assessment of the systemic risk they pose, consistent with a framework agreed to by the Basel Committee. In addition, the Dodd-Frank Act’s enhanced prudential standards provisions allow federal regulators to impose more stringent risk management standards and oversight of SIFIs’ activities, including by conducting stress tests, to help ensure that weaknesses are addressed before they threaten the financial system. Experts noted that these stricter standards, including the surcharges, could serve as a disincentive to financial firms to become larger or otherwise increase the risks they pose to the broader financial system. Despite generally supporting an increase in the capital requirements, experts questioned the potential effectiveness of certain aspects of the enhanced prudential standards for SIFIs: Impact on “too-big-to-fail” perceptions: Experts suggested that the market may view SIFIs as too big to fail, paradoxically giving such firms an implicit promise of government support if they run into financial difficulties. As discussed below, perceptions that SIFIs are too big to fail can weaken incentives for creditors to restrain excessive risk-taking by SIFIs and could give such firms a funding advantage over their competitors. However, others noted that the heightened standards were specifically designed to address these issues and view the act as explicitly prohibiting federal government support for SIFIs. For example, the act revises the Federal Reserve Act to prohibit the Federal Reserve from providing support to individual institutions in financial distress and, as discussed below, the act creates a new option for liquidating such firms. Limits of Basel approach to capital standards: The Federal Reserve will base its enhanced regulatory capital standards, in part, on Basel’s approach, which several experts view as having limitations. They recognized that the Basel III standards address some of the limitations that the financial crisis revealed in the regulatory capital framework, but maintain that Basel III continues to place too much reliance on risk-based approaches to determining capital adequacy. During the 2007-2009 crisis, some banks experienced capital shortages, in part because they suffered large losses on assets that were assigned low risk weights under Basel’s standards but posed greater risk than their risk weights. The Basel III framework will increase risk weights for certain asset classes—and includes a leverage ratio as a safeguard against inaccurate risk weights—but experts noted that the potential remains for financial institutions to “game” the Basel risk weights by increasing holdings of assets that carry risk-weights that are lower than their actual risks. In addition, some experts maintain that the Basel standards overall may not provide a sufficient buffer to protect firms during times of stress. However, one regulator noted that the leverage ratio, and the higher requirements for common equity and tier 1 capital called for in the Basel III standards, represent a significant tightening of capital regulation (in combination with the imposition of some higher risk weights and better quality of capital). Implementation of these SIFI provisions is ongoing. In January 2012, the Federal Reserve proposed rules to implement the enhanced prudential standards, but has not yet finalized all of these rules. In addition, the Federal Reserve and other federal prudential regulators are continuing to work to implement Basel III. As of December 2012 FSOC had not yet designated any nonbank financial companies for Federal Reserve supervision; the Federal Reserve will subsequently be responsible for developing rules for the heightened capital and other prudential standards for these entities. Faced with the impending failure of a number of large financial companies during the 2007-2009 financial crisis, federal financial regulators generally had two options: (1) allowing these companies to file for bankruptcy at the risk of exacerbating the crisis (e.g., Lehman Brothers) or (2) providing such companies with emergency funding from the government at the risk of increasing moral hazard (e.g., AIG). As we previously reported, traditional bankruptcy may not be effective or appropriate for financial companies for a variety of reasons. For example, in bankruptcy proceedings for companies that hold derivatives or certain other qualified financial contracts, creditors may terminate such contracts, even though creditors generally may not terminate other contracts because they are subject to automatic stays. Termination of derivative contracts can lead to large losses for the failed firm and other firms through fire sales and other interconnections. For example, the insolvency of Lehman Brothers had a negative effect on financial stability by contributing to a run on money market mutual funds and disrupting certain swaps markets. Further, bankruptcy is a domestic legal process that varies by jurisdiction. Thus, the bankruptcy of a financial company with foreign subsidiaries, such as Lehman Brothers, can raise difficult international coordination challenges. In contrast to the Lehman case, the government provided support to some financial firms, such as AIG, because of concerns that their failures would further disrupt the broader financial system. A number of experts maintain this government assistance increased moral hazard by encouraging market participants to expect similar emergency actions in future crises for large, interconnected financial institutions—in effect, reinforcing perceptions that some firms are too big to fail. The perception of certain firms as too big to fail weakens market discipline by reducing the incentives of shareholders, creditors, and counterparties of these companies to discipline excessive risk taking. For example, creditors and shareholders may not demand that firms they view as too big to fail make adequate disclosures about these risks, which could further undermine market discipline. Perceptions that firms are too big to fail also can produce competitive distortions because companies perceived as ‘too big to fail’ may be able to fund themselves at a lower cost than their competitors. The Dodd-Frank Act’s Title II provides the federal government with a new option for resolving failing financial companies by creating a process under which FDIC has the authority to liquidate large financial companies, including nonbanks, outside of the bankruptcy process—called orderly liquidation authority (OLA). In general, under this authority, FDIC may be appointed receiver for a financial firm if the Treasury Secretary determines that the firm’s failure would have a serious adverse effect on U.S. financial stability. Under OLA, FDIC must maximize the value of the firm’s assets, minimize losses, mitigate systemic risk, and minimize moral hazard. OLA also establishes additional authorities for FDIC as receiver, such as the ability to set up a bridge financial company and to borrow funds from the Treasury to carry out the liquidation. FDIC can subsequently collect funding for the OLA process from the financial industry after a company has been liquidated. A range of financial market regulators, academics, and industry and public interest group experts identified a number of ways in which the Dodd-Frank Act’s OLA provisions could help mitigate threats to the financial system posed by the failure of SIFIs or other large, complex, interconnected financial companies. First, the OLA framework may be effective in addressing the limitations of the bankruptcy process. For example, experts noted that under OLA, FDIC will be able to control the liquidation process and can temporarily prevent creditors from terminating their qualified financial contracts, the termination of which could prompt fire sales that could be destabilizing. Second, under its rules, FDIC has indicated that it will ensure that creditors and shareholders of a company in OLA will bear the losses of the company. By helping to ensure that creditors and shareholders will bear losses in the event of a failure, OLA could strengthen incentives for creditors and shareholders to monitor these firms’ risks. Finally, OLA could help convince market participants that government support will no longer be available for SIFIs, which could increase investors’ incentives to demand that SIFIs become more transparent and refrain from taking excessive risks. Experts also identified a number of potential challenges and limitations of OLA. OLA is new and untested, and its effectiveness in reducing moral hazard will depend on the extent to which the market believes FDIC will use OLA to make creditors bear losses of any SIFI failure. Experts identified a conflict between OLA’s goal of eliminating government bailouts on one hand and minimizing systemic risk on the other. For example, if FDIC imposes losses on some creditors of a failed SIFI, these losses could cause other SIFIs to fail. In that regard, some experts observed that governments historically have not allowed potentially systemically important financial firms to fail during a crisis and question whether a different outcome can be expected in the future. Moreover, experts questioned whether FDIC has the capacity to use OLA to handle multiple SIFI failures, which might occur during a crisis. Another concern is that OLA will be applied to globally active financial institutions, and how FDIC and foreign regulators will handle the non-U.S. subsidiaries of a failed SIFI remains unclear. In addition, SIFIs must formulate and submit to their regulators resolution plans (or “living wills”) that detail how they could be resolved in bankruptcy should they encounter financial difficulties. Experts noted that resolution plans may provide regulators with critical information about a firm’s organizational structure that could aid the resolution process. The plans also could motivate SIFIs to simplify their structures, and this simplification could help facilitate an orderly liquidation. However, other experts commented that while resolution plans may assist regulators in gaining a better understanding of SIFI structures and activities, the plans may not be useful guides during an actual liquidation—in part because of the complex structures of the institutions or because the plans may not be helpful during a crisis. Resolution plans also may provide limited benefits in simplifying firm structures, in part because tax, jurisdictional, and other considerations may outweigh the benefits of simplification. FDIC has finalized key OLA rules and is engaged in a continuing process of clarifying how certain aspects of the OLA process would work. For example, FDIC officials have clarified that the OLA process will focus on the holding company level of the firm, and stated that the creation of the bridge institution will help ensure that solvent subsidiaries may continue to function. In addition, FDIC and the Federal Reserve are in the process of reviewing the first set of resolution plans, which were submitted in July 2012. Except for credit default swaps (CDS)—a type of derivative used to hedge or transfer credit risk—other over-the-counter (OTC) swaps and derivative contracts generally were not central to the systemwide problems encountered during the financial crisis, according to FSOC. Nonetheless, FSOC noted that OTC derivatives generally were a factor in the propagation of risks during the recent crisis because of their complexity and opacity, which contributed to excessive risk taking, a lack of clarity about the ultimate distribution of risks, and a loss in market confidence. In contrast to other OTC derivatives, credit default swaps exacerbated the 2007-2009 crisis, particularly because of AIG’s large holdings of such swaps, which were not well understood by regulators or other market participants. Furthermore, the concentration of most OTC derivatives trading among a small number of dealers created the risk that the failure of one of these dealers could expose counterparties to sudden losses and destabilize financial markets. While some standardized swaps, such as interest rate swaps, have traditionally been cleared through clearinghouses—which stand between counterparties in assuming the risk of counterparty default—most CDS and most other swaps have been traded in the OTC market where holders of derivatives contracts bear the risk of counterparty default. In addition, swaps traded in the OTC market have typically featured an exchange of margin collateral to cover current exposures between the two parties, but not “initial” margin to protect a nondefaulting party against the cost of replacing the contract if necessary. As of the end of the second quarter of 2012, the outstanding notional value of derivatives held by insured U.S. commercial banks and savings associations totaled more than $200 trillion. As noted earlier, Title VII of the Dodd-Frank Act, also known as the Wall Street Transparency and Accountability Act of 2010, establishes a new regulatory framework for swaps to reduce risk, increase transparency, and promote market integrity in swaps markets. Among other things, Title VII generally provides for the registration and regulation of swap dealers and major swap participants, including subjecting them to (1) prudential regulatory requirements, such as minimum capital and minimum initial and variation margin requirements and (2) business conduct requirements to address, among other things, interaction with counterparties, disclosure, and supervision; imposes mandatory clearing requirements on swaps but exempts certain end users that use swaps to hedge or mitigate commercial risk; requires swaps subject to mandatory clearing to be executed on an organized exchange or swap execution facility, which promotes pre- trade transparency (unless no facility offers the swap for trading); and requires all swaps to be reported to a registered swap data repository or, if no such repository will accept the swap, to CFTC or SEC, and subjects swaps to post-trade transparency requirements (real-time public reporting of swap data). Figure 8 illustrates some of the differences between swaps traded on exchanges and cleared through clearinghouses and swaps traded in the OTC market. A broad range of financial market regulators, participants, and observers expect various provisions under Title VII to help promote financial stability, but they also identified potential obstacles or challenges. Clearing through clearinghouses: According to experts, the clearing of swaps through clearinghouses could be beneficial. Clearing can reduce the vulnerability of the financial system to the failure of one or a few of the major swap dealers by transferring credit risk from the swap counterparties to the clearinghouse. By becoming the central counterparty in every trade, a clearinghouse can provide multilateral netting efficiencies to reduce counterparty credit and liquidity risks faced by market participants. Unlike dealers, clearinghouses do not take positions on the trades they clear and may have stronger incentives to develop effective risk management measures and monitor their members’ financial condition. In addition, clearinghouses have tools to mitigate counterparty credit risk, for instance, initial and variation margin, as well as the ability to assess their members for additional financial contributions. At the same time, experts have pointed out that clearinghouses concentrate credit risk and thus represent a potential source of systemic risk. For example, a former regulatory official told us that, in her opinion, clearinghouses essentially are too big to fail, given that the Dodd-Frank Act includes provisions mandating centralized clearing of standardized swaps and authorizing the Federal Reserve to provide emergency liquidity to systemically important clearinghouses provided certain conditions are met. Others commented that clearinghouses may be engaged in clearing less standardized or illiquid products, which could pose risk- management challenges for clearinghouses and expose them to greater risks. Margin requirements: Experts expect the margin requirements for uncleared swaps with swap dealers and major swap participants to help promote financial stability by helping to ensure that market participants have enough collateral to absorb losses. For example, imposing both initial and variation margin requirements on uncleared swaps could help prevent the type of build-up of large, uncollateralized exposures experienced by AIG. Some experts commented that margin requirements, depending how they are implemented, could have a negative impact on liquidity if there is not a sufficient supply of quality securities that can be posted as collateral to meet margin requirements. Reporting requirements: Many experts generally expect the swaps reforms that improve transparency to benefit the financial system. For example, the requirement for regulatory reporting of swaps transactions may provide regulators with a better understanding of the current risks in the swaps market and help enhance their oversight of the market. Similarly, public reporting of swap data could benefit market participants by providing them with data on prices and other details about swaps that they can use to better assess their risks. A number of industry representatives noted that the public reporting requirement could lead some market participants to reduce their participation out of fear that others can take advantage of such information. In their view, this could result in a loss of liquidity to the system. CFTC and SEC have finalized many of the regulations needed to implement Title VII, though several had yet to be finalized as of December 2012. OTC derivatives are globally traded, and many other jurisdictions are in the process of developing new regulatory regimes. However, the United States is one of the first jurisdictions to have enacted legislation in this area. Indeed, the implementation of at least one derivatives-related provision has already been delayed because of the importance of coordinating with international entities. The outcome of the reform process in other jurisdictions will determine the extent to which U.S. firms could be at a competitive advantage or disadvantage. (See app. II for a description of international coordination efforts.) While the previously discussed Dodd-Frank Act provisions were commonly cited as the most important ones for enhancing U.S. financial stability, several financial market regulators, participants, and observers we spoke with identified other provisions that they expect to help enhance financial stability. As with the provisions discussed above, certain key rules implementing the following provisions have not yet been finalized. Mortgage-related reforms: According to experts, problems in the mortgage market, particularly with subprime mortgages, played a central role in the recent financial crisis, and the act’s mortgage- related reforms may help prevent such problems in the future. Some bank and nonbank mortgage lenders weakened their underwriting standards and made mortgage loans to homebuyers who could not afford them or engaged in abusive lending practices before the crisis. These factors, along with the decline in housing prices, contributed to the increase in mortgage defaults and foreclosures. A number of the act’s provisions seek to reform the mortgage market—for example, by authorizing CFPB to supervise nonbank mortgage lenders and by prohibiting certain mortgage lending practices, such as issuing mortgage loans without making a reasonable and good faith effort to determine that the borrower has a reasonable ability to repay. Some industry representatives have expressed concerns that these reforms could prevent certain potential homebuyers from being able to obtain mortgage loans. However, other experts noted that before the crisis some loans had rates that did not fully reflect their risks, which contributed to an excess of credit, and the act’s reforms may help ensure that loans are accurately priced to reflect risks. Many of the Dodd-Frank Act’s mortgage reforms have not yet been implemented through rulemaking. Risk retention for asset securitizations: According to experts, the securitization of residential mortgages into mortgage-backed securities that subsequently were part of other securitizations also played a central role in the crisis, and the act contains provisions to reform the market. Experts also noted that institutions that created mortgage-backed securities in the lead-up to the crisis engaged in a number of practices that undermined the quality of their securities, including not adequately monitoring the quality of the mortgages underlying their securities, because they did not bear the risk of significant losses if those mortgages defaulted. The act contains provisions that require securitizers of asset-backed securities to retain some “skin in the game” in the form of a certain percentage of the credit risk in asset-backed securities they create. However, experts have different views on the extent to which the level of risk retention for securitizations was central to the problems encountered during the recent crisis, and a few do not view these provisions as potentially beneficial for financial stability. Regulators proposed implementing rules for the provision in 2011 but had yet to finalize the rules as of December 2012. The Volcker rule: The role that proprietary trading—trading activities conducted by banking entities for their own account as opposed to those of their clients—played in the recent crisis is a matter of debate. However, a number of experts maintain that the ability of banking entities to use federally insured deposits to seek profits for their own account provides incentives for them to take on excessive risks. In particular, some have noted that commercial banks that benefit from the federal financial safety net enjoy access to subsidized capital and thus do not bear the full risks of their proprietary trading activities. To address these concerns, section 619 of the Dodd-Frank Act, referred to as the Volcker rule, generally prohibits a banking entity from engaging in proprietary trading or acquiring or retaining more than a certain maximum percentage of any equity, partnership, or other ownership interest in, or sponsoring, a hedge fund or a private equity fund, among other restrictions involving transactions between covered banking entities and sponsored hedge funds and private equity funds. A number of experts view these restrictions as enhancing financial stability by discouraging excessive risk-taking by these institutions. Others, however, have noted that the Volcker rule, by prohibiting certain proprietary activities of these institutions, could have adverse effects on liquidity and, in turn, the unintended effect of undermining financial stability. In 2011, regulators proposed rules to implement the Volcker rule but had not yet finalized them as of December 2012. Financial market regulators, participants, and observers whom we interviewed also identified provisions that may result in benefits beyond increased financial stability. For example, the act may enhance consumer and investor protections and improve economic efficiency. As with the provisions previously noted, the realization of such benefits will depend, in part, on how regulators implement the provisions. Benefits beyond financial stability that experts highlighted include the following: Enhanced consumer protections: The Dodd-Frank Act’s Title X consolidates rulemaking and other authorities over consumer financial products and services under CFPB. The new agency assumes authority to implement consumer protection laws, such as the Truth in Lending Act and Home Ownership and Equity Protection Act of 1994. CFPB could assist consumers by improving their understanding of financial products and services. For example, experts noted that consumers could benefit from CFPB’s efforts, which include providing information on consumer financial products and simplifying disclosures for mortgages, credit cards, and other consumer financial products. Enhanced investor protections: Certain provisions in the act could provide shareholders with greater influence over, and insight into, the activities of publicly traded companies. For example, the act contains provisions that require shareholder advisory votes on executive compensation, disclosure of the ratio between the chief executive officer’s annual total compensation and median annual total compensation for all other employees, and clawback policies for erroneously awarded incentive-based compensation. Improving resource allocation in the economy: Some experts noted that mortgages and related credit instruments were not accurately priced before the crisis to reflect their risks. As a result, the economy experienced a credit bubble that facilitated a misallocation of resources to the housing sector. For example, one expert noted that residential housing construction during the 2000s was excessive and inefficient. To the extent that the act contributes to a more accurate pricing of credit, the economy could benefit from a more efficient allocation of resources across the broader economy. The Dodd-Frank Act’s potential benefit of reducing the probability or severity of a future financial crisis cannot be readily observed and this potential benefit is difficult to quantify. Any analyses must be based on assumptions about, or models of, the economy. Consequently, the results of such analyses are subject to substantial uncertainty. Nonetheless, as we noted previously in this report, a working group of the Basel Committee on Banking Supervision summarized several studies that analyze the costs of financial crises, and that used different macroeconomic models of the economy to estimate the impact of more stringent capital and liquidity standards on the annual likelihood of a financial crisis, and the benefits of avoiding associated output losses. The Basel Committee report suggests that increases in capital and liquidity ratios are associated with a reduction in the probability that a country will experience a financial crisis. Higher capital and liquidity requirements may generate social benefits by reducing the frequency and severity of banking crises and the consequent loss of economic output. The Basel Committee working group found that although there is considerable uncertainty about the exact magnitude of the effect, the evidence suggests that higher capital and liquidity requirements can reduce the probability of banking crises. For example, the models suggest, on average, that if the banking system’s capital ratio—as measured by the ratio of tangible common equity to risk-weighted assets—is 7 percent, then a 1 percentage point increase in the capital ratio is associated with a 1.6 percentage point reduction in the probability of a financial crisis—from 4.6 percent to 3.0 percent per year. The working group also found that if the capital ratio was 7 percent, then a 12.5 percent increase in the ratio of liquid assets to total assets in the banking system is associated with a 0.8 percentage point reduction in the probability of a crisis per year, on average. In addition, the incremental benefits of higher capital requirements are greater when bank capital ratios are increased from lower levels and they decline as standards become progressively more stringent. For example, the models suggest, on average, that the reduction in the likelihood of a crisis is three times larger when the capital ratio is increased from 7 percent to 8 percent than it is when the capital ratio is increased from 10 percent to 11 percent. The further away banks are from insolvency, the lower their marginal benefit is from additional protection. Estimates of the reduced probability of a financial crisis are subject to a number of limitations. For example, researchers note that the reduction in the probability of a crisis depends on the baseline assumptions about the average probability of a crisis before the policy changes—in this case, before the increase in capital requirements. In addition, overall economic conditions, or factors outside of the financial system, also may affect the probability of a financial crisis. The Basel Committee working group also summarized the studies’ estimates of the potential benefits from higher capital and liquidity requirements in terms of economic output gains that could result from a lower probability of a crisis. The studies used estimates of the costs of a crisis to estimate that a 1 percent decrease in the annual probability of a crisis could have a benefit of 0.2 percent to 1.6 percent per year of increased economic output, depending on the extent to which the crisis losses are temporary or permanent. If, for example, annual GDP were $15 trillion (around the size of U.S. GDP) these estimates suggest that the economic benefit in terms of increased GDP could range from approximately $29 billion to about $238 billion per year. These estimates also are subject to limitations, however. As we previously discussed in this report, estimates of financial crisis losses have varied widely depending on the assumptions made. In addition, these models did not take into account variations in responses to higher capital and liquidity requirements among institutions and regulatory environments. Given the difficulty of measuring the extent to which the Dodd-Frank Act may reduce the probability of a future crisis, a few academics have proposed a more conceptual approach for comparing the act’s potential benefits and costs. According to these experts, the benefits of the act can be framed by determining the percent by which the cost of a financial crisis needs to be reduced to be equal to the act’s costs. If the cost of a future crisis is expected to be in the trillions of dollars, then the act likely would need to reduce the probability of a future financial crisis by only a small percent for its expected benefit to equal the act’s expected cost. Although an academic told us this thought exercise helped put the benefits and costs of the Dodd-Frank Act into perspective, it provides no insight into whether the act reduces the probability of a future crisis by even a small percent. The Dodd-Frank Act requires federal agencies and the financial services industry to expend resources to implement or comply with its requirements, and some of its reforms are expected to impose costs on the economy. First, federal agencies are devoting resources to fulfill rule- making and other new regulatory responsibilities created by the act. A large portion of these agency resources are funded by fees paid by industry participants or other revenue sources outside of congressional appropriations, limiting the impact of these activities on the federal budget deficit. Second, the act contains a broad range of reforms that generally are imposing or will impose additional regulations and costs on a correspondingly broad range of financial institutions, including banks, broker-dealers, futures commission merchants, investment advisers, and nonbank financial companies. Given the act’s focus on enhancing financial stability, large, complex financial institutions will likely bear the greatest costs, but smaller financial institutions and other financial market participants also will incur costs. Third, by imposing costs on the financial services industry, the act also may impose costs on the broader economy and reduce output. For example, financial institutions may charge their customers more for credit or other financial services. While the act’s costs can be viewed as the price to be paid to achieve a more resilient financial system and other benefits, some industry representatives question whether the costs, individually or cumulatively, are excessive. Furthermore, observers have also expressed concerns about potential unintended consequences of the act, such as reducing the competiveness of U.S. financial institutions in the global financial marketplace. The amount of funding that 10 federal financial entities have reported as associated with their implementation of the Dodd-Frank Act varied significantly from 2010 through 2013, and the amounts have been increasing for some of these entities. Funding resources associated with the Dodd-Frank Act’s implementation from 2010 through 2012 ranged from a low of $4.3 million for FHFA to a high of $432.3 million for CFPB (see table 2). In addition, funding associated with the act’s implementation increased from 2011 through 2012 for all but one of the agencies, FHFA, and more than doubled for four entities: OFR, FSOC, CFPB, and OCC. Three of these four entities—OFR, FSOC, and CFPB— were created through the Dodd-Frank Act and thus are in the process of establishing management structures and mechanisms to carry out their missions. Likewise, according to CFPB and OFR, while some of their funding was used for recurring staffing costs, other funding was used for start-up costs, such as systems development, contractor support, and data purchases. According to FSOC and OFR, the increase in funding is directly proportional to the growth in their staffing and reflects an increase in the size and scope of their organizations. Some new funding resources reported by agencies may represent transfers between entities rather than new funding resources. For example, the large increase in Dodd- Frank-related funding for OCC between 2011 and 2012 reflects OCC’s integration of OTS responsibilities and staff, according to OCC officials. In addition, new funding resources for CFPB include some funding resources transferred from the Federal Reserve. In such cases, these new funding resources do not represent an incremental cost of the act’s implementation. To meet their Dodd-Frank-related responsibilities, federal entities reported that they have hired new staff, redirected staff from other areas, or used staff transferred from other entities. The number of full-time equivalents (FTE) reported by the 10 federal entities as associated with their implementation of the act also varied significantly from 2010 through 2013, and the amounts have been increasing for some entities (see table 3). The entities’ estimates of new FTEs related to implementing the Dodd- Frank provisions for 2010 through 2012 ranged from a low of 18 for FHFA to a high of 964 for the Federal Reserve. Some new FTEs reported by agencies represent transfers of staff between agencies rather than new hires. New FTEs for OCC in 2011 include staff transferred from OTS. In addition, new FTEs for CFPB include staff transferred from the agencies whose consumer protection responsibilities were transferred to CFPB. In such cases where new FTEs for an entity have resulted from a transfer of existing regulatory responsibilities between entities, these new FTEs do not represent an incremental cost of the act’s implementation. A large portion of the federal entities’ resources devoted to the act’s implementation are funded by fees paid by regulated institutions or other sources outside the congressional appropriations process, limiting the impact of these activities on the federal budget deficit. Seven of the entities (CFPB, FSOC, OFR, FDIC, FHFA, OCC, and the Federal Reserve) are funded in full through assessments, fees, or other revenue sources and, thus, have not received any congressional appropriations. Moreover, FSOC and OFR are funded by assessments on large bank holding companies and nonbank financial companies designated by FSOC for supervision by the Federal Reserve. SEC receives appropriations, but SEC collects transaction fees and assessments that are designed to recover the costs to the federal government of its annual appropriation. CFPB receives a mandatory transfer of funding from the Federal Reserve, subject to certain limits, but may request discretionary appropriations. Treasury and CFTC are funded through congressional appropriations. Although entities’ funding resources and staff have increased due to implementation of the act, these increases are not expected to have a significant impact on the federal deficit. In 2011, CBO estimated that the Dodd-Frank Act would reduce federal deficits by $3.2 billion over the period from 2010 to 2020. CBO projected that the act would increase revenues by $13.4 billion and increase direct spending by $10.2 billion over this period. While CBO’s analysis did not consider the potential impacts of the act’s reforms on economic growth, its estimates suggest that the size of the act’s direct impacts on federal spending is small relative to total federal net outlays of $3.6 trillion in fiscal year 2011. While fees and assessments paid by financial institutions to the federal entities help to limit the act’s direct impacts on the federal budget deficit, they represent a cost to these institutions and could have indirect impacts on the economy, as discussed later in this report. In collecting and analyzing this information, we found challenges and limitations that affected our efforts to aggregate the data. For example, agencies told us that their reported funding and FTE resources for 2013 reflect their best estimates of the level of resources required to implement existing and new responsibilities but stated that these estimates were uncertain. As shown in tables 3 and 4, a few agencies did not provide projections for 2013 resources related to the act’s implementation. In addition, not all of the federal entities are on a federal fiscal year, so the reported budgetary activities for some entities cover different time frames. Moreover, the entities may have used different approaches to estimate the funding and FTE resources, potentially making the figures harder to compare across entities. The Dodd-Frank Act’s provisions and regulations generally impose or are expected to impose costs on banks and other financial institutions. According to some academics and others, certain types of costs imposed by the act on financial institutions serve to make such institutions internalize costs that they impose on others through their risk-taking and thereby reduce the risk that they pose to the financial system. The extent to which the act imposes costs on financial institutions may vary among not only different types of financial firms (e.g., banks versus nonbank financial companies) but also among the same types of firms (e.g., large banks versus small banks). In discussions with regulators, industry representatives, and other experts, we identified two main categories of financial impacts on financial institutions: (1) increased regulatory compliance and other costs and (2) reduced revenue associated with new restrictions on certain activities. However, as commonly noted by financial firms in their annual reports, the Dodd-Frank Act’s full impact on their businesses, operations, and earnings remains uncertain, in part because of the rulemakings that still need to be completed. For example, in its 2012 annual report, one large bank holding company noted that it could not quantify the possible effects of the significant changes that were under way on its business and operations, given the status of the regulatory developments. Furthermore, even when the reforms have been fully implemented, it may not be possible to determine precisely the extent to which observed costs can be attributed to the act versus other factors, such as changes in the economy. No comprehensive data are readily available on the costs that the financial services industry is incurring to comply with the Dodd-Frank Act. Representatives from financial institutions and industry associations told us that firms generally do not track their incremental costs for complying with the act. Moreover, they said that the piecemeal way that the act is being implemented makes it difficult to measure their regulatory costs. Likewise, none of the industry associations we met with are tracking the incremental costs that their members are incurring to comply with the act. Regulators and others have collected some data on certain compliance costs. Specifically, federal agencies typically estimate the cost of complying with any recordkeeping and reporting requirements of their rules under the Paperwork Reduction Act, but these estimates do not capture other types of compliance costs, which can be more substantial. For example, an SEC rule on asset-backed securities requires issuers of such securities to conduct, or hire a third party to conduct, a review of the assets underlying the securities; this cost is not a paperwork-related cost and thus not included in the compliance costs captured under the Paperwork Reduction Act. In May 2012, the Treasury Secretary asked the Federal Reserve’s Federal Advisory Council, a group of bank executives, to prepare a study to provide regulators with more specific examples of the regulatory burdens imposed by the act’s reforms. A number of the Dodd-Frank Act provisions target large financial firms and are expected to increase their compliance or other costs more significantly than for other financial firms. In particular, several provisions specifically apply to SIFIs, which include bank holding companies with $50 billion or more in total consolidated assets (which we refer to as “bank SIFIs”) and nonbank financial companies designated by FSOC for supervision by the Federal Reserve. Examples of provisions targeting large financial institutions include the following: Enhanced prudential standards: Higher capital and liquidity requirements can increase funding costs for banks. Studies by the Basel Committee on Banking Supervision, IMF, and Organization for Economic Cooperation and Development estimated that increased capital and liquidity requirements would have modest impacts on funding costs for financial institutions. In contrast, a study by the International Institute of Finance, a global association of financial institutions, found much larger negative impacts. Differences in these studies’ estimates result from differences in certain assumptions. For example, the size of the estimated impact on funding costs depends on assumptions about how much of the increase in banks’ capital levels is due to regulatory reforms rather than other factors. Some researchers have noted that attributing all of the increase in banks’ capital levels to regulatory reforms may overstate the cost impacts of these reforms, because banks likely increased their capital levels, to some extent, in response to market forces after the crisis. Resolution plans: Regulators and industry officials stated that bank SIFIs have devoted significant staffing resources to developing the required resolution plans and that some plans submitted in July 2012 were thousands of pages in length. Regulators estimated that each bank SIFI required to complete a full resolution plan (20 banks) will spend, on average, 9,200 hours to complete the first plan and 2,561 hours to update the plan annually. Stress tests: In accordance with the act, the Federal Reserve, OCC, and FDIC have issued rules for stress testing requirements for certain bank holding companies, banks, thrift institutions, state member banks, savings and loan companies, and nonbank financial companies FSOC designates for supervision by the Federal Reserve. Bank holding companies with $50 billion or more in assets and nonbank financial companies designated by FSOC will be required to conduct company-run stress tests semi-annually, and the Federal Reserve will be required to conduct stress tests on these companies annually. Financial companies with more than $10 billion but less than $50 billion in assets will be required to conduct company-run stress tests annually as directed by their primary federal banking supervisor. According to industry representatives, stress testing requires newly covered firms to incur significant compliance costs associated with building information systems, contracting with outside vendors, recruiting experienced personnel, and developing stress testing models that are unique to their organization. Regulatory assessments: The Dodd-Frank Act also increases operating costs for SIFIs and certain large banks through new or higher regulatory assessments. First, under the act, large bank holding companies and nonbank financial companies designated by FSOC for supervision by the Federal Reserve must fund the Financial Research Fund, which funds the operating costs of FSOC and OFR, and certain expenses for the implementation of the orderly liquidation activities of FDIC, through a periodic assessment. The President’s fiscal year 2013 budget included estimates of about $158 million for the Financial Research Fund for fiscal year 2013. Second, pursuant to the act, FDIC issued a final rule changing the assessment base for the deposit insurance fund and the method for calculating the deposit insurance assessment rate. According to FDIC, the change in the assessment base shifted some of the overall assessment burden from community banks to the largest institutions, which rely less on domestic deposits for their funding than smaller institutions, but without affecting the overall amount of assessment revenue collected. According to FDIC data, following implementation of the new assessment base, from the first to the second quarter of 2011, total assessments for banks with $10 billion or more in assets increased by $413 million. In addition to increasing compliance costs for SIFIs and other large financial institutions, Title VII of the Dodd-Frank Act establishes a new regulatory framework for swaps, which is expected to impose substantial compliance and other costs on swap dealers, which generally include large banks, and other swap market participants. Business conduct standards: Swap dealers and major swap participants will face increased costs to comply with new business conduct standards under the act. These requirements address, among other things, interaction with counterparties, disclosure, reporting, recordkeeping, documentation, conflicts of interest, and avoidance of fraud and other abusive practices. Under CFTC’s final rules, swap dealers and major swap participants will need to adopt or amend written policies and procedures, obtain needed representations from counterparties, and determine whether existing counterparty relationship documents need to be otherwise changed or supplemented. Clearing, exchange trading, and data reporting: Changes to the market infrastructure for swaps—such as clearing and exchange- trading requirements—and real-time reporting requirements for designated major swap dealers or major swap participants will require firms to purchase or upgrade information systems. Industry representatives and regulators said that while some compliance costs of the derivatives reforms could be recurring, a large part of these costs will come from one-time upfront investments to update processes and technology. For example, according to industry groups and agency officials, the real-time reporting and swap execution facility technology upgrades for reporting are among the largest technology investment compliance cost areas for derivatives reforms, and costs to develop new reporting technology for firms may vary depending on the compatibility of the new reporting system with the prior system used. In its final rule on real-time reporting of swap data, CFTC estimated that the annual information collection burden on swap dealers and major swap participants would be approximately 260,000 hours. Margin rules: Swap dealers and end users will incur costs to post the additional collateral required under the new margin rules, including costs to borrow assets to pledge as collateral. For newly raised funds, the net cost would be the difference between the interest rate paid on the borrowed funds and the interest rate earned on the securities purchased to use as collateral. Estimating the incremental costs is difficult, in part because the incremental cost must take into account the extent to which swap dealers in the past, even if they did not require margin explicitly, may have charged end users more to price in a buffer to absorb losses. Although the Dodd-Frank Act reforms are directed primarily at large, complex U.S. financial institutions, many of the act’s provisions are expected to impose costs on other financial institutions as well. For example, we recently reported that the act’s reforms covering residential mortgages, securitizations, executive compensation, and other areas may impose additional requirements and, thus, costs on a broad range of financial institutions, but the magnitude of these costs will depend on, among other things, how the provisions are implemented. In addition to imposing compliance and other costs on financial institutions, the Dodd-Frank Act’s provisions may limit or restrict financial institutions’ business activities and reduce their revenue or revenue opportunities. Examples of such provisions include the following. Volcker rule: By generally prohibiting banks from engaging in proprietary trading and limiting their ability to sponsor or invest in hedge and private equity funds, the restrictions could eliminate past sources of trading and fee income for some banks. In addition, according to industry representatives, some banks currently holding private funds face the risk of incurring losses on the investments, if they are required to liquidate such investments at a substantial discount within an allotted period. Swaps reform: The provisions of the Dodd-Frank Act requiring central clearing and exchange trading of certain swaps could reduce the volume of dealers’ higher-profit margin swaps and thereby reduce their revenue. In addition, the margin requirements could reduce the ability of U.S. dealers to compete internationally, according to industry representatives. Single counterparty credit limit: Section 165(e) of the act directs the Federal Reserve to establish single-counterparty credit limits for SIFIs to limit the risks that the failure of any individual company could pose to a SIFI. According to industry representatives, the Federal Reserve’s proposed rule to implement credit limits would, among other things, require some SIFIs to reduce their derivatives and securities lending activities. Debit card interchange fees: Under section 1075 of the act (known as the Durbin amendment) the Federal Reserve issued a final rule that places a cap on debit card interchange fees charged by debit card issuers with at least $10 billion of assets. In their SEC filings, several large debit card issuers have estimated lost revenues from the Durbin amendment to be in the hundreds of millions of dollars annually. Similarly, we recently reported that large banks that issue debit cards initially have experienced a decline in their debit interchange fees as a result of the rule but that small banks generally have not. The reduction in debit interchange fees following the adoption of the rule likely has resulted or will result in savings for merchants. However, debit card issuers, payment card networks, and merchants are continuing to react to the rule; thus, the rule’s impact has not yet been fully realized. Financial markets can channel funds from savers and investors looking for productive investment opportunities to borrowers who have productive investment opportunities but not the funds to pursue them. By serving this financial intermediation function, financial markets can contribute to higher production and efficiency in the economy. Banks and other financial institutions can facilitate transactions between savers and borrowers and reduce the associated costs, as well as provide other financial services and products that contribute to economic growth. However, according to academics and industry representatives, by imposing higher costs on financial institutions, the Dodd-Frank Act may indirectly impose higher costs on businesses and households and reduce their investment and consumption with a consequent effect on economic output. Industry representatives, academics, and others generally expect the costs imposed by the act on the economy to be more significant than the act’s compliance costs for regulated institutions. At the same time, experts have noted that such costs can be viewed as part of the price to pay to realize the act’s potential financial stability and other benefits. For example, reforms that increase safety margins in the financial system— such as by requiring increased capital and collateral to absorb potential losses—represent a tradeoff between lower economic growth in the short term and a lower probability of a financial crisis in the long term. Furthermore, reforms may cause financial market participants to internalize costs that their failure could impose on others through, for example, triggering declines in asset prices and strains in funding markets; thus, such reforms could improve overall economic outcomes. Nevertheless, experts continue to debate whether the economic costs of the act’s reforms, individually and cumulatively, could be excessive relative to their potential benefits. One way through which the Dodd-Frank Act could impose costs on the broader economy is through its reforms that ultimately increase the cost or reduce the availability of credit for households and businesses. All else equal, when credit becomes more expensive or harder to obtain, households may reduce purchases and businesses may reduce investments that are funded by debt. These declines in consumption and investment can reduce GDP. According to academics, industry associations and firms, and others, reforms that could increase the cost or reduce the availability of credit include higher capital and liquidity requirements for financial institutions, the Volcker rule, counterparty credit limits, and mortgage-related provisions. Capital and liquidity requirements: Higher capital and liquidity requirements for banks can increase their funding and other costs. While banks can respond to these additional costs in a variety of ways, they generally are expected to pass on some of these costs to borrowers by charging higher interest rates on their loans, which could lead to a reduction in output. Some studies have assessed the potential short-term and long-term cost impacts of higher capital and liquidity requirements. Differences in estimates produced by different studies follow from differences in key modeling assumptions. With respect to short-term impacts, studies generally suggest that increasing capital and liquidity requirements for banks will likely be associated with short-term increases in interest rates for borrowers and short-term decreases in lending volumes, output, and economic growth rates during the period over which banks transition to these new requirements, but the magnitudes vary considerably across studies. For example, a Macroeconomic Assessment Group study summarized research by its members on the impact of the transition to the Basel III capital and liquidity requirements and found that interest rates for borrowers are likely to increase and lending volumes are likely to fall during the transition period, but that the ultimate reductions in output and growth are likely to be modest. Studies from the IMF and the Organization for Economic Cooperation and Development found broadly similar results. In contrast, a study by the Institute of International Finance estimated the impact of banks’ making the transition to meeting Basel III and additional country- specific requirements and found much larger short-term impacts on lending rates, lending volumes, output, and growth rates during the transition period. Studies also suggest that increasing capital and liquidity requirements for banks will likely be associated with long-term or permanent changes in lending rates and output. For example, a Basel Committee working group assessed the long-term impact of higher capital and liquidity requirements and found that they are likely to be associated with modest long-term increases in lending spreads and modest long-term reductions in output. An IMF study found similar results. Volcker rule: Some experts and industry representatives have expressed concern that the Volcker rule’s restriction on proprietary trading by banks could reduce market liquidity and increase the cost of raising funds in the securities markets and thus reduce output. As we previously reported, some market observers maintain that restrictions on proprietary trading by banks under the Volcker rule may reduce the amount of liquidity in the securities markets, depending on how the restrictions are implemented. For example, the rule could reduce the amount of market-making provided by banks for certain debt securities and ultimately result in higher borrowing rates for corporations, state and local governments, or others that use debt securities to help finance their activities. A study sponsored by an industry association estimated that the Volcker rule could increase annual borrowing costs for debt securities issuers by billions of dollars, and reduce liquidity in a wide range of markets, and consequently, to some extent, impede the ability of businesses to access capital through increases in cost of funds to borrowers. However, other experts have asserted that the study’s estimate is too high, in part because they believe it understates the potential for other firms to fill the gap left by banks and provide liquidity to the market. Single counterparty credit limit: According to industry representatives, the Federal Reserve’s proposed single counterparty credit limit rule could restrict the ability of SIFIs to engage in derivatives transactions with each other to hedge risk. In turn, such interference could reduce market liquidity and result in higher funding, hedging, and transaction costs for businesses. Mortgage-related reforms: The act’s provisions regulating the underwriting of mortgages also could restrict the availability of mortgage loans and raise mortgage costs for some homebuyers. For example, the act amends the Truth in Lending Act to prohibit lenders from making mortgage loans without regard to borrowers’ ability to repay them. As described earlier in this report, lenders may comply with the ability-to-repay standard by originating qualified mortgages that meet criteria that will be finalized by CFPB in rulemaking. In addition, securitized mortgages that meet certain criteria and which are referred to as “qualified residential mortgages” (QRM), are exempt from the act’s risk retention requirements. While there is general agreement that new Dodd-Frank rules should restrict certain types of risky loans and loan products that proliferated in the lead-up to the crisis, many market observers have expressed concern that these restrictions could go too far. For example, some mortgage industry representatives have raised concerns that including overly restrictive requirements for loan-to-value and debt service-to-income ratios in the qualified residential mortgage criteria could restrict the availability of mortgages to lower-income borrowers. Measuring the costs of financial regulation to the broader economy is challenging because of the multitude of intervening variables, the complexity of the global financial system, and data limitations. Many of the rules implementing the act’s reforms have not been finalized, and it is difficult to predict how regulated institutions will respond to the act’s reforms. For example, the extent to which regulated institutions pass on a portion of their increased costs to their customers may be impacted by competitive forces or other factors. Furthermore, even when the reforms have been fully implemented, it may not be possible to determine precisely the extent to which observed costs can be attributed to the act versus other factors, such as changes in the economy. Differences in assumptions about the appropriate baseline for comparison can lead to significant variation in estimates of the act’s impacts. As discussed below, other sources of uncertainty, such as the potential for regulatory arbitrage, add to the challenges of estimating the act’s potential costs. Some of the act’s reforms have the effect of transferring wealth across groups and may create economic costs if they result in resources being deployed less efficiently. For example, new assessments to fund the Financial Research Fund, which funds the operating costs of FSOC, OFR, and certain expenses for the implementation of the orderly liquidation activities of FDIC, represent an economic transfer from bank holding companies to the Financial Research Fund. In addition, as noted previously, changes in the deposit insurance fund assessment base shift some of the overall assessment burden from smaller banks to the largest institutions without affecting the overall amount of assessment revenue collected. Similarly, while the Durbin amendment has reduced revenues from interchange fees for large debit card issuers, these lost revenues will be offset to some extent by financial benefits to merchants who will pay lower interchange fees. Predicting the extent to which such transfers across groups could reduce economic growth is difficult, in part because how financial institutions will respond to these changes is unclear. For example, financial institutions could respond to increased assessment burdens or reduced revenue streams by cutting other expenses or increasing fees and other costs for their customers. Some market observers have noted that some financial institutions have increased fees on certain services, such as bank checking accounts, to compensate for lost revenues and increased fee assessments from the act. However, financial institutions’ business strategies are impacted by a wide range of factors, and determining the extent to which such increased fees can be attributed to the Dodd-Frank Act is difficult. Academics, industry representatives, and others we spoke with also have expressed concern about the potential for the Dodd-Frank Act’s reforms to have unintended consequences that could harm U.S. economic growth or the global competitiveness of U.S. financial markets. Experts have a wide range of views on the act’s potential to enhance financial stability, with some maintaining that certain reforms could make the financial system more vulnerable to a crisis. For example, some experts suggest that higher capital, liquidity, and collateral requirements will cause regulated institutions to increase significantly their holdings of relatively safe and liquid securities, such as U.S. Treasuries. Such an outcome could inflate the value of such securities and result in large losses if there were a sharp correction in the securities’ valuation. In addition, experts raised concerns about the potential for certain reforms to cause financial activities to shift to less regulated or unregulated markets and pose risks to U.S. financial stability. Of particular concern is the potential for increased regulation of U.S. financial markets to cause financial activities in the United States to move to foreign jurisdictions with less stringent regulations. For example, some academics and industry groups contend that if the United States imposes new margin requirements on swaps before other countries, the swap business could migrate to countries with lower margin requirements. Similarly, industry representatives have raised concerns about the potential for the Volcker rule and single counterparty credit limit to disadvantage U.S. financial institutions relative to foreign competitors that will be permitted to engage in proprietary trading activities outside the United States. While acknowledging these concerns and the need for harmonizing international regulatory standards, regulators noted that it can be advantageous for the United States to be the leader in implementing new regulatory safeguards. For example, when financial institutions are more resilient to unexpected shocks, they can continue to provide loans and other financial services that are important to economic growth, even during periods of market turmoil. These potential unintended consequences add to the challenge of assessing the costs and full impacts of the Dodd-Frank Act. Currently, the act is imposing costs on the financial services industry that could contribute to slower economic growth. At the same time, the act may help reduce the probability or severity of a future financial crisis, which would benefit the economy by preventing or mitigating crisis-related costs. However, the Dodd-Frank Act remains untested in a number of areas, has yet to be fully implemented, and leaves unresolved certain potential sources of system risk, such as money market funds and the tri-party repo market. As noted earlier, because the costs associated with a financial crisis can total trillions of dollars, the Dodd-Frank Act might need to reduce the probability of a crisis by only a small fraction for its benefits to equal its costs. Whether the act can achieve that outcome is unknown. As the impact of the act’s multitude of provisions, individually or cumulatively, materializes, their benefits and costs will become more fully known and understood—enabling policy makers and regulators to revise the requirements, as needed, to achieve the appropriate balance between the act’s benefits and costs to the U.S. economy. We provided a draft of this report to CFPB, CFTC, FDIC, the Federal Reserve, FSOC, OCC, OFR, Treasury, and SEC for their review and comment. We also provided excerpts of the draft report for technical comment to FHFA. All of the agencies provided technical comments, which we have incorporated, as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to CFPB, CFTC, FDIC, FHFA, the Federal Reserve, FSOC, OCC, OFR, Treasury, and SEC, interested congressional committees, members, and others. In addition, this report will be available at no charge on our web site at http://www.gao.gov. Should you or your staff have questions concerning 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 IV. The objectives of our report were to examine what is known about (1) the losses and related economic impacts associated with the 2007-2009 financial crisis; (2) the benefits of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), particularly its key financial stability provisions, for the U.S. financial system and broader economy; and (3) the costs associated with the act, particularly its key financial stability provisions. To address our first objective, we reviewed and analyzed studies by regulators and academics. We conducted searches of social science, economic, and federal research databases, including EconLit, Google Scholar, and JSTOR, to identify relevant studies that examine the losses associated with the 2007-2009 financial crisis. To help us identify relevant studies, we also relied on federal agencies and academic and other experts. Although we found these studies to be sufficiently reliable for the purposes of our report, the results should not necessarily be considered as definitive, given the potential methodological or data limitations contained in the studies individually or collectively. In addition, we reviewed our prior work that addresses economic impacts associated with the crisis, including the impacts on the fiscal challenges faced by federal, state, and local governments. We interviewed federal financial regulators, academics, industry associations, market participants and others to obtain their perspectives on how the recent financial crisis impacted the economy and what methods have been used to quantify the economic impacts associated with the crisis. Based on our literature review and interviews with experts, we identified approaches commonly used by experts to quantify or describe the economic losses associated with the crisis, and the limitations of these approaches. For example, we summarized approaches used by some researchers to quantify losses associated with the financial crisis in terms of lost gross domestic product, which measures the total goods and services produced in the economy. To describe trends in economic measures associated with the financial crisis, we collected and analyzed data from the Bureau of Economic Analysis, the Bureau of Labor Statistics, CoreLogic, the Federal Reserve Flow of Funds database, and the National Bureau of Economic Research. Lastly, we obtained and analyzed perspectives on the role of the federal government’s policy interventions in mitigating the costs of the financial crisis. We obtained and analyzed data from government financial statements and other reports on the income and losses for the most significant government programs to assist the financial sector, including the Troubled Asset Relief Program, the Board of Governors of the Federal Reserve System’s (Federal Reserve) emergency liquidity programs, the Temporary Liquidity Guarantee Program, and assistance provided to rescue individual institutions, such as American International Group, Inc. and the government-sponsored enterprises. Our review did not consider the potential short-term and long-term impacts of other federal policy responses to the recession that coincided with the financial crisis, including the American Recovery and Reinvestment Act of 2009. To address our second objective, we obtained and analyzed a broad range of perspectives on the potential economic benefits of the Dodd- Frank Act and factors that could impact the realization of these benefits. Using a literature search strategy similar to the one described under our first objective, we identified and analyzed academic and other studies that evaluate the potential benefits of one or more of the act’s reforms. In addition, we reviewed relevant reports and public statements by federal financial regulators, industry associations, and others. We obtained additional perspectives from regulators, academics, and representatives of industry and public interest groups through interviews and an expert roundtable we held with the assistance of the National Academy of Sciences (NAS). Based on our literature review, interviews, and expert roundtable, we identified provisions of the act that could have the most significant impacts on financial stability, and factors that could impact the effectiveness of these provisions. In addition, we obtained and summarized expert perspectives on potential benefits of the act beyond enhanced financial stability, such as increased consumer and investor protections. Finally, we reviewed and summarized approaches used by researchers to quantify potential benefits of the act’s reforms. Although we found these studies to be sufficiently reliable for the purposes of our report, the results should not necessarily be considered as definitive, given the potential methodological or data limitations contained in the studies individually or collectively. To address our third objective, we obtained and analyzed information on the costs of implementing the Dodd-Frank Act, including for the federal government, the financial sector, and the broader economy. We obtained and summarized data on the incremental budgetary costs associated with the act’s implementation for 10 federal entities (Board of Governors of the Federal Reserve System, Commodity Futures Trading Commission, Federal Deposit Insurance Corporation, Federal Housing Finance Agency, Office of the Comptroller of the Currency, Securities and Exchange Commission, Department of the Treasury, Consumer Financial Protection Bureau, Financial Stability Oversight Council, and the Office of Financial Research). We requested data on the entities’ estimates of their funding and full-time equivalents agency-wide and for activities related to the Dodd-Frank Act in 2010, 2011, 2012, and 2013. We also requested that the entities identify their sources of funding (appropriations, assessments of supervised institutions, revenue from investments or providing services, and transfers of funds from other agencies), and describe the extent to which new resources related to the Dodd-Frank Act would be funded on a one-time or recurring basis. We corroborated the information with other data, where available. In addition, we reviewed the Congressional Budget Office’s estimate of the act’s effect on the federal government’s direct spending and revenue and, in turn, deficit. To describe the potential costs for the financial sector and the broader economy, we reviewed published works, public statements, and other available analyses by financial regulators, industry representatives, academics, and other experts. We also obtained perspectives from representatives of these groups through interviews and the expert roundtable we held in coordination with NAS. We also had two financial markets experts review a draft of our report and incorporated their comments, as appropriate. To help inform our work on the second and third objectives, we contracted with NAS to convene a 1-day roundtable of 14 experts to discuss the potential benefits and potential costs of the Dodd-Frank Act. The group of experts was selected with the goal of obtaining a balance of perspectives and included former financial regulatory officials, representatives of financial institutions impacted by the act’s reforms, academic experts on financial regulation, a representative of a public interest group, and an industry analyst. The discussion was divided into three moderated sub-sessions. The sub-sessions addressed (1) the potential benefits of the act’s key financial stability reforms; (2) the potential costs of these key financial stability reforms; and (3) methodological approaches and challenges in measuring the impacts of the act’s reforms. For a list of the 14 experts, see appendix III. For parts of our methodology that involved the analysis of computer- processed data, we assessed the reliability of these data and determined that they were sufficiently reliable for our purposes. Data sets for which we conducted data reliability assessments include gross domestic product data from the Bureau of Economic Analysis; employment data from the Bureau of Labor Statistics; home price data from CoreLogic; Federal Reserve Flow of Funds data on retirement fund assets; loan default and foreclosure data from the Mortgage Bankers Association; and recession data from the National Bureau of Economic Research. We reviewed information on the statistical collection procedures and methods for these data sets to assess their reliability. In addition, we assessed the reliability of estimates federal entities provided for the funding resources and full-time equivalents associated with Dodd-Frank implementation by comparing these estimates to agency budget documents and interviewing agency staff about how the data were collected. Finally, for studies that present quantitative estimates of the economic impacts associated with financial crises or financial regulatory reforms, we assessed the reasonableness of the methodological approaches used to generate these estimates. Although we found certain studies to be sufficiently reliable for the purposes of our report, the results should not necessarily be considered definitive, given the potential methodological or data limitations contained in the studies, individually or collectively. 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. Many U.S. financial firms conduct business around the world and thus generally are subject to rules on banking, securities, and other financial market activities in multiple jurisdictions. In response to the financial crisis that began in 2007, the United States and other countries have taken steps to introduce financial reforms into their domestic legal and regulatory systems. In parallel with these domestic reform efforts, international organizations have issued new standards and principles to guide their members’ efforts. The goal of these international efforts is to harmonize and coordinate views and policies across different jurisdictions to minimize opportunities for regulatory arbitrage—the ability of market participants to profit from differences in regulatory regimes between one jurisdiction and another. Examples of some of these efforts include the following: The G20, a group that represents 20 of the largest global economies, created the Financial Stability Board (FSB) to coordinate and monitor international financial regulatory reform efforts, among other activities. The Basel Committee on Banking Supervision (BCBS)—hosted at the Bank for International Settlements (BIS)—has developed a new set of capital and, for the first time, liquidity requirements for banks. The Committee on Payment and Settlement Systems (CPSS), which is comprised of central banks, focuses on the efficiency and stability of payment, clearing, and settlement arrangements, including financial market infrastructures. Recently, CPSS has worked jointly with the International Organization of Securities Commissions (IOSCO) to produce a new set of prudential standards for financial market infrastructures. IOSCO, a multilateral organization of securities market regulators, has issued policy documents to guide national securities commissions’ regulatory reform efforts. Various other forums and groups, including the International Association of Insurance Supervisors (IAIS), are housed at BIS and cooperate on financial regulatory reform initiatives. For example, the Joint Forum—which includes representatives of IAIS, BCBS, and IOSCO—works to coordinate financial services reforms. Separately, multilateral organizations, such as the International Monetary Fund and Organization for Economic Cooperation and Development, have published research and analysis of international financial reforms. Table 5 summarizes selected international financial regulatory reform efforts. In addition to the contact named above, Richard Tsuhara (Assistant Director), William R. Chatlos, John Fisher, Catherine Gelb, G. Michael Mikota, Marc Molino, Courtney LaFountain, Robert Pollard, Jennifer Schwartz, Andrew J. Stephens, and Walter Vance made significant contributions to this report. Acharya, Viral V., Thomas F. Cooley, Matthew Richardson, and Ingo Walter. Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance. Hoboken, New Jersey, John Wiley & Sons, 2011. Admati, Anat R., Peter M. DeMarzo, Martin F. Hellwig, and Paul Pfleiderer. “Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive.” Stanford GSB Research Paper No. 2065. Stanford University: March 23, 2011. Basel Committee on Banking Supervision, The Transmission Channels Between the Financial and Real Sectors: A Critical Survey of the Literature, Bank for International Settlements (BIS) Working Paper No. 18. Basel, Switzerland, February 2011. Basel Committee on Banking Supervision, An Assessment of the Long- Term Economic Impact of Stronger Capital and Liquidity Requirements, BIS. Basel, Switzerland, August 2010. Boyd, John H., Sungkyu Kwak, and Bruce Smith, “The Real Output Losses Associated with Modern Banking Crises.” Journal of Money, Credit and Banking, vol. 37, no. 6. (December 2005): 977-999. Cecchetti, Stephen G., Marion Kohler, and Christian Upper, Financial Crises and Economic Activity. National Bureau of Economic Research (NBER), Working Paper 15379. Cambridge, MA, September 2009. Congressional Budget Office (CBO), Understanding and Responding to Persistently High Unemployment (February 2012). CBO, The Budget and Economic Outlook: Fiscal Years 2012 to 2022 (January 2012). Duffie, Darrell and Haoxing Zhu. “Does a Central Clearing Counterparty Reduce Counterparty Risk?” Review of Asset Pricing Studies, 1 (1) (July 18, 2011): 74-95. Elmendorf, Douglas W. Review of CBO’s Cost Estimate for the Dodd- Frank Wall Street Reform and Consumer Protection Act, Statement Before the Subcommittee on Oversight and Investigations, Committee on Financial Services, U.S. House of Representatives. March 30, 2011. Federal Financial Analytics, Inc., “Strategic Regulatory Landscape: Regulatory Intent versus Policy and Market Risk in Financial-Services Industry – Capital, Liquidity, Risk Management and Related Prudential Requirements,” October 2012. Financial Stability Oversight Council (FSOC), 2011 Annual Report. Washington, D.C. July 26, 2011. FSOC, 2012 Annual Report. July 24, 2012. Gorton, Gary and Andrew Metrick. “Regulating the Shadow Banking System,” Brookings Papers on Economic Activity. Fall 2010. Hanson, Samuel G., Anil K. Kashyap, and Jeremy C. Stein. “A Macroprudential Approach to Financial Regulation.” Journal of Economic Perspectives, vol. 25, no. 1 (Winter 2011): 3–28. Institute of International Finance, The Cumulative Impact on the Global Economy of Changes in the Financial Regulatory Framework, September 2011. Laevan, Luc and Fabian Valencia, Systemic Banking Crises Database: An Update, International Monetary Fund Working Paper 12/163. Washington, D.C. June 2012. Levine, Ross. The Governance of Financial Regulation: Reform Lessons from the Recent Crisis, BIS Working Paper No. 329, BIS Monetary and Economic Department. Basel, Switzerland. November 2010. Macroeconomic Assessment Group, Final Report: Assessing the Macroeconomic Impact of the Transition to Stronger Capital and Liquidity Requirements, Bank for International Settlements, Basel, Switzerland: December 2010. Office of Financial Research, 2012 Annual Report. July 20, 2012. Reinhart, Carmen M. and Kenneth S. Rogoff, The Aftermath of Financial Crises, NBER Working Paper 14656. January 2009. Santos, André Oliveira and Douglas Elliott, Estimating the Costs of Financial Regulation, IMF Staff Discussion Note. September 11, 2012. Schwarcz, Steven. “Systemic Risk.” Georgetown Law Journal (2008): 97:193. Skeel, David. The New Financial Deal: Understanding the Dodd-Frank Act and Its (Unintended) Consequences. John Wiley & Sons, Hoboken, New Jersey. 2011. The Squam Lake Group. The Squam Lake Report: Fixing the Financial System. Princeton University Press, Princeton, New Jersey. 2010. Community Banks and Credit Unions: Impact of the Dodd-Frank Act Depends Largely on Future Rule Makings. GAO-12-881. Washington, D.C.: September 13, 2012. Financial Stability: New Council and Research Office Should Strengthen the Accountability and Transparency of Their Decisions. GAO-12-886. Washington, D.C.: September 11, 2012. Bankruptcy: Agencies Continue Rulemakings for Clarifying Specific Provisions of Orderly Liquidation Authority. GAO-12-735. Washington, D.C.: July 12, 2012. Unemployed Older Workers: Many Experience Challenges Regaining Employment and Face Reduced Retirement Security. GAO-12-445. Washington, D.C.: April 25, 2012. State and Local Government Pension Plans: Economic Downturn Spurs Efforts to Address Costs and Sustainability. GAO-12-322. Washington, D.C.: March 2, 2012. Dodd-Frank Act Regulations: Implementation Could Benefit from Additional Analyses and Coordination. GAO-12-151. Washington, D.C.: November 10, 2011. Bankruptcy: Complex Financial Institutions and International Coordination Pose Challenges. GAO-11-707. Washington, D.C.: July 19, 2011. Mortgage Reform: Potential Impacts in the Dodd-Frank Act on Homebuyers and the Mortgage Market. GAO-11-656. Washington, D.C.: July 19, 2011. Dodd-Frank Act: Eleven Agencies’ Estimates of Resources for Implementing Regulatory Reform. GAO-11-808T. Washington, D.C.: July 14, 2011. Proprietary Trading: Regulators Will Need More Comprehensive Information to Fully Monitor Compliance with New Restrictions When Implemented. GAO-11-529. Washington, D.C.: July 13, 2011. State and Local Governments: Knowledge of Past Recessions Can Inform Future Federal Fiscal Assistance. GAO-11-401. Washington, D.C.: March 31, 2011. The Federal Government’s Long-Term Fiscal Outlook: January 2011 Update. GAO-11-451SP. Washington, D.C.: March 18, 2011. Financial Assistance: Ongoing Challenges and Guiding Principles Related to Government Assistance for Private Sector Companies. GAO-10-719. Washington, D.C.: August 3, 2010. Credit Cards: Rising Interchange Fees Have Increased Costs for Merchants, but Options for Reducing Fees Pose Challenges, GAO-10-45 Washington, D.C.: November 19, 2009. Financial Markets Regulation: Financial Crisis Highlights Need to Improve Oversight of Leverage at Financial Institutions and across System. GAO-09-739. Washington, D.C.: July 22, 2009. Systemic Risk: Regulatory Oversight and Recent Initiatives to Address Risk Posed by Credit Default Swaps. GAO-09-397T. Washington, D.C.: March 5, 2009. Financial Regulation: A Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory System. GAO-09-216. Washington, D.C.: January 8, 2009. | The 2007-2009 financial crisis threatened the stability of the U.S. financial system and the health of the U.S. economy. To address regulatory gaps and other problems revealed by the crisis, Congress enacted the Dodd- Frank Act. Federal regulators will need to issue hundreds of rules to implement the act. Industry representatives, academics, and others generally have supported the act's goal of enhancing U.S. financial stability, but implementation of certain of the act's provisions has led to much debate. These experts have expressed a wide range of views on the potential positive and negative effects that the act could have on the U.S. financial system and broader economy. GAO was asked to examine the (1) losses associated with the recent financial crisis; (2) benefits of the act for the U.S. financial system and the broader economy; and (3) costs of the act's reforms. GAO reviewed empirical and other studies on the impacts of financial crises and the Dodd-Frank reforms, as well as congressional testimonies, comment letters, and other public statements by federal regulators, industry representatives, and others. GAO obtained and analyzed data on agency resources devoted to the act's implementation. GAO also obtained perspectives from regulators, academics, and representatives of industry and public interest groups through interviews and an expert roundtable held with the assistance of the National Academy of Sciences. GAO provided a draft of this report to the financial regulators for review and comment and received technical comments, which were incorporated as appropriate. The 2007-2009 financial crisis has been associated with large economic losses and increased fiscal challenges. Studies estimating the losses of financial crises based on lost output (value of goods and services not produced) suggest losses associated with the recent crisis could range from a few trillion dollars to over $10 trillion. Also associated with the crisis were large declines in employment, household wealth, and other economic indicators. Some studies suggest the crisis could have long-lasting effects: for example, high unemployment, if persistent, could lead to skill erosion and lower future earnings for those affected. Finally, since the crisis began, federal, state, and local governments have faced greater fiscal challenges, in part because of reduced tax revenues from lower economic activity and increased spending to mitigate the impact of the recession. While the Dodd-Frank Wall Street Reform and Consumer Protection Act's (Dodd- Frank Act) reforms could enhance the stability of the U.S. financial system and provide other benefits, the extent to which such benefits materialize will depend on many factors whose effects are difficult to predict. According to some academics, industry representatives, and others, a number of the act's provisions could help reduce the probability or severity of a future crisis and thereby avoid or reduce the associated losses. These include subjecting large, complex financial institutions to enhanced prudential supervision, authorizing regulators to liquidate a financial firm whose failure could pose systemic risk, and regulating certain complex financial instruments. In contrast, some experts maintain these measures will not help reduce the probability or severity of a future crisis, while others note that their effectiveness will depend on how they are implemented by regulators, including through their rulemakings, and other factors, such as how financial firms respond to the new requirements. Quantifying the act's potential benefits is difficult, but several studies have framed potential benefits of certain reforms by estimating output losses that could be avoided if the reforms lowered the probability of a future crisis. Federal agencies and the financial industry are expending resources to implement and comply with the Dodd-Frank Act. First, federal agencies are devoting resources to fulfill rulemaking and other new regulatory responsibilities created by the act. Many of these agencies do not receive any congressional appropriations, limiting federal budget impacts. Second, the act imposes compliance and other costs on financial institutions and restricts their business activities in ways that may affect the provision of financial products and services. While regulators and others have collected some data on these costs, no comprehensive data exist. Some experts stated that many of the act's reforms serve to impose costs on financial firms to reduce the risks they pose to the financial system. Third, in response to reforms, financial institutions may pass increased costs on to their customers. For example, banks could charge more for their loans or other services, which could reduce economic growth. Although certain costs, such as paperwork costs, can be quantified, other costs, such as the act's impact on the economy, cannot be easily quantified. Studies have estimated the economic impact of certain of the act's reforms, but their results vary widely and depend on key assumptions. Finally, some experts expressed concern about the act's potential unintended consequences and their related costs, adding to the challenges of assessing the benefits and costs of the act. |
Since 1986, VBA has been trying to modernize its old, inefficient information systems. It reportedly spent an estimated $294 million on these activities between October 1, 1986, and February 29, 1996. The modernization program can have a major impact on the efficiency and accuracy with which about $20 billion in benefits and other services is paid annually to our nation’s veterans and their dependents. Software development is a critical component of this modernization effort. Also, a mature software development capability will provide added assurance that software developers will be able to effectively make changes to the software needed to address the Year 2000 computing problem. To evaluate VBA’s software development processes, in 1996, we applied the Software Engineering Institute’s (SEI) software capability evaluation methodology to those projects identified by VBA as using the best development processes. This evaluation compares agencies’ and contractors’ software development processes against SEI’s five-level software capability maturity model, with 5 being the highest level of maturity and 1 being the lowest. In June 1996, we reported that VBA was operating at a level 1 capability. At this level, VBA cannot reliably develop and maintain high-quality software on any major project within existing cost and schedule constraints, which places VBA software development projects at significant risk. Accordingly, VBA must rely on the various capabilities of individuals rather than on an institutional process that will yield repeatable, or level 2, results. VBA did not satisfy any of the criteria for a repeatable or level 2 capability, the minimum level necessary to significantly improve productivity and return on investment. For example, VBA is extremely weak in the requirements management, software project planning, and software subcontract management areas, with no identifiable strengths or improvement activities. Because of VBA’s software development weaknesses, we recommended that the Secretary of Veterans Affairs obtain expert advice to improve VBA’s ability to develop high-quality develop and expeditiously implement an action plan that describes a strategy for reaching the repeatable (level 2) level of process maturity; ensure that any future contracts for software development require the contractor to have a software development capability of at least level 2; and delay any major investment in new software development—beyond what is needed to sustain critical day-to-day operations—until the repeatable level of process maturity is attained. In commenting on a draft of the June 1996 report, VBA agreed with three of our recommendations but disagreed with delaying major investments in software development. VBA stated that while it agreed that a repeatable level of process maturity is a goal that must be attained, it disagreed that “all software development beyond that which is day-to-day critical must be curtailed.” VBA stated that the payment system replacement projects, the migration of legacy systems, and other activities to address the change of century must continue. In our response to VBA’s comments, we agreed that the change of century and changes to legislation must be continued, and we characterized these changes as sustaining day-to-day operations. However, for those projects that do not meet this criterion, we continue to believe that VBA should delay software development investments until a maturity of level 2 is reached. To assess actions taken by VBA to improve its software capability, we reviewed VBA documents, such as its “Software Process Improvement Initiative Strategic Plan,” dated March 1997; the Best Practices Round Up Method; and the Interagency Agreement with the Air Force, dated September 1996, to obtain expert software process improvement assistance. We also reviewed SEI’s IDEALSM: A User’s Guide for Software Process Improvement, dated February 1996, and technical report on Best Training Practices Within the Software Engineering Industry, dated November 1996. In addition, we reviewed VBA contracts, correspondence to contractors, and supporting documents to determine what VBA has done to ensure that VBA’s software development contractors are at the repeatable level. We interviewed VBA officials and contractor personnel involved with the software process improvement effort to determine what actions VBA has taken to improve its software capability. We also interviewed selected VBA project managers involved in new systems development on their knowledge of the software process improvement initiative. We performed our work from October 1996 through August 1997 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Secretary-Designate of Veterans Affairs. The Secretary-Designate provided us with written comments, which are discussed in the “Agency Comments and Our Evaluation” section and reprinted in appendix I. VBA has initiated several actions to improve its software development capability. For example, in response to our recommendation that it obtain expert assistance, VBA has hired a contractor—SEI—to (1) assist it in developing an integrated set of software practices that will position VBA for successful, lasting improvements, (2) help formulate a software improvement program, and (3) provide expertise in executing software improvement activities. SEI is also expected to provide expertise in strategic and tactical planning, training, policy preparation, and action planning. In addition, in response to our recommendation that it develop and implement an action plan describing a strategy for reaching the repeatable level, VBA launched a software process improvement initiative in June 1996 to lay the foundation and build the context for sustainable, measurable improvements to its software development capability. It has developed a strategic plan that describes the purpose and goals of this improvement initiative. One of the plan’s goals is to establish organization policies and guidelines for the management, planning, and tracking of software projects that will enable VBA to repeat earlier successes on projects with similar applications. VBA has also recently initiated two software process improvement projects. The first project, called “Best Practices Round Up,” will identify software development practices that VBA software development teams are doing correctly. VBA believes that there are “pockets of excellence” within its organization not identified in our June 1996 report that it can build upon. The Best Practices Round Up project team started its review in April 1997 and briefed VBA’s chief information officer on its results in August 1997. The second project, called “Standards, Policies, and Procedures,” will assess whether VBA’s software development teams are following current software development policies, procedures, and standards. This project was initiated in June 1997 and is expected to be completed by the end of September 1997. The project team is expected to make recommendations to ensure compliance with standards. Although VBA has launched a software process initiative and an accompanying strategic plan, VBA has not yet clearly presented how it intends to move from an ad hoc and chaotic level of software development capability to a repeatable level. SEI’s IDEALSM: A User’s Guide for Software Process Improvement requires that a plan be developed that includes a schedule for initial activities, basic resource requirements, and benefits to the organization. VBA’s current plan contains no milestones—beginning, interim, or completion dates—by which to measure the agency’s progress and to identify problems. The plan also contains no analysis or information on costs, benefits, or risks. VBA officials stated that they recognize that the agency’s strategic plan for software process improvement lacks this specificity. At the conclusion of our review, these officials said that VBA intends to address this area in an upcoming action plan for the software process improvement initiative. VBA has also not yet established a baseline from which to measure its software process improvements. According to the SEI IDEALSM: A User’s Guide for Software Process Improvement, an organization needs to understand its current software process baseline so that it can develop a plan to achieve the business changes necessary to reach its software process improvement goals. At the conclusion of our review, VBA officials told us that they plan to use as their baseline the results of our June 1996 report, along with the results from their Best Practices Round Up and Standards, Policies, and Procedures projects. They stated that the baseline should be established by September 1997. Training of key staff is critical to achieving level 2 repeatability. According to SEI’s technical report entitled, Best Practices Within the Software Engineering Industry, best training practices include defining a process for software engineering education. Although VBA has provided process improvement training to many of the managers in its software engineering process group and management steering group, key software personnel—software developers, project managers, and line managers—have not been trained in the process improvement methodology, the principles behind it, and the key process areas. VBA’s software process improvement project manager explained that these key people had not yet been trained because VBA did not want to train them too long before implementing the process improvement projects. The project manager said that VBA plans to train these staff during fiscal years 1998 and 1999. However, VBA does not have a documented training plan to help ensure that these personnel receive training. Unless these individuals are trained in the process improvement methodology, its principles, and the key process areas, it will be difficult for them to implement the new policies and procedures required to reach the repeatable level. At the conclusion of our review, VBA officials stated that a training plan is now under development and will be made part of the software process improvement initiative action plan. In responding to our recommendation that it ensure that contractors have a repeatable software development capability, VBA intends to use a new provision in future software development contracts. This provision, however, does not require potential contractors to submit supporting documentation to VBA certifying their level of maturity. Validation of potential contractors’ software development capability maturity level should be a key factor in VBA’s software contracting decisions. The Internal Revenue Service, for example, recently started requiring that all current, in-process, and future contract solicitations for software development services require that contractors submit documentation to verify how their software development practices and processes satisfy the repeatable key process areas specified by SEI’s capability maturity model. The Internal Revenue Service plans to use this information when selecting software development services. Also, the Department of the Air Force’s acquisition policy states that software capability evaluations should be used for selecting software contractors. Although VBA has asserted that two of its current contractors are at the repeatable level, VBA could not provide documentation to support this. VBA subsequently requested the documentation from the contractors, but the information the contractors provided did not clearly show that they were at the repeatable level. In one case, the contractor presented information on how it assisted federal agencies in achieving the repeatable and/or higher levels of software development capability but did not provide documentation that the contractor was certified. In the second case, a component of the contractor’s organization asserted that it was at the repeatable level but did not provide documentation supporting this assertion. Recognizing the importance of a mature software development capability, VBA has initiated actions to address the weaknesses identified in our June 1996 report. These actions will help it move toward a repeatable software capability maturity level, but additional efforts are needed. Specifically, VBA has not (1) developed a detailed strategy for how VBA plans to achieve a repeatable level of software development capability, (2) established a baseline to measure performance improvements, (3) trained its software development teams in the process improvement methodology, and (4) established a process for ensuring that its software development contractors are at the repeatable level. Recognizing that these deficiencies need to be addressed, VBA has efforts underway to do so. If these deficiencies are not sufficiently addressed, VBA’s software development capability will remain ad hoc and chaotic, subjecting the agency to continuing risk of cost overruns, poor quality software, and schedule delays. We recommend that the Secretary of Veterans Affairs direct the Under Secretary for Benefits, in conjunction with VBA’s chief information officer, to define the milestones, costs, tasks, and risks of the software process improvement initiative in order to provide a clear strategy for how VBA plans to improve its software development capability to a repeatable level; develop and use a baseline showing VBA’s current software development capability from which to measure VBA’s software improvement effort; ensure that a training plan is developed and implemented that will provide key software development staff training in the software process improvement methodology, its principles, and key process areas; and establish a source selection process to ensure that VBA’s software development contractors have the mature processes necessary for timely, high-quality software development, including evaluating and validating documentation provided by potential contractors establishing that they are at the repeatable level or higher. In comments on a draft of this report, VA concurred with our recommendations. VA also agreed that a repeatable level of process maturity is a goal that VBA must attain and described a number of activities underway to improve its software development capability. For example, VBA has developed a draft action plan to define a strategy to reach the repeatable level and specify the activities/tasks, milestones, costs, and timeliness associated with the process improvement effort. VBA also was reviewing and revising the draft plan to fully address the issues raised in our report. VA added that a significant amount of work still remains before this plan is finalized. We are encouraged by VBA’s response and will continue to monitor the agency’s progress in implementing its software improvement effort. We are sending copies of this report to the Ranking Minority Member of the Subcommittee on Oversight and Investigations and the Chairman and Ranking Minority Member of the Subcommittee on Benefits, House Committee on Veterans’ Affairs. We will also provide copies to the Chairmen and Ranking Minority Members of the House and Senate Committees on Veterans’ Affairs and the House and Senate Committees on Appropriations; the Secretary-Designate of Veterans Affairs; and the Director of the Office of Management and Budget. Copies will also be made available to other parties upon request. Please contact me at (202) 512-6253 or by e-mail at [email protected] if you have any questions concerning this report. Major contributors to this report are listed in appendix II. The following is GAO’s comment on the Department of Veterans Affairs letter dated September 4, 1997. 1. Enclosure (2) has not been included. Helen Lew, Assistant Director Leonard J. Latham, Technical Assistant Director K. Alan Merrill, Technical Assistant Director David Chao, Senior Technical Advisor Tonia L. Johnson, Senior Information Systems Analyst The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO conducted a follow-up review to determine the actions taken by the Veterans Benefits Administration (VBA) to address management and technical weaknesses identified in the June 19, 1996, hearing on the agency's modernization effort, focusing on the agency's actions to improve its software development capability. GAO noted that: (1) VBA has taken action to improve its software development capability; (2) among other things, it has launched a software process improvement initiative, chartered a software engineering process group, and obtained the services of an experienced contractor to assist in developing and implementing a software process improvement effort; (3) although it has made progress, VBA has not yet fully addressed needed software development improvements; (4) these include a need for: (a) a defined strategy to reach the repeatable level and a baseline to measure improvements; (b) a process improvement training program for its software developers; and (c) a process to ensure that VBA's software development contractors are at the repeatable level; (5) VBA generally agrees that these issues need to be addressed and has efforts under way to do so; and (6) until these deficiencies are sufficiently addressed, VBA's software development capability remains ad hoc and chaotic, subjecting the agency to continuing risk of cost overruns, poor quality software, and schedule delays in software development. |
The CFATS program is intended to ensure the security of the nation’s chemical infrastructure by identifying, assessing the risk posed by, and requiring the implementation of measures to protect high-risk chemical facilities. Section 550 of the DHS Appropriations Act, 2007, required DHS to issue regulations establishing risk-based performance standards for chemical facilities that, as determined by DHS, present high levels of risk, and required vulnerability assessments and the development and implementation of site security plans for such facilities.the CFATS interim final rule in April 2007 and appendix A to the rule, DHS published published in November 2007, lists 322 chemicals of interest (COI) and the screening threshold quantities amount for each. According to DHS and subject to certain statutory exclusions, all facilities that manufacture chemicals of interest as well as facilities that store or use such chemicals as part of their daily operations may be subject to CFATS. In general, however, only chemical facilities determined to possess a requisite quantity of COI (that is, the screening threshold quantity) and that are subsequently determined to present high levels of security risk—that is, covered facilities—are subject to the more substantive requirements of the CFATS regulation. The Protecting and Securing Chemical Facilities from Terrorist Attacks Act of 2014, enacted in December 2014, amended the Homeland Security Act of 2002 by adding the Chemical Facility Anti- Terrorism Standards as Title XXI and, in effect, authorizing the program for an additional 4 years. Among other things, the Act expressly repeals DHS’s authority to implement the program under section 550 of the DHS Appropriations Act, 2007, but also expressly provides that the CFATS regulation promulgated under that authority shall remain in effect unless otherwise amended, consolidated, or repealed. Consequently, while the Act imposes new and additional responsibilities on DHS to implement the CFATS program, the program continues to be implemented by ISCD under the existing regulatory framework. In addition to implementing the CFATS program, ISCD is also to manage the Ammonium Nitrate Security Program—a program DHS is to establish pursuant to section 563 of the DHS Appropriations Act, 2008. While the CFATS program covers facilities with certain thresholds of ammonium nitrate, the Ammonium Nitrate Security Program is to regulate the sale and transfer of ammonium nitrate by an ammonium nitrate facility for the purpose of preventing the misappropriation or use of ammonium nitrate in an act of terrorism. Among other things, the statute authorizing the ammonium nitrate program authorizes DHS to require individuals who purchase, sell, or transfer ammonium nitrate to register with DHS and submit to vetting against the Terrorist Screening Database, and requires the owners of ammonium nitrate facilities to maintain records on each sale or transfer of ammonium nitrate and to report any identified theft or loss of ammonium nitrate to appropriate federal authorities. DHS issued a proposed rule for the Ammonium Nitrate Security Program in August 2011 and, as of July 2015, has yet to establish the program. The CFATS regulation outlines how ISCD is to administer the CFATS program. Specifically, any facility that possess any of the 322 chemicals of interest (COI) in quantities that meet or exceed the screening threshold quantities established by DHS for those COI are required to use ISCD’s Chemical Security Assessment Tool (CSAT)—a web-based application through which owners and operators of facilities with COI are to provide information about the facility—to complete a Top-Screen. The Top- Screen is the initial screening tool whereby a chemical facility in possession of a COI at the requisite thresholds is to provide ISCD data, including the name and location of the facility and the chemicals and their quantities at the site. ISCD’s risk assessment approach, which relies on data from the Top- Screen, among other sources, is based on three security issues: (1) release (toxic, flammable, and explosive) chemicals with the potential for impacts within and beyond a facility; (2) theft or diversion; and (3) sabotage, depending on the type of risk associated with the COI. Release: For the release threat, ISCD’s approach assumes that a terrorist will release the COI at the facility and then estimates the risk to the facility and surrounding population. Facilities with toxic release chemicals are to calculate and report in their Top-Screen submission the Distance of Concern—which represents the radius of an area in which exposure to a toxic chemical cloud from a release event could cause serious injury or fatalities from short-term exposure. ISCD uses the Distance of Concern to estimate the number of fatalities from an intentional toxic release and to categorize the risk posed by this facility. The Top-Screen directs respondents to use an online tool called RMP*Comp to calculate the Distance of Concern.RMP*Comp takes inputs such as the quantity of chemical that could be released and the surrounding terrain type to determine the Distance of Concern. Theft or diversion: For theft or diversion, the approach assumes that a terrorist will steal or have the COI diverted to him or herself and then estimates the risk of a terrorist attack using the COI to cause the most harm at an unspecified off-site location. Sabotage: For sabotage, the approach assumes that a terrorist will cause water to be mixed with a COI that is shipped from the facility, creating a toxic release at an unspecified location, and then estimates the risk to a medium-sized U.S. city. If, according to ISCD’s automated assessment of information provided via the Top-Screen, the facility is preliminarily categorized to be high-risk it becomes a “covered chemical facility,” and ISCD is to notify the facility of its preliminary placement in one of four risk-based tiers—tier 1, 2, 3, or 4. If ISCD does not categorize the chemical facility as high-risk, ISCD does not assign the facility to one of these four risk-based tiers and the facility is not subject to additional requirements under the CFATS regulation.Facilities that ISCD preliminarily categorizes to be high-risk—covered chemical facilities—are required to then complete the CSAT security vulnerability assessment, which includes the identification of potential critical assets at the facility, and a related vulnerability analysis.to review the security vulnerability assessment to confirm and notify the facility as to whether the facility remains categorized as high-risk and, if so, about its final placement in one of the four tiers. Once a covered chemical facility is assigned a final tier, the facility may use CSAT to submit a site security plan (SSP) or submit an Alternative Security Program in lieu of the CSAT SSP. The security plan is to describe the existing and planned security measures to be implemented to address the vulnerabilities identified in the security vulnerability assessment, and identify and describe how existing and planned security measures selected by the facility are to address the applicable risk-based performance standards. To meet risk-based performance standards, covered facilities may choose the security programs or processes they deem appropriate to address the performance standards so long as ISCD determines that the facilities achieve the requisite level of performance on each of the applicable areas in their existing and agreed-upon planned measures. To determine whether facilities achieve the requisite level of performance for each of the applicable areas, ISCD is to conduct a preliminary review of the facility’s security plan to determine whether it meets the risk-based regulatory requirements. If these requirements appear to be satisfied, ISCD is to issue a letter of authorization for the plan, and conduct an authorization inspection of the facility to determine whether to approve the plan. Upon inspection of the facility, if ISCD determines that the plan satisfies the CFATS requirements, it will issue a letter of approval to the facility, which is to then implement the approved SSP. If ISCD determines that the plan does not satisfy CFATS requirements, ISCD then notifies the facility of any deficiencies and the facility must submit a revised plan for correcting them. See 6 C.F.R. § 27.250. in compliance with their approved SSP or whether to take enforcement actions. Figure 1 illustrates the CFATS regulatory process. Since 2007, when ISCD began identifying chemical facilities to determine which facilities present a high risk and therefore should be subject to further regulation under CFATS, about 37,000 facilities have submitted a Top-Screen but ISCD officials acknowledged some facilities may have failed to do so. According to these officials, as of April 2015, ISCD had received most Top-Screens within the first 3 years of the program; specifically, ISCD received about 88 percent of Top-Screens from 2007 through 2009. ISCD officials told us they believe the 37,000 facilities that have submitted Top-Screens represent most facilities subject to CFATS. However, as we previously reported, ISCD officials have acknowledged some facilities may not comply with the requirement to submit a Top-Screen and therefore some facilities may not be included in ISCD’s data, but the magnitude of potential Top-Screen noncompliance is not known. In response to Executive Order 13650, in May 2014, ISCD outlined a number of efforts it had taken and planned to take to identify potentially noncompliant chemical facilities. These efforts included comparing facilities data from relevant federal partners and from state entities against ISCD’s current database of chemical facilities to identify potentially noncompliant chemical facilities, among others. ISCD officials told us ISCD consulted with the Occupational Safety and Health Administration; the Department of Transportation; the Department of Agriculture; the Bureau of Alcohol, Tobacco, Firearms and Explosives; and the Environmental Protection Agency (EPA) to determine the extent to which ISCD could identify all chemical facilities using data held by those agencies. According to ISCD officials, ISCD also reached out to all 50 states’ Homeland Security Advisors to request lists of chemical facilities maintained by the states. According to ISCD officials, as of April 2015, ISCD completed some of these efforts, such as conducting cross-agency compliance analysis with EPA and analyzing facility lists provided by New York, New Jersey, and Texas. Although these efforts resulted in the identification of chemical facilities subject to CFATS that had not submitted a Top-Screen, ISCD officials told us the work resulted in few new covered facilities. For example, in 2013, after conducting cross-agency compliance analysis with EPA, ISCD identified and notified about 3,300 chemical facilities as potentially noncompliant with the requirement to submit a Top-Screen. As shown in figure 2, in response to notification by ISCD 1,571 facilities reported they had previously submitted a Top-Screen and another 361 claimed they are not currently subject to the requirement to submit a Top- Screen. An additional 374 facilities have not submitted a Top-Screen for other reasons such as the facility closed or the facility does not have chemicals of interest above the screening threshold quantity. Of the 1,056 facilities required to submit a Top-Screen as a result of ISCD’s notification, representing approximately 30 percent of all facilities notified, ISCD categorized 2.3 percent, 24 facilities, as high-risk. ISCD officials told us that although the effort to compare EPA and CFATS facility data did result in more than 1,000 chemical facilities submitting Top-Screens, they noted that efforts to identify chemical facilities have resulted in few new covered facilities. Because of this, ISCD officials are reevaluating how ISCD conducts federal-and state-level cross-agency compliance analysis as a method for identifying chemical facilities. While they plan to continue these efforts and the California Environmental Protection Agency recently provided ISCD with information on over 46,000 facilities regulated by the state, ISCD is currently assessing which approaches for identifying potentially noncompliant facilities will result in a high return on investment. The officials cited two challenges to cross- agency matching. First, while other federal agencies collect some information on chemical facilities, differing program goals and data formats may limit the utility of these data in identifying chemical facilities for the CFATS program. Second, according to ISCD officials, 14 of 50 states responded to ISCD’s request for facility lists. To continue identifying chemical facilities for which the submission of a Top-Screen is required, ISCD plans to designate a lead staff member to oversee efforts to identify such facilities, measure effectiveness of efforts relative to the costs and benefits, and recommend a long-term future strategy. ISCD officials told us they also have hired a third-party vendor to pilot an effort to analyze supply-chain data to identify noncompliant facilities. ISCD has used self-reported and unverified data to determine the risk for facilities with a toxic release threat. As described earlier, approximately 37,000 facilities have submitted Top-Screens to ISCD. Of these facilities, we estimate that more than 6,400 facilities hold a chemical at or above the screening threshold quantity that could pose a toxic chemical release threat. As part of the Top-Screen, ISCD requires these facilities to self- report the Distance of Concern, which represents the radius of an area in which exposure to a toxic chemical cloud from a release event could cause serious injury or fatalities from short-term exposure. As part of its risk assessment of facilities with toxic release chemicals, ISCD uses the Distance of Concern to determine the consequences from an intentional toxic release. Using DHS guidance and Top-Screen information stored in a DHS database—which contains facility-reported information such as chemicals and quantities in their possession, and the Distance of Concern—we recalculated the Distance of Concern for a generalizable sample of facilities and compared these results to what facilities reported. On the basis of these results, we estimate more than 2,700 facilities, or at least 44 percent of facilities with a toxic release chemical, misreported the Distance of Concern. We further estimate that at least 1,200 of the 2,700 misreporting facilities, or about 43 percent, underestimated the Distance of Concern. Figure 3 depicts an example of 1 facility with more than 200,000 pounds of anhydrous ammonia that reported a Distance of Concern of 0.9 miles compared to a minimum possibly correct Distance of Concern of 2.4 miles. ISCD officials acknowledged that some facilities may have erred when reporting the Distance of Concern. However, ISCD officials told us that they do not verify the Distance of Concern on the Top-Screen because they believe that most facilities with toxic release chemicals above the screening threshold quantities would be familiar with RMP*Comp. According to ISCD officials, chemical facilities use the RMP*Comp for purposes of meeting EPA regulatory requirements. However, guidance published on the DHS web-site directs facilities to calculate the Distance of Concern in a manner that is different from EPA reporting requirements. For example, to satisfy EPA reporting requirements, facilities can include in their Distance of Concern calculation information about passive mitigation systems (such as dikes, enclosures, berms, and drains) that may reduce the output RMP*Comp generates. Conversely, according to DHS guidance, because the Top-Screen is evaluating an intentional release rather than an accidental release, facilities are not to include passive mitigation systems to calculate the Distance of Concern. ISCD officials stated that because RMP*Comp is outside the domain of ISCD oversight, they cannot say with full certainty that the information facilities use to generate the Distance of Concern is accurate. Nevertheless, ISCD has retained all Top-Screen data, including the necessary information that can be used to verify the accuracy of Distances of Concern provided by relevant facilities. ISCD officials also stated that they plan to develop a new model that will incorporate a Distance of Concern calculation into the next iteration of the Top-Screen, originally scheduled to be operational by September 2015, which will not require facilities to calculate and provide a Distance of Concern using RMP*Comp. Instead, the new Top-Screen will calculate the Distance of Concern using chemical information, such as the quantity of chemicals, reported by facilities. However, officials stated ISCD has not yet decided whether to re-screen facilities that hold toxic release chemicals that have already submitted a Top-Screen. As of May 2015, ISCD officials stated that implementation of the new Top- Screen is delayed, and ISCD officials did not have a timeline for implementation. As described earlier, the Distance of Concern is one key input in the risk assessment approach that ISCD uses to preliminarily categorize facilities that could pose a toxic chemical release threat. Facilities ISCD categorizes as high-risk are covered facilities subject to additional requirements under the CFATS regulation, while facilities not categorized as high-risk are, in general, not subject to additional requirements under the CFATS program. According to ISCD officials, ISCD only verifies information in the Top-Screens reported by high-risk facilities, including the Distance of Concern. ISCD officials also told us that because ISCD takes other factors into account, errors in the Distance of Concern may not necessarily result in changes in ISCD’s risk-assessment of facilities that misreport the Distance of Concern. According to ISCD, within our sample 1 high-risk facility could be miscategorized based upon an erroneous Distance of Concern. On the basis of ISCD’s finding of 1 potentially miscategorized facility within our sample, we estimate that ISCD could have miscategorized 85 high-risk facilities, but potentially up to 543 high-risk facilities that have previously submitted Top-Screens.Additionally, because implementation of the new Top-Screen is delayed, ISCD cannot provide reasonable assurance it will categorize facilities with release toxic chemicals using reliable Distance of Concern data as these facilities submit new Top-Screens. Standard project management practices include activities such as developing a schedule with milestone dates to identify points throughout the project to reassess efforts under way to determine whether project changes are necessary. Practices such as developing a new target schedule with a forecasted finish date would provide ISCD a more realistic plan to guide the implementation of the new Top-Screen.Additionally, the NIPP risk management framework calls for risk assessment approaches—such as ISCD’s risk-based implementation of CFATS—to be reproducible and defensible. Specifically, the NIPP states the risk assessment methodology must produce comparable, repeatable results free from significant errors or omissions. In the interim, before ISCD implements the new Top-Screen and determines whether to re- screen facilities that have already submitted a Top-Screen, identifying potentially miscategorized facilities that may pose a significant security risk and verifying the Distance of Concern these facilities report is accurate could help ensure that ISCD has accurately categorized facilities with the potential to cause the greatest harm. Moreover, ISCD could provide more reasonable assurance it has identified the nation’s high-risk chemical facilities and, subsequently, that these facilities take actions to address potential terrorist threats. ISCD has taken actions to improve its processes for reviewing and approving site security plans, which have reduced the amount of time needed to resolve the backlog of unapproved plans. On the basis of ISCD’s pace of site security plan approvals in calendar year 2014— between 80 and 100 plans per month—as of April 2015, we estimate that it could take between 9 and 12 months for ISCD to review and approve site security plans for the 929 facilities currently awaiting approval. This represents a substantial improvement over our previous estimates, in April 2013, when, we reported that, based upon ISCD’s estimated approval rate of between 30 and 40 security plans per month, it could take between 7 and 9 years for ISCD to complete reviews of the approximately 3,120 plans in its queue at that time. Figure 4 shows our revised estimate for the time needed to approve plans for unapproved final-tiered facilities as of April 2015—assuming approval rates of 80, 90, and 100 plans per month—as compared to our original April 2013 estimates. ISCD officials attributed the increased rate of approvals and reduction in the backlog of facilities awaiting approval to a number of improvements in ISCD’s processes. These improvements included new steps ISCD has taken since our last report and planned actions we previously reported in April 2013 and May 2014, but could not assess at that time because they had not yet been fully implemented. For example, ISCD has continued the revised site security plan review process implemented in July 2012 in which teams of ISCD headquarters officials review plans by assessing how layers of security measures meet the intent of each of the performance standards; issued updates to the online Chemical Security Assessment Tool (CSAT) beginning in March 2014 to make the system more user- friendly and improve facility data collection; distributed updated internal guidance and lessons learned on plan approvals to inspectors and plan reviewers; transitioned to a new internal case management system in December 2013 that provides improved program and facility management capabilities; begun using inspectors alongside ISCD headquarters officials to review site security plans in order to leverage inspectors’ knowledge of facility security and role conducting CFATS inspections; implemented changes to inspection processes, such as employing smaller inspection teams, conducting preinspection phone calls with facilities to help them prepare for inspections, and enabling inspectors to help facility personnel edit their site security plans during inspections; distributed updated guidance to facilities to help them improve their site security plans and worked to expand the use of alternative security programs; and worked with corporations that have multiple covered chemical facilities to leverage inspection documents and security procedures that are standard across corporations to expedite the inspection process. While ISCD has taken actions to reduce the backlog of site security plans, our estimate that ISCD could complete its approval of all current site security plans within 9 to 12 months does not take into account the potential impact of other tasks central to the CFATS program and additional compliance activities for which ISCD is responsible. Specifically, our estimate does not include the time required to: identify, categorize, review, and approve site security plans for facilities that have not yet submitted Top-Screens or those that ISCD previously did not categorize as high risk but may now qualify as high- risk in light of the aforementioned errors in the Top-Screen submissions we identified related to toxic release Distance of Concern calculations, and review approved site security plans to resolve issues relating to one requirement of the personnel surety performance standard, under which covered facilities are to perform background checks and ensure appropriate credentials for personnel and visitors at their facilities. As part of the personnel surety standard, DHS plans to check for terrorist ties by comparing certain employee information against the Terrorist Screening Database. ISCD currently has measures in place for other screening requirements under the personnel surety standard, and as of May 2015, ISCD was determining how the terrorist screening requirement will be implemented. In addition, our estimate assumes that the pace of site security plan approvals will not be affected by ISCD’s implementation of the Ammonium Nitrate Security Program. As described earlier, ISCD released a proposed rule on August 3, 2011, for how it plans to implement the program. According to ISCD officials, the final rule was initially scheduled to be released in April 2015; as of May 2015, the rule had not been released but, according to the DHS semiannual regulatory agenda published in June 2015, a final rule for the program is anticipated in October 2015. Although the rule has not yet been released, DHS has stated that development and implementation of the ammonium nitrate requirements would be resource-intensive and require trade-offs with ISCD’s responsibilities under the CFATS program. For example, ISCD officials estimated that approximately 1,000 or more ammonium nitrate facilities would need to be inspected annually, which would likely increase ISCD’s inspectors’ workload since they would be responsible for both the CFATS program and the Ammonium Nitrate Security Program. According to ISCD officials, it will take at least 1 year from issuance of the final rule to establish the ammonium nitrate regulatory program. As a result, we could not assess the impact of the pending ammonium nitrate regulations on ISCD’s approval of site security plans or on the CFATS program as a whole. The CFATS regulation, consistent with the program’s underlying statutory authority, authorizes ISCD to take enforcement action, such as issuing orders to assess civil penalties or to cease operations, against a covered chemical facility if, for example, a compliance inspection finds a facility to be noncompliant with its approved site security plan. The regulation also provides, however, that if a facility is found to be noncompliant, the facility shall be provided written notification, an opportunity for consultation, and time frames within which the facility is to ensure compliance. According to ISCD officials, based on the nature of the violations found thus far, it has been ISCD practice to exercise the discretion afforded to it under law and regulation and not to take enforcement actions but to instead work with noncompliant facilities on a case-by-case basis to ensure compliance. However, ISCD does not have documented processes and procedures to track facilities that are noncompliant with their approved site security plans and ensure facilities implement planned measures to become compliant. ISCD standard operating procedures for inspections of covered facilities provide that inspectors are to report to ISCD, among other things, any recommended enforcement actions resulting from a compliance inspection. The CFATS regulation also provides that if a facility is in violation of any part of the regulation, appropriate action may be taken, including the issuance of an order, compelling a facility to take actions necessary to become compliant. For example, if a compliance inspection determines that a facility does not fully implement security measures as outlined in its site security plan, an order may be issued specifying actions the facility must take to remedy the instances of noncompliance, along with timeframes for coming into compliance. If a noncompliant facility does not comply with such an order, an order assessing a civil penalty of up to $25,000 per day for as long as the violation continues or, if warranted, an order to cease operations may be issued. ISCD officials stated that they consider an approved site security plan to be a contract between a facility and ISCD and a facility is therefore required to implement planned security measures by the deadlines specified in its site security plan—commonly between 6 and 12 months after plan approval. According to ISCD officials, facilities that do not implement planned measures by these deadlines are noncompliant with their requirements under CFATS. ISCD began conducting compliance inspections in September 2013 and as of April 2015 had conducted 83 compliance inspections out of 1,727 facilities with approved site security plans. Our analysis of these compliance inspections found that nearly half of facilities did not fully implement security measures needed to satisfy the risk-based performance standards—as required by the CFATS regulation—and therefore were not fully compliant with their approved site security plans. Specifically, 34 of 69 facilities that underwent compliance inspections and had completed compliance inspection reports as of February 2015 had not implemented one or more planned measures by deadlines specified in their approved plans. According to ISCD officials, ISCD has not exercised its authority to issue orders and take enforcement actions based on the nature of violations identified through compliance inspections it has conducted as of May 2015. Instead, ISCD officials told us they track noncompliant facilities individually and work with the facilities on a case-by-case basis to help ensure compliance. According to ISCD officials, as part of ISCD’s review process following compliance inspections, officials track noncompliant facilities on a case-by-case basis using individual compliance inspection reports and do not close out a facility’s report until issues of noncompliance are resolved. ISCD officials stated that, thus far, they have provided additional time to noncompliant facilities and conducted follow-on inspections to ensure implementation of planned measures. ISCD officials also stated that, thus far, it has been more productive to work with facilities on a case-by-case basis to ensure compliance than to use enforcement actions. However, we found that ISCD does not have documented processes and procedures for how officials and inspectors are to track noncompliant facilities and ensure that they take actions towards compliance when ISCD exercises its discretion not to take enforcement actions. According to ISCD officials, ISCD provided written guidance on this issue to inspectors in the March 2015 update to ISCD’s inspections and approvals lessons-learned guidance. However, this guidance outlines requirements for the proper submission of compliance inspection reports by inspectors but does not provide documented guidance for how officials and inspectors are to ensure noncompliant facilities take actions to become compliant, such as how much additional time to provide to facilities to implement planned measures. Our analysis of compliance inspections conducted by ISCD as of February 2015 indicated that inspectors made varying recommendations relating to the 34 facilities that inspectors found had not implemented planned measures as outlined in their site security plans by deadlines and therefore were not fully compliant with their approved site security plans: Inspectors recommended both a follow-on compliance inspection and an enforcement action for 1 of the 34 noncompliant facilities. However, ISCD officials later elected not to take an enforcement action in that instance and determined that they would instead work with the facility to ensure it implemented planned measures. Inspectors recommended a follow-on compliance inspection to verify the implementation of planned measures for 12 of the 34 noncompliant facilities. Inspectors did not recommend an enforcement action or follow-on compliance inspection for the remaining 21 of 34 noncompliant facilities. Inspectors reported that the 34 noncompliant facilities required additional time, beyond their compliance inspection date, to implement planned measures that were not implemented by deadlines in their site security plans. Among the 34 noncompliant facilities, additional time to implement these planned measures as intended ranged from 3 weeks to another year. Figure 5 summarizes our analysis of compliance inspections conducted by ISCD. Compliance inspections—after which ISCD makes compliance determinations to either mitigate or accept risk at facilities—are a critical stage in ISCD’s risk management approach to implementing the CFATS program. The NIPP risk management framework states that risk assessment approaches should be documented, reproducible, and defensible—common principles that are broadly applicable to all parts of a risk methodology. Specifically, the NIPP calls for risk assessment approaches to clearly document what information is used, and that subjective judgments need to be transparent to minimize their impact and help ensure comparable results. In addition, Standards for Internal Control in the Federal Government states that all organizational transactions—which can include processes and procedures for dealing with regulated entities—need to be clearly documented and that this documentation should be readily available for examination in administrative policies or operating manuals. According to ISCD officials, ISCD’s processes and procedures—although not documented— track noncompliant facilities through the compliance process and ensure they implement planned measures. According to ISCD officials, ISCD’s current method of tracking noncompliant facilities on a case-by-case basis using individual compliance inspection reports is sufficient. ISCD officials also stated that inspectors and ISCD headquarters officials evaluate the significance of security gaps and facilities’ ability to implement planned measures when working to bring facilities into compliance. By documenting its processes and procedures for tracking noncompliant facilities and ensuring planned measures are implemented, ISCD could better ensure consistency in how officials and inspectors address noncompliance in the CFATS program. Variations in the process for addressing noncompliant facilities—such as facilities having widely varying amounts of time to implement measures—may be warranted on a case-by-case basis. However, according to ISCD officials, facilities that do not implement planned security measures in accordance with their approved site security plans remain vulnerable to security threats until such measures are implemented. Such vulnerabilities could increase over time as the CFATS program matures and ISCD conducts compliance inspections for the approximately 2,900 additional facilities that, as of April 2015, had an approved site security plan or were assigned a final tier and awaiting approval of the site security plan. Documented processes and procedures that prescribe how to address noncompliance in lieu of taking enforcement actions, including the establishment of time frames to implement planned measures, would better position ISCD to achieve its broader mission of securing chemical facilities in a consistent and timely manner. DHS’s performance measure for the CFATS program, which was developed by ISCD and is intended to reflect security measures implemented by facilities and the overall impact of the CFATS regulation on facility security, does not solely capture security measures that are implemented by facilities and verified by ISCD. Instead, DHS’s performance measure reflects both existing security measures that were in place when facilities completed their site security plans and planned security measures approved by ISCD that facilities intend to implement within the fiscal year. DHS reported this performance measure for the CFATS program in its Annual Performance Report for Fiscal Years 2013- 2015 as the percent of performance standards implemented by the highest risk chemical facilities and verified by ISCD. According to ISCD, the performance measure reflects the value of the CFATS program and its impact on reducing risk at facilities. ISCD officials stated that they calculate the performance measure based on existing and planned measures identified in each facility’s site security plan rather than based on the results of compliance inspections, at which ISCD verifies that facilities have implemented planned measures as intended. According to ISCD officials, they count the planned measure as having been implemented once the implementation date listed in a facility’s site security plan has passed. However, according to ISCD officials, ISCD does not adjust the performance measure if it later determines that a facility did not implement a planned measure on time. In our analysis of compliance inspections conducted as of February 2015, we identified that 34 of 69 facilities did not implement one or more planned measures by intended deadlines. As a result, ISCD may have improperly counted some planned measures as implemented in the performance measure and therefore overstated the CFATS program’s progress in reducing risk. According to ISCD officials, when ISCD developed the performance measure, in fiscal year 2013, it had not yet begun conducting compliance inspections, at which ISCD verifies that facilities have implemented planned measures as intended. As a result, the performance measure does not take into account information gathered during compliance inspections, such as if facilities had implemented planned measures by the intended date. Since developing the performance measure, ISCD began conducting compliance inspections in September 2013, but ISCD officials stated that they did not begin verifying that planned measures had been implemented before including them in the performance measure at that point because they had conducted too few compliance inspections to produce meaningful performance data. ISCD officials also told us that the performance measure includes existing measures that were in place when facilities completed their site security plans because the goal of the performance measure is to capture the overall extent of security implemented by facilities. According to ISCD officials, it is difficult to assess the source of existing security measures because facilities could anticipate CFATS requirements and make enhancements prior to becoming a covered facility under CFATS. As a result, ISCD officials stated that it is a challenge to assess the baseline security measures already in place at facilities and therefore the impact of the CFATS program on improving those security measures. However, while it may be illustrative to report the overall extent of security implemented, including all existing measures does not reflect the value of the CFATS program and its impact on reducing risk at facilities, as ISCD’s current performance measure is intended to do. The NIPP calls for evaluating the effectiveness of risk management efforts by collecting performance data to assess progress in achieving identified outputs and outcomes. In addition, the purpose of CFATS, as stated in its regulation, is to enhance national security by furthering DHS’s mission and lowering the risk posed by certain chemical facilities. Measuring the effectiveness of the CFATS program requires that facilities implement planned security measures identified as necessary to address vulnerabilities and that DHS evaluate implementation of these measures against CFATS performance standards. However, because ISCD’s performance measure reflects both existing security measures that had not necessarily been implemented in response to CFATS and planned security measures that have not yet been verified as implemented, ISCD’s performance measure does not reflect the value of the CFATS program and its impact on reducing risk at facilities, as stated in performance reports. As the CFATS program matures and ISCD conducts compliance inspections in greater numbers, revising current performance measures or adding new ones to accurately reflect only security measures that have been implemented and verified would help provide a more accurate picture of ISCD’s progress and help ISCD ensure that the program is meeting its goals. Individuals intent on using or gaining access to hazardous chemicals to carry out a terrorist attack continue to pose a threat to the security of chemical facilities and surrounding populations. DHS, through the CFATS program overseen by ISCD, has made progress in identifying chemical facilities that pose the greatest risks and in expediting the time it takes to approve security plans. However, DHS has not taken steps to mitigate errors in some facility-reported data and does not have reasonable assurance that it has identified all of the nation’s highest-risk chemical facilities. Additionally, DHS cannot ensure consistency in how it addresses noncompliance in the CFATS program because it does not have documented processes and procedures. Finally, DHS’s CFATS performance measure does not reflect security measures that facilities have implemented and that ISCD has verified, thus not accurately reflecting the value of the CFATS program and its impact on reducing risk at facilities. We recommend that the Secretary of Homeland Security direct the Under Secretary for NPPD, the Assistant Secretary for the Office of Infrastructure Protection, and the Director of ISCD to take the following two actions to ensure the accuracy of the data submitted by chemical facilities: provide milestone dates and a timeline for implementation of the new Top-Screen and ensure that changes to this Top-Screen mitigate errors in the Distance of Concern submitted by facilities, and in the interim, identify potentially miscategorized facilities with the potential to cause the greatest harm and verify the Distance of Concern these facilities report is accurate. In addition, to better manage compliance among high-risk chemical facilities and demonstrate program results, we recommend the following two actions: develop documented processes and procedures to track noncompliant facilities and ensure they implement planned measures as outlined in their approved site security plans, and improve the measurement and reporting of the CFATS program performance by developing a performance measure that includes only planned measures that have been implemented and verified. We provided a draft of this report to DHS for review and comment. DHS provided written comments, which are reproduced in full in appendix III, and technical comments, which we incorporated as appropriate. DHS concurred with all four recommendations and outlined steps that the National Protection and Programs Directorate (NPPD), Office of Infrastructure Protection (IP), Infrastructure Security Compliance Division (ISCD) will take to address them. With respect to the first recommendation that NPPD provide milestone dates and a timeline for implementation of the new Top-Screen and ensure that changes to this Top-Screen mitigate errors in the Distance of Concern submitted by facilities, DHS noted that NPPD is developing a revised Top-Screen to eliminate the need for facilities to calculate and self-report Distances of Concern. In the interim, NPPD will verify the accuracy of Distances of Concern submitted in new Top-Screens. These actions, if fully implemented, should address the intent of the recommendation. Regarding the first recommendation, DHS indicated in its letter that the impact from the erroneous Distance of Concern data is likely extremely minimal because only 85 of approximately 37,000 facilities that submitted Top-Screens were likely to have been assigned a lower risk status had they correctly reported their Distances of Concern, with potentially as few as two facilities actually having been impacted. However, as stated in our report, we based our estimates on a simple random sample and followed a probability procedure based on random selections. Our sample is only one of a large number of samples that we might have drawn, each of which could have provided different estimates. Therefore, the number of facilities affected by this issue may be as low as two or as high as 543. DHS also stated that the erroneous Distance of Concern data impacts only preliminary tiering (categorization) results and additional information submitted through a security vulnerability assessment will affect the final tiering decision. As stated in our report, according to DHS data, 80 percent of facilities were determined not to be high-risk based upon information provided in the Top-Screen, which made those facilities not subject to additional requirements under the CFATS regulation. Thus, only a minority of facilities that submitted a Top-Screen were ultimately required to submit a security vulnerability assessment. Regarding the second recommendation that NPPD identify potentially miscategorized facilities with the potential to cause the greatest harm and verify the Distance of Concern these facilities report is accurate, DHS stated that NPPD will review facilities that submitted Top-Screens with release-toxic chemicals of interest. NPPD will determine which facilities are most likely to potentially cause the greatest harm and will verify the Distances of Concern reported by the facilities. These actions, if fully implemented, should address the intent of the recommendation. In response to the third recommendation that NPPD develop documented processes and procedures to track noncompliant facilities and ensure they implement planned measures, DHS stated that NPPD was in the process of developing and documenting such procedures. DHS also stated that NPPD has drafted requirements to update its case management system to separately track noncompliant facilities, a function not currently available in the system. According to DHS, in the interim, NPPD will monitor noncompliant facilities through a function in the case management system that keeps compliance inspection reports open until a facility implements all aspects of its site security plan. These actions, if fully implemented, should address the intent of the recommendation. Finally, for the fourth recommendation that NPPD improve the measurement and reporting of the CFATS program performance by developing a performance measure that includes only planned measures that have been implemented and verified, DHS stated that NPPD will develop a performance measure that will provide an additional means to evaluate and illustrate the value of the CFATS program. According to DHS, the new measure will be included in ISCD’s Fiscal Year 2016 Annual Operating Plan. These actions, if fully implemented, should address the intent of the recommendation. We are sending copies of this report to the Secretary of Homeland Security, the Under Secretary for the National Protection Programs Directorate, 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 questions about this report, please contact me at (404) 679-1875 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IV. Required elements Section 2. Chemical Facility Anti-Terrorism Standards Program The Secretary of Homeland Security’s (Secretary) efforts to identify facilities, require the submission of Top-Screen and other information, establish risk-based performance standards, and require each covered facility to submit a security vulnerability assessment and to develop, submit and implement a site security plan. (6 U.S.C. § 622) Content of site security plans and employee input. (§ 622(b)) In August 2014, DHS’s Infrastructure Security Compliance Division (ISCD) initiated a rulemaking process through an Advance Notice of Proposed Rulemaking to identify ways to make the Chemical Facility Anti-Terrorism Standards (CFATS) program more effective in achieving its regulatory process. The rulemaking process comment period closed in October 2014, and ISCD is reviewing comments. According to ISCD officials, the rulemaking was included in the latest unified agenda, but it was listed as a long term item and thus did not have an expected timeframe associated with it. ISCD is considering requiring that facilities validate that employee input has been obtained to the greatest extent practicable in the development of their site security plans. Approval and disapproval of site security plans, approval of alternative security programs, risk assessment policies and procedures for site security plan assessments. (§ 622(c)(1)-(3)) ISCD does not expect its review process to change. Expedited approval program for site security plans, including guidance issued by the Secretary within 180 days of enactment (enacted December 18, 2014). (§ 622(c)(4)) The expedited approval process is the biggest change from the original statute, according to ISCD. DHS issued guidance for the expedited removal program in May 2015. Audits and inspections by the Secretary, including (1) requirements for individuals working for nondepartmental or nongovernmental entities, who conduct audits or inspections, to report to a regional supervisor and (2) standards for training and retaining auditors and inspectors. (§ 622(d)(1)) ISCD is not planning to make any changes to its audits or inspections. Third party inspectors could be considered at a later date as appropriate, but ISCD did not have plans to use them as of June 2015. In terms of training, ISCD officials stated that in February 2015, they re-instituted a training task force to assess the effectiveness of ISCD’s training efforts. As part of this effort, ISCD developed a statement of work to hire a contractor to analyze inspectors’ training competencies. The Secretary’s establishment and carrying-out of a personnel surety program. (§ 622(d)(2)) ISCDs personnel surety program is awaiting Office of Management and Budget approval and ISCD did not have an estimate on when it will be finalized. DHS plans according to officials political subdivisions, relevant business associations, and public and private labor organizations to identify all chemical facilities of interest; (§ 622(e)(1)) 2. Develop a security risk assessment approach and corresponding tiering methodology for covered chemical facilities; (§ 622(e)(2)) 3. Document each instance where tiering for a covered facility changes or a covered facility is no longer subject to the requirements; (§ 622(e)(3)) 4. Submit semiannual reports, beginning not later than 6 months after enactment, that includes for the period covered the number of covered facilities in the United States, changes in tiering, metrics addressing reviews and inspections, among other information. (§ 622(e)(4)) ISCD completed this requirement in response to Executive Order 13650 and is documented in the report of the Executive Order 13650 working group. ISCD intends to continue consulting with stakeholders as appropriate to identify chemical facilities of interest. In response to GAO recommendations to incorporate additional threat information into the risk tiering methodology, ISCD is updating how it addresses consequence, vulnerability and threat in its risk approach and corresponding tiering methodology. The risk methodology will be subject to a peer review when completed. ISCD currently documents each instance where a previously assigned tier changes and is modifying its case management system to facilitate required reporting on the number of such instances and the rationale for each. ISCD has drafted the first semi-annual report, which is currently in the DHS review and clearance process. ISCD is on schedule to submit the report to Congress in June 2015. Protection and sharing of information. (§ 623) ISCD does not plan to make changes to the protection and sharing of information. ISCD is working to share permissible information with certain partners through Infrastructure Protection Gateway, a DHS portal containing tools and information to help partners prepare vulnerability assessments and risk analysis. Civil enforcement, including providing notices of noncompliance and addressing circumstances of continued noncompliance; use of civil penalties and emergency orders. (§ 624) ISCD has assessed the new statutory language and believes that some minor changes are necessary to make existing procedures conform to the new statutory language. These modifications are expected to be procedural in nature (i.e., do not require industry notification and an opportunity to comment) and ISCD is in the process of developing them. Whistleblower protections, including: the establishment of procedures within 180 days of enactment for reporting violations to the Secretary. (§ 625) Procedures for reporting violations already exist and are being expanded with the ability to submit reports by e-mail. In addition, ISCD is refining outreach materials to promote the availability of these mechanisms, and is working closely with the Department of Labor’s Occupational Safety and Health Administration to establish mechanisms to enforce the whistleblower retaliation protections should they ever be invoked. The Secretary’s efforts to promulgate regulations or amend the existing CFATS regulations to implement provisions of the Act and, within 30 days of enactment, whether the Secretary repealed any existing CFATS regulation that the Secretary determines is duplicative of, or conflicting with, the act. (§ 627) This is a challenging deadline for DHS to meet, because repealing any of this without including any pending program changes resulting from the rulemaking process would not make sense. Therefore, as a matter of policy, DHS is going to miss these deadlines and continue to work through the rulemaking process. Efforts undertaken by the Secretary, if any, to provide guidance and other support to “small covered chemical facilities” (as that term is defined in the Act) and whether the Secretary submitted the requisite report on best practices that may assist small covered chemical facilities in development of physical security best practices. (§ 628) ISCD is developing guidance as part of its 18-month reporting requirement, but this may result in a separate deliverable to the small covered chemical facilities. No additional activities are anticipated. Required elements Establish an outreach implementation plan to identify chemical facilities of interest and make available compliance assistance materials and information on education and training, not later than 90 days after the date of enactment of the act. (§ 629) DHS plans according to officials ISCD completed this plan on March 18, 2015, and shared it with federal, state, local, commerce, and other stakeholders for comments in advance of completion. This third party assessment is under development. This report is under development. the CFATS program that includes certification by the Secretary that significant progress in identifying all chemical facilities of interest under 6 U.S.C § 622(e)(1) has been made; (§ 3(c)(1)(A)) b. certification by the Secretary that a risk assessment approach and corresponding tiered methodology under 6 U.S.C § 622(e)(2) has been developed; (§ 3(c)(1)(B)) the Secretary’s assessment of implementation by DHS of recommendations by the Homeland Security Studies and Analysis Institute; (§ 3(c)(1)(C)) and d. a description of best practices that may assist small covered chemical facilities in the development of physical security best practices. (§ 3(c)(1)(D)) This appendix provides details of our scope and methodology to answer each objective. For both objectives, we reviewed applicable laws, regulations (including proposed rules), Department of Homeland Security’s (DHS) Chemical Facility Anti-Terrorism Standards (CFATS) program policies and procedures, and our prior reports on the CFATS program. We also identified various criteria relevant to this program and compared the results of our analyses with these criteria, including the CFATS statute and rule, internal control standards, project management guidance, and policies and procedures outlined in the National Infrastructure Protection Plan (NIPP) risk management framework, which calls for risk assessments to be documented, reproducible, and defensible in order to generate results that can support investment, planning, and resource prioritization decisions. To address our first objective, on the extent to which the DHS’s Infrastructure Security Compliance Division (ISCD) has identified and categorized facilities subject to the CFATS regulation, we reviewed laws applicable to facilities that possess chemicals, including the statutes authorizing and regulations governing the CFATS program and Executive Order 13650. To address how ISCD has identified facilities that could potentially be subject to CFATS but have not yet self-identified or been identified by ISCD as being required to submit information to ISCD pursuant to CFATS, we reviewed and analyzed ISCD documentation related to its efforts to identify facilities, including documentation on coordinating with other federal agencies that regulate chemical facilities, and the Executive Order 13650 Report for the President: Actions to Improve Chemical Facility Safety and Security—a Shared Commitment. To address how ISCD has categorized chemical facilities, we reviewed and analyzed documentation ISCD provides to facilities intended to guide them in submitting data that ISCD uses to preliminarily categorize facilities as high-risk, which renders them subject to additional requirements under the CFATS regulation during its preliminary screening We reviewed ISCD applications and documents including web- process.based Chemical Security Assessment Tools (CSAT) applications—such as the Top-Screen—used to collect security information from facilities, the ISCD risk assessment approach used to determine a facility’s preliminary risk tier, and policies and procedures on preliminary tiering. As part of this effort, we obtained and analyzed data submitted by facilities to ISCD as required by CFATS. First, to assess the reliability of data we obtained from CSAT, we reviewed system documentation, compared similar data sets for consistency, and interviewed knowledgeable ISCD officials about system controls and determined that CSAT data were sufficiently reliable for the purposes of this report. Second, we outlined the CFATS risk assessment approach and the three security issues upon which it is based—release-toxic/flammable/explosive, theft or diversion, and sabotage. Finally, we analyzed a sample of ISCD data and compared it to criteria in the National Infrastructure Protection Plan (NIPP), Supplemental Tool: Executing a Critical Infrastructure Risk Management Approach, to determine the extent to which ISCD used facility-reported data to make categorization decisions that are documented and reproducible. Specifically, we selected a simple random sample of 475 facilities from the population of 36,811 facilities that submitted Top-Screens since the inception of the CFATS program in 2007 through January 2, 2015. During our review we identified 91 facilities from among the sample of 475 facilities that indicated that their facility had toxic release chemicals of interest above the screening threshold quantity. For these 91 facilities we tested the reliability of the Distance of Concern reported in Top-Screens. To determine how DHS intended respondents to calculate the Distance of Concern, we reviewed DHS guidance that directs facilities to use an online tool, RMP*Comp. We also reviewed instructions for using this tool. Using RMP*Comp, DHS guidance, and data from their most recently submitted Top-Screen (the type and quantity of chemical that could be released and terrain type surrounding facility), we calculated the Distance of Concern for the 91 facilities and compared these results to what facilities reported. 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 lower of our particular sample’s results as a 95 percent confidence interval (e.g., plus or minus 7 percentage points). This is the interval that would contain the actual population value for 95 percent of the samples we could have drawn. For our determination of facilities potentially at risk of being missed by DHS because of errors in their RMP*Comp calculations we provide the 95 percent confidence interval associated with each estimate. To corroborate and confirm our understanding of ISCD’s approach to identify and categorize chemical facilities, we also interviewed ISCD officials knowledgeable about the processes to identify and categorize chemical facilities to corroborate our understanding of the program. To address our second objective, on the extent to which DHS has approved site security plans, conducted compliance inspections, and measured results, we reviewed laws and regulations on how DHS is to approve site security plans and ensure compliance with the CFATS program. We analyzed ISCD data to identify the number of site security plans approved per month, and used the results of our analysis to estimate the number of months it could take ISCD to approve remaining site security plans. To assess the reliability of data we obtained from ISCD’s case management system, we reviewed system documentation, conducted data and logic testing, and interviewed knowledgeable ISCD officials about system controls and determined that the data were sufficiently reliable for the purposes of this report. We note limitations in our analysis, including that our estimate does not take into consideration resource constraints ISCD may face as it implements the pending We analyzed 69 of 74 compliance Ammonium Nitrate Security Program.inspection reports completed as of February 2015 to identify the extent to which the reports identify noncompliance among facilities that have reached the compliance inspection phase of the CFATS program. When we conducted our analysis, in February 2015, ISCD inspectors had not completed compliance inspection reports outlining the results of the inspections for 5 of the 74 facilities, so we did not include these facilities in our analysis. We compared ISCD’s processes and procedures for tracking and monitoring noncompliant facilities to criteria in the NIPP for documented, reproducible, and defensible risk assessment approaches and Standards for Internal Control in the Federal Government for documenting transactions and significant decisions. To determine how DHS has measured results, we compared ISCD’s performance measure with criteria in the NIPP for evaluating the effectiveness of risk management efforts by, among other things, collecting performance data to assess progress in achieving outputs and outcomes. We also interviewed ISCD headquarters officials regarding their processes and systems for authorizing, approving, and inspecting facilities for compliance. Finally, we conducted four site visits to observe (1) two authorization inspections and (2) two compliance inspections. We selected inspection locations in California, Oregon, Maryland, and Texas based on geographic dispersion and to cover different types of chemical facilities regulated by the CFATS program. While the information obtained from these inspections cannot be generalized to all inspections, it provides insight and context on how ISCD conducts CFATS inspections. We conducted this performance audit from September 2014 to July 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 Ben Atwater, Assistant Director, and Joel Aldape, Analyst-in-Charge, managed this assignment. Carl Barden, Andrew Curry, Kathleen Donovan, Michele C. Fejfar, Eric D. Hauswirth, Susan Hsu, Thomas F. Lombardi, and Kelly Snow made significant contributions to the work. Critical Infrastructure Protection: DHS Action Needed to Enhance Integration and Coordination of Vulnerability Assessment Efforts. GAO-14-507. Washington, D.C.: September 15, 2014. Chemical Safety: Actions Needed to Improve Federal Oversight of Facilities with Ammonium Nitrate. GAO-14-274. Washington, D.C.: May 19, 2014. Critical Infrastructure Protection: Observations on DHS Efforts to Implement and Manage Its Chemical Security Program. GAO-14-608T. Washington, D.C.: May 14, 2014. Critical Infrastructure Protection: Observations on DHS Efforts to Identify, Prioritize, Assess, and Inspect Chemical Facilities. GAO-14-365T. Washington, D.C.: February 27, 2014. Critical Infrastructure Protection: DHS Efforts to Assess Chemical Security Risk and Gather Feedback on Facility Outreach Can Be Strengthened. GAO-13-353. Washington, D.C.: April 5, 2013. Critical Infrastructure Protection: An Implementation Strategy Could Advance DHS’s Coordination of Resilience Efforts across Ports and Other Infrastructure. GAO-13-11. Washington, D.C.: October 25, 2012. Critical Infrastructure Protection: Summary of DHS Actions to Better Manage Its Chemical Security Program. GAO-12-1044T. Washington, D.C.: September 20, 2012. Critical Infrastructure Protection: DHS Is Taking Action to Better Manage Its Chemical Security Program, but It Is Too Early to Assess Results. GAO-12-567T. Washington, D.C.: September 11, 2012. Critical Infrastructure: DHS Needs to Refocus Its Efforts to Lead the Government Facilities Sector. GAO-12-852. Washington, D.C.: August 13, 2012. Critical Infrastructure Protection: DHS Is Taking Action to Better Manage Its Chemical Security Program, but It Is Too Early to Assess Results. GAO-12-515T. Washington, D.C.: July 26, 2012. Critical Infrastructure Protection: DHS Could Better Manage Security Surveys and Vulnerability Assessments. GAO-12-378. Washington, D.C.: May 31, 2012. Critical Infrastructure Protection: DHS Has Taken Action Designed to Identify and Address Overlaps and Gaps in Critical Infrastructure Security Activities. GAO-11-537R. Washington, D.C.: May 19, 2011. Critical Infrastructure Protection: DHS Efforts to Assess and Promote Resiliency Are Evolving but Program Management Could Be Strengthened. GAO-10-772. Washington, D.C.: September 23, 2010. Critical Infrastructure Protection: Update to National Infrastructure Protection Plan Includes Increased Emphasis on Risk Management and Resilience. GAO-10-296. Washington, D.C.: March 5, 2010. | Thousands of facilities have hazardous chemicals that could be targeted or used to inflict mass casualties or harm surrounding populations in the United States. DHS established the CFATS program to, among other things, identify and assess the security risk posed by chemical facilities. Within DHS, ISCD oversees this program. GAO was asked to assess the CFATS program. This report addresses, among other things, the extent to which DHS has (1) categorized facilities as subject to the CFATS regulation, and (2) approved site security plans and conducted compliance inspections. GAO reviewed laws, regulations, and program documents; randomly selected data submitted to ISCD by facilities from 2007 to 2015, tested the data's reliability; and generated estimates for the entire population of facilities, and interviewed officials responsible for overseeing, identifying, categorizing, and inspecting chemical facilities from DHS headquarters and in California, Maryland, Oregon, and Texas (selected based on geographic location and other factors). Since 2007, the Office of Infrastructure Protection's Infrastructure Security Compliance Division (ISCD), within the Department of Homeland Security (DHS), has identified and collected data from approximately 37,000 chemical facilities under its Chemical Facility Anti-Terrorism Standards (CFATS) program and categorized approximately 2,900 as high-risk based on the collected data. However, ISCD used unverified and self-reported data to categorize the risk level for facilities evaluated for a toxic release threat. A toxic release threat exists where chemicals, if released, could harm surrounding populations. One key input for determining a facility's toxic release threat is the Distance of Concern (distance) that facilities report—an area in which exposure to a toxic chemical cloud could cause serious injury or fatalities from short-term exposure. ISCD requires facilities to calculate the distance using a web-based tool and following DHS guidance. ISCD does not verify facility-reported data for facilities it does not categorize as high-risk for a toxic release threat. However, following DHS guidance and using a generalizable sample of facility-reported data in a DHS database, GAO estimated that more than 2,700 facilities (44 percent) of an estimated 6,400 facilities with a toxic release threat misreported the distance. By verifying that the data ISCD used in its risk assessment are accurate, ISCD could better ensure it has identified the nation's high-risk chemical facilities. ISCD has made substantial progress approving site security plans but does not have documented processes and procedures for managing facilities that are noncompliant with their approved site security plans. Site security plans outline, among other things, the planned measures that facilities agree to implement to address security vulnerabilities. As of April 2015, GAO estimates that it could take between 9 and 12 months for ISCD to review and approve security plans for approximately 900 remaining facilities—a substantial improvement over the previous estimate of 7 to 9 years GAO reported in April 2013. ISCD officials attributed the increased approval rate to efficiencies in ISCD's security plan review process, updated guidance, and a new case management system. Further, ISCD began conducting compliance inspections in September 2013, but does not have documented processes and procedures for managing the compliance of facilities that have not implemented planned measures outlined in their site security plans. According to the nature of violations thus far, ISCD has addressed noncompliance on a case-by-case basis. Almost half (34 of 69) of facilities ISCD inspected as of February 2015 had not implemented one or more planned measures by deadlines specified in their approved site security plans and therefore were not fully compliant with their plans. GAO found variations in how ISCD addressed these 34 facilities, such as how much additional time the facilities had to come into compliance and whether or not a follow-on inspection was scheduled. Such variations may or may not be appropriate given ISCD's case-by-case approach, but having documented processes and procedures would ensure that ISCD has guidelines by which to manage noncompliant facilities and ensure they close security gaps in a timely manner. Additionally, given that ISCD will need to inspect about 2,900 facilities in the future, having documented processes and procedures could provide ISCD more reasonable assurance that facilities implement planned measures and address security gaps. GAO recommends, among other things, that DHS (1) verify the Distance of Concern reported by facilities is accurate and (2) document processes and procedures for managing compliance with site security plans. DHS concurred with GAO's recommendations and outlined steps to address them. |
From defending the homeland against terrorists, to preventing the spread of infectious diseases, to providing a reliable stream of social security income to retirees and supporting the transition from welfare to work, the federal government provides funding and services to the American public that can affect their lives in critical ways every day. However, the federal government is in a period of profound transition and faces an array of challenges and opportunities to enhance performance, ensure accountability, and position the nation for the future. A number of overarching trends, such as diffuse security threats and homeland security needs, increasing global interdependency, the shift to knowledge-based economies, and the looming fiscal challenges facing our nation, drive the need to reconsider the proper role for the federal government in the 21st century, how the government should do business (including how it should be structured), and in some instances, who should do the government’s business. Without effective short- and long-term planning, which takes into account the changing environment and needs of the American public and the challenges they face and establishes goals to be achieved, federal agencies risk delivering programs and services that may or may not meet society’s most critical needs. At a cost to taxpayers of over $2 trillion annually, the federal government should be able to demonstrate to the American public that it can anticipate emerging issues, develop sound strategies and plans to address them, and be accountable for the results that have been achieved. Concerned that the federal government was more focused on program activities and processes than the results to be achieved, Congress passed the Government Performance and Results Act of 1993 (GPRA). The act required federal agencies to develop strategic plans with long-term strategic goals, annual goals linked to achieving the long-term goals, and annual reports on the results achieved. Now that GPRA has been in effect for 10 years, you asked us to assess the effectiveness of GPRA in creating a focus on results in the federal government. Specifically, this report discusses (1) the effect of GPRA over the last 10 years in creating a governmentwide focus on results and the government’s ability to deliver results to the American public, including an assessment of the changes in the overall quality of agencies’ strategic plans, annual performance plans, and annual performance reports; (2) the challenges agencies face in measuring performance and using performance information in management decisions; and (3) how the federal government can continue to shift toward a more results-oriented focus. With the 21st century challenges we are facing, it is more vital than ever to maximize the performance of federal agencies in achieving their long-term goals. The federal government must address and adapt to major trends in our country and around the world. At the same time, our nation faces serious long-term fiscal challenges. Increased pressure also comes from world events: both from the recognition that we cannot consider ourselves “safe” between two oceans—which has increased demands for spending on homeland security—and from the United States (U.S.) role in combating terrorism in an increasingly interdependent world. To be able to assess federal agency performance and hold agency managers accountable for achieving their long-term goals, we need to know what the level of performance is. GPRA planning and reporting requirements can provide this essential information. Our country’s transition into the 21st century is characterized by a number of key trends, including the national and global response to terrorism and other threats to our personal and national security; the increasing interdependence of enterprises, economies, markets, civil societies, and national governments, commonly referred to as globalization; the shift to market-oriented, knowledge-based economies; an aging and more diverse U.S. population; rapid advances in science and technology and the opportunities and challenges created by these changes; challenges and opportunities to maintain and improve the quality of life for the nation, communities, families, and individuals; and the changing and increasingly diverse nature of governance structures and tools. As the nation and government policymakers grapple with the challenges presented by these evolving trends, they do so in the context of rapidly building fiscal pressures. GAO’s long-range budget simulations show that this nation faces a large and growing structural deficit due primarily to known demographic trends and rising health care costs. The fiscal pressures created by the retirement of the baby boom generation and rising health costs threaten to overwhelm the nation’s fiscal future. As figure 1 shows, by 2040, absent reform or other major tax or spending policy changes, projected federal revenues will likely be insufficient to pay more than interest on publicly held debt. Further, our recent shift from surpluses to deficits means the nation is moving into the future in a more constrained fiscal position. The United States has had a long-range budget deficit problem for a number of years, even during recent years in which we had significant annual budget surpluses. Unfortunately, the days of surpluses are gone, and our current and projected budget situation has worsened significantly. The bottom line is that our projected budget deficits are not manageable without significant changes in “status quo” programs, policies, processes, and operations. GPRA is the centerpiece of a statutory framework that Congress put in place during the 1990s to help resolve the long-standing management problems that have undermined the federal government’s efficiency and effectiveness and to provide greater accountability for results. In addition to GPRA, the framework comprises the Chief Financial Officers Act of 1990, as amended by the Government Management Reform Act of 1994, and information technology reform legislation, including the Paperwork Reduction Act of 1995 and the Clinger-Cohen Act of 1996. Together, these laws provide a powerful framework for developing and integrating information about agencies’ missions and strategic priorities, the results- oriented performance goals that flow from those priorities, performance data to show the level of achievement of those goals, and the relationship of reliable and audited financial information and information technology investments to the achievement of those goals. GPRA was intended to address several broad purposes, including strengthening the confidence of the American people in their government; improving federal program effectiveness, accountability, and service delivery; and enhancing congressional decision making by providing more objective information on program performance. 2. The agency must develop annual performance plans covering each program activity set forth in the agencies’ budgets* Building on the decisions made as part of the strategic planning process, GPRA requires executive agencies to develop annual performance plans covering each program activity set forth in the agencies’ budgets. Annual performance plans, covering the upcoming fiscal year, are to be submitted to Congress after the President’s Budget is submitted, which generally occurs in February. Each plan is to contain an agency’s annual performance goals and associated measures, which the agency is to use in order to gauge its progress toward accomplishing its strategic goals. OMB is to use the agencies’ performance plans to develop an overall federal government performance plan that is to be submitted with the President’s Budget. The performance plan for the federal government is to present to Congress a single cohesive picture of the federal government’s annual performance goals for a given fiscal year. 3. The agency must prepare annual reports on program performance for the previous fiscal year, to be issued by March 31 each year GPRA requires executive agencies to prepare annual reports on program performance for the previous fiscal year, to be issued by March 31 each year. In each report, an agency is to compare its performance against its goals, summarize the findings of program evaluations completed during the year, and describe the actions needed to address any unmet goals. Recent OMB guidance states that executive agencies must combine their program performance report with their accountability report and transmit the combined report for fiscal year 2003 by January 30, 2004, and the combined report for fiscal year 2004 by November 15, 2004. *Program activity refers to the lists of projects and activities in the appendix portion of the Budget of the United States Government. Program activity structures are intended to provide a meaningful representation of the operations financed by a specific budget account. The Office of Management and Budget (OMB) plays an important role in the management of the federal government’s performance, and specifically GPRA implementation. Part of OMB’s overall mission is to ensure that agency plans and reports are consistent with the President’s Budget and administration policies. OMB is responsible for receiving and reviewing agencies’ strategic plans, annual performance plans, and annual performance reports. To improve the quality and consistency of these documents, OMB issues annual guidance to agencies for their preparation, including guidelines on format, required elements, and submission deadlines. GPRA requires OMB to prepare the overall governmentwide performance plan, based on agencies’ annual performance plan submissions. OMB also played an important role in the pilot phase of GPRA implementation by designating agencies for pilot projects in performance measurement, managerial accountability and flexibility, and performance budgeting, and assessing the results of the pilots. Finally, GPRA provides OMB with authority to grant agencies waivers to certain administrative procedures and controls. Recent OMB guidance requires agencies to submit “performance budgets” in lieu of annual performance plans for their budget submission to OMB and Congress. Performance budgets are to meet all the statutory requirements of GPRA for annual performance plans. In addition, agencies are to include all performance goals used in the assessment of program performance done under OMB’s Program Assessment Rating Tool (PART) process. Moreover, the guidance states that until all programs have been assessed by PART, the performance budget will also for a time include performance goals for agency programs that have not yet been assessed using PART. The expectation is that agencies are to substitute new or revised performance goals resulting from OMB’s review for goals it deemed unacceptable. In crafting GPRA, Congress recognized that managerial accountability for results is linked to managers having sufficient flexibility, discretion, and authority to accomplish desired results. GPRA authorizes agencies to apply for managerial flexibility waivers in their annual performance plans beginning with fiscal year 1999. The authority of agencies to request waivers of administrative procedural requirements and controls is intended to provide federal managers with more flexibility to structure agency systems to better support program goals. The nonstatutory requirements that OMB can waive under GPRA generally involve the allocation and use of resources, such as restrictions on shifting funds among items within a budget account. Agencies must report in their annual performance reports on the use and effectiveness of any GPRA managerial flexibility waivers that they receive. OMB was to designate at least five agencies from the first set of pilot projects to test managerial accountability and flexibility during fiscal years 1995 and 1996. We previously reported on the results of the pilot project to implement managerial flexibility waivers and found that the pilot did not work as intended. OMB did not designate any of the seven departments and one independent agency that submitted a total of 61 waiver proposals as GPRA managerial accountability and flexibility pilots. For about three- quarters of the waiver proposals, OMB or other central management agencies determined that the waivers were not allowable for statutory or other reasons or that the requirement for which the waivers were proposed no longer existed. For the remaining proposals, OMB or other central management agencies approved waivers or developed compromises by using authorities that were already available independent of GPRA. Under GPRA, another set of pilot projects, which were scheduled for fiscal years 1998 and 1999, were to test performance budgeting—i.e., the presentation of the varying levels of performance that would result from different budget levels. We previously reported that OMB initially deferred these pilots—originally to be designated in fiscal years 1998 and 1999—to give federal agencies time to develop the capability of calculating the effects of marginal changes in cost or funding on performance. When the pilots began in August 1999, OMB designed them as case studies prepared by OMB staff to demonstrate how performance information could be used to compare alternatives and to develop funding recommendations for incorporation into the President’s fiscal year 2001 budget submission. On January 18, 2001, OMB reported the results of five performance budgeting pilots that explored agencies’ capabilities of more formally assessing the effects of different funding levels on performance goals. OMB selected the pilots to reflect a cross section of federal functions and capabilities so that a representative range of measurement and reporting issues could be explored. In its report, OMB concluded that legislative changes were not needed. OMB reported that the pilots demonstrated that assuring further performance measurement improvements and steadily expanding the scope and quality of performance measures is paramount, and that the existing statute provides sufficient latitude for such improvement. Overall, OMB concluded that the pilots raised several key challenges about performance budgeting at the federal level including, for example, the following: In many instances, measuring the effects of marginal, annual budget changes on performance is not precise or meaningful. While continuing to change from an almost total reliance on output measures to outcome measures, it will be much more difficult to associate specific resource levels with those outcomes, particularly over short periods of time. Establishing clear linkages between funding and outcomes will vary by the nature of the program and the number of external factors. Delays in the availability of performance data, sometimes caused by agencies’ reliance on nonfederal program partners for data collection, will continue to present synchronization problems during budget formulation. To meet the three objectives stated earlier, we reviewed our extensive prior work on GPRA best practices and implementation and collected governmentwide data to assess the government’s overall focus on results. We conducted a random, stratified, governmentwide survey of federal managers comparable to surveys we conducted in 1997 and 2000. We also held eight in-depth focus groups—seven comprised of federal managers from 23 federal agencies and one with GPRA experts. We also interviewed top appointed officials from the current and previous administrations. Finally, we judgmentally selected a sample of six agencies to review for changes in the quality of their strategic plans, performance plans, and performance reports since their initial efforts. The agencies we selected were the Departments of Education (Education), Energy (DOE), Housing and Urban Development (HUD), and Transportation (DOT) and the Small Business (SBA) and Social Security Administrations (SSA). In making this selection, we chose agencies that collectively represented the full range of characteristics in the following four areas: (1) agency size (small, medium, large); (2) primary program types (direct service, research, regulatory, transfer payments, and contracts or grants); (3) quality of fiscal year 2000 performance plan based on our previous review (low, medium, high); and (4) type of agency (cabinet department and independent agency). Appendix I contains a more detailed discussion of our scope and methodology. We performed our work in Washington, D.C., from January through November 2003 in accordance with generally accepted government auditing standards. Major contributors to this report are listed in appendix XII. Among the purposes of GPRA cited by Congress was to improve federal program effectiveness and service delivery by promoting a new focus on results, service quality, and customer satisfaction by setting program goals, measuring performance against goals, and reporting publicly on progress. Furthermore, GPRA was to improve congressional decision making by providing better information on achieving objectives, and on the relative effectiveness and efficiency of federal programs and spending. Ten years after enactment, GPRA’s requirements have laid a foundation of results- oriented agency planning, measurement, and reporting that have begun to address these purposes. Focus group participants, high-level political appointees, and OMB officials we interviewed cited positive effects of GPRA that they generally attributed to GPRA’s statutory requirements for planning and reporting. Our survey results indicate that since GPRA went into effect governmentwide in 1997, federal managers reported having significantly more of the types of performance measures called for by GPRA—particularly outcome-oriented performance measures. GPRA has also begun to facilitate the linking of resources to results, although much remains to be done in this area. Prior to enactment of GPRA, our 1992 review of the collection and use of performance data by federal agencies revealed that, although many agencies collected performance information at the program level, few agencies had results-oriented performance information to manage or make strategic policy decisions for the agency as a whole. Federal agencies surveyed indicated that many had a single, long-term plan that contained goals, standards, or objectives for the entire agency or program. Many of these agencies also reported they collected a wide variety of performance measures. However, in validating the survey responses with a sample of agencies, we found that measures were typically generated and used by program-level units within an agency and focused on measuring work activity levels and outputs or compliance with statutes. Little of this performance information was transparent to Congress, OMB, or the public and few of the agencies we visited used performance measures to manage toward long-term objectives. Few of the agencies surveyed had the infrastructure in place, such as a unified strategic plan with measurable goals, an office that collected performance measures, and regular consolidated reports, to tie plans and measures. GPRA addressed these shortcomings by creating a comprehensive and consistent statutory foundation of required agencywide strategic plans, annual performance plans, and annual performance reports. In contrast to prior federal government efforts to measure performance, GPRA explicitly emphasized that, in addition to performance indicators that agencies may need to manage programs on a day-to-day basis, such as quantity, quality, timeliness, and cost, agencies also needed outcome-oriented goals and measures that assess the actual results, effects, or impact of a program or activity compared to its intended purpose. Expert and agency focus group participants cited the creation of this statutory foundation as one of the key accomplishments of GPRA. Participants agreed that GPRA created a framework in statute for federal agencies to plan their activities in order to become more results oriented and provided a managerial tool for program accountability. Using this framework, agencies could develop and focus on strategies to carry out the programs they administer; set goals and identify performance indicators that will inform them whether or not they achieved the performance they expected; and determine what impact, if any, their programs have had on the American public. According to the experts in one of our focus groups, comparing federal agencies’ current mission statements contained in their strategic plans to what they were in the past demonstrates that the agencies have done some “soul searching” to get a better sense of what their role is (or should be) and how they can achieve it. Given that GPRA is in statute, participants indicated that the use of this planning framework is likely to be sustained within agencies. One of the premises of GPRA is that both congressional and executive branch oversight of federal agency performance were seriously hampered by a lack of adequate results-oriented goals and performance information. As noted above, prior to the enactment of GPRA few agencies reported their performance information externally. OMB officials we interviewed as part of our current review suggested that OMB has been a key consumer of the performance information produced under GPRA and that it has provided a foundation for their efforts to oversee agency performance. For example, during the development of the fiscal year 2004 budget, OMB used PART to review and rate 234 federal programs. We recently reported that one of PART’s major impacts was its ability to highlight OMB’s recommended changes in program management and design. PART reviews look at four elements—program purpose and design, strategic planning, program management, and program results/accountability—and rate the program on how well each of these elements is executed. However, without the foundation of missions, goals, strategies, performance measures, and performance information generated under GPRA, such oversight would be difficult to carry out. Participants in most of our focus groups also agreed that GPRA has been a driving force behind many cultural changes that have occurred within federal agencies. Highlighting the focus on results, participants stated that GPRA had stimulated a problem-solving approach within federal agencies and encouraged agency managers to think creatively when developing performance indicators for their programs. GPRA has also changed the dialogue within federal agencies; front-line managers and staff at lower levels of the organization now discuss budget issues in connection with performance. Similarly, experts noted that information about performance management and resource investments are more frequently communicated between agency officials and Congress than in the past. Within agencies, GPRA documents can provide a context of missions, goals, and strategies that political appointees can use to articulate agencies’ priorities. A key purpose of GPRA was “to improve the confidence of the American people in the capability of the Federal Government, by systematically holding Federal agencies accountable for achieving program results.” When asked about the direct effects of GPRA on the public in our 2003 survey, an estimated 23 percent of federal managers agreed to a moderate or greater extent that GPRA improved their agency’s ability to deliver results to the American public; a larger percentage—38 percent—chose a “no basis to judge/not applicable” category. When a similar question was posed in our focus groups with experts and federal managers, participants’ views were generally mixed. Some federal managers in our focus groups agreed that GPRA has had a positive effect on raising awareness on many performance issues, and that in and of itself is a way of delivering results. The information gathered and reported for GPRA allows agencies to make better-informed decisions, which improves their ability to achieve results. Other participants stated that while certain aspects of GPRA-related work have been positive, agencies’ ability to deliver results and public awareness of their activities cannot always be exclusively attributed to GPRA. For example, some participants stated that many agencies rely on grant recipients to carry out their work, and delivering results to the American public depends, to a large extent, on the diligence of these organizations to implement their programs; such results would not change dramatically if GPRA were no longer a requirement. A number of the political appointees we interviewed cited examples of outcomes they believe would not have occurred without the structure of GPRA. For example, a former deputy secretary of the Department of Veterans Affairs (VA) stated that “the Results Act brought about a fundamental rethinking of how we managed our programs and processes. . . . We developed a strategic plan that was veteran- focused. . . . We made every effort to define program successes from the veteran’s perspective.” A former Chief Financial Officer (CFO) cited Customs Service goals to reduce the quantity of illegal drugs flowing into the United States and the Food and Drug Administration’s focus on speeding up the approval of new drugs as examples of outcomes that can make a big difference in people’s lives. Another major accomplishment of GPRA cited by our focus group participants is that GPRA improved the transparency of government results to the American public. As noted above, prior to GPRA, few agencies reported performance results outside of their agencies. Focus group participants indicated a key accomplishment of GPRA was its value as a communication tool by increasing the transparency to the public of what their agencies did in terms the public could understand. For example, information on agencies’ strategic plans, performance goals, measures, and results are easily obtainable from agency Web sites. One focus group participant commented that GPRA helps bureaucrats explain to nonbureaucrats what the federal government does in terms they can better understand. Other comments indicated that because of GPRA agencies could now tell Congress and the American public what they are getting for their money. A fundamental element in an organization’s efforts to manage for results is its ability to set meaningful goals for performance and to measure performance against those goals. From our 2003 survey we estimate that 89 percent of federal managers overall said there were performance measures for the programs they were involved with. This is a statistically significantly higher percentage than the 76 percent of managers who answered yes to this item on our 1997 survey. (See fig. 2.) Moreover, when we asked managers who said they had performance measures which of five types of measures they had to a great or very great extent, they reported increases in all five types of measures between 1997 and 2003, all of which were statistically significant. (See fig. 3.) Notably, managers indicated the existence of outcome measures, defined as “performance measures that demonstrate to someone outside the organization whether or not intended results are being achieved,” grew from a low of 32 percent in 1997 to the current estimate of 55 percent, a level that is on par with output measures for the first time since we began our survey. Similarly, focus group participants commented on certain cultural changes that had taken place within their agencies since the passage of GPRA in which the “vocabulary” of performance planning and measurement—e.g., a greater focus on performance management; orientation toward outcomes over inputs and outputs; and an increased focus on program evaluation— had become more pervasive. This perception is partly born out by our survey results. Since 1997 those reporting a moderate to extensive knowledge of GPRA and its requirements shifted significantly from 26 percent to 41 percent in 2003, while those reporting no knowledge of GPRA declined significantly from 27 percent to 20 percent. (See fig. 4.) Consistent with our survey results indicating increases in results-oriented performance measures and increasing GPRA knowledge, we also observed a significant decline in the percentage of federal managers who agreed that certain factors hindered measuring performance or using the performance information. For example, as shown in figure 5, of those who expressed an opinion, the percentage of managers who noted that determining meaningful measures was a hindrance to a great or very great extent was down significantly from 47 percent in 1997 to 36 percent in 2003. Likewise, the percentage that agreed to a great or very great extent that different parties are using different definitions to measure performance was a hindrance also declined significantly from 49 percent in 1997 to 36 percent in 2003. Finally, our survey data suggested that more federal managers, especially at the Senior Executive Service (SES) level, believed that OMB was paying attention to their agencies’ efforts under GPRA. Moreover, there was no corresponding increase in their concern that OMB would micromanage the programs in their agencies. In our survey, we asked respondents to assess the extent to which OMB pays attention to their agencies’ efforts under GPRA. As seen in figure 6, in 2003, the percentage of respondents who responded “Great” or “Very Great” to this question (31 percent) was significantly higher than in 2000 (22 percent). Of those, SES respondents showed an even more dramatic increase, from 33 to 51 percent. We also asked respondents the extent to which their concern that OMB would micromanage programs in their agencies was a hindrance to measuring performance or using performance information. The percentage among those expressing an opinion that it was a hindrance to a great or very great extent was low—around 24 percent in 2003—with no significant difference between 2000 and 2003. Among its major purposes, GPRA aims for a closer and clearer linkage between requested resources and expected results. The general concept of linking performance information with budget requests is commonly known as performance budgeting. Budgeting is and will remain an exercise in political choice, in which performance can be one, but not necessarily the only, factor underlying decisions. However, efforts to infuse performance information into resource allocation decisions can more explicitly inform budget discussions and focus them—both in Congress and in agencies—on expected results, rather than on inputs. GPRA established a basic foundation for performance budgeting by requiring that an agency’s annual performance plan cover each program activity in the President’s budget request for that agency. GPRA does not specify any level of detail or required components needed to achieve this coverage. Further, GPRA recognizes that agencies’ program activity structures are often inconsistent across budget accounts and thus gives agencies the flexibility to consolidate, aggregate, or disaggregate program activities, so long as no major function or operation of the agency is omitted or minimized. In addition, OMB guidance has traditionally required agencies to display, by budget program activity, the funding level being applied to achieve performance goals. OMB’s guidance on developing fiscal year 2005 performance budgets also encourages a greater link between performance and funding levels, however, it places greater emphasis on linking agencies’ long-term and annual performance goals to individual programs. At a minimum, agencies are to align resources at the program level, but they are encouraged to align resources at the performance goal level. Resources requested for each program are to be the amounts needed to achieve program performance goal targets. Our 1998 assessment of fiscal year 1999 performance plans found that agencies generally covered the program activities in their budgets, but most plans did not identify how the funding for those program activities would be allocated to performance goals. However, our subsequent reviews of performance plans indicate that agencies have made progress in demonstrating how their performance goals and objectives relate to program activities in the budget. Over the first 4 years of agency efforts to implement GPRA, we observed that agencies continued to tighten the required link between their performance plans and budget requests. Of the agencies we reviewed over this period, all but three met the basic requirement of GPRA to define a link between their performance plans and the program activities in their budget requests, and most of the agencies in our review had moved beyond this basic requirement to indicate some level of funding associated with expected performance described in the plan. Most importantly, more of the agencies we reviewed each year—almost 75 percent in fiscal year 2002 compared to 40 percent in fiscal year 1999—were able to show a direct link between expected performance and requested program activity funding levels—the first step in defining the performance consequences of budgetary decisions. However, we have also observed that the nature of these linkages varied considerably. Most of the agencies in our review of fiscal year 2002 performance plans associated funding requests with higher, more general levels of expected performance, rather than the more detailed “performance goals or sets of performance goals” suggested in OMB guidance. Although not cited by our group of experts, participants at six of our seven focus groups with federal managers cited progress in this area as a key accomplishment of GPRA. However, the participants also commented that much remains to be done in this area. The comments ranged from the general—GPRA provides a framework for planning and budgeting, to the more specific—GPRA created a definition of programs and how they will help the agency achieve its goals/objectives and the amount of money that will be required to achieve said goals/objectives. One of the comments implied that GPRA has helped to prioritize agency efforts by helping agencies align their efforts with programs or activities that make a difference. A political appointee we interviewed echoed this comment, stating that GPRA was pushing the department to think about what it gets out of the budget, not just what it puts into it—12 to 15 years ago the “so what” was missing from the budget process. Another political appointee we interviewed stated that the department was in the process of tying its goals to its budget formulation and execution processes and linking program costs to departmental goals. A former political appointee discussed how his department used program performance information to inform a major information systems investment decision. Furthermore, GAO case studies on the integration of performance information in budget decision making found that performance information has been used to inform the allocation of resources and for other management purposes at selected agencies. For example, the Veterans Health Administration provides its health care networks with performance information on patterns of patient care and patient health outcomes, which can be used to analyze resource allocation and costs and reallocate resources as appropriate. Officials at the Administration for Children and Families said that training and technical assistance and salaries and expense funds are often allocated based on program and performance needs. The Nuclear Regulatory Commission monitors performance against targets and makes resource adjustments, if needed, to achieve those targets. Although there has been progress in formally establishing the linkages between budgets and plans, our survey results are somewhat conflicting and have not reflected any notable changes either in managers’ perceptions governmentwide as to their personal use of plans or performance information when allocating resources, or in their perceptions about the use of performance information when funding decisions are made about their programs. Our 2003 survey data show that a large majority of federal managers reported that they consider their agency’s strategic goals when they are allocating resources. As shown in figure 7, on our 2003 survey, an estimated 70 percent of all federal managers agreed to a great or very great extent that they considered their agency’s strategic goals when allocating resources. However, using our 1997 survey responses as a baseline, it was not a statistically significant increase over 64 percent of the managers who responded comparably then. As shown in figure 8, a similar, but somewhat smaller, majority (60 percent) of managers who expressed an opinion on our 2003 survey agreed to a great or very great extent that they used information from performance measurement when they were involved in allocating resources. In 1997, the comparable response was about the same at 62 percent. When we asked managers on another item, however, about the extent to which they perceived funding decisions for their programs being based on results or outcome-oriented performance information, only 25 percent of federal managers in 2003 endorsed this view to a great or very great extent. In 1997, 20 percent of managers expressed a comparable view, again not a significant increase. (See fig. 9.) Beginning with federal agencies’ initial efforts to develop effective strategic plans in 1997 and annual performance plans and reports for fiscal year 1999, Congress, GAO, and others have commented on the quality of those efforts and provided constructive feedback on how agency plans and reports could be improved. On the basis of our current review of the strategic plans, annual performance plans, and annual performance reports of six selected agencies—Education, DOE, HUD, DOT, SBA, and SSA—we found that these documents reflect much of the feedback that was provided. For example, goals were more quantifiable and results oriented, and agencies were providing more information about goals and strategies to address performance and accountability challenges and the limitations to their performance data. However, certain weaknesses, such as lack of detail on how annual performance goals relate to strategic goals and how agencies are coordinating with other entities to achieve common objectives, persist. A detailed discussion of our scope and methodology and the results of our reviews of the six agencies’ most recent strategic plans, annual performance plans, and annual performance reports compared to initial efforts are contained in appendixes III, IV, and V, respectively. Under GPRA, strategic plans are the starting point and basic underpinning for results-oriented management. GPRA requires that an agency’s strategic plan contain six key elements: (1) a comprehensive agency mission statement; (2) agencywide long-term goals and objectives for all major functions and operations; (3) approaches (or strategies) and the various resources needed to achieve the goals and objectives; (4) a description of the relationship between the long-term goals and objectives and the annual performance goals; (5) an identification of key factors, external to the agency and beyond its control, that could significantly affect the achievement of the strategic goals; and (6) a description of how program evaluations were used to establish or revise strategic goals and a schedule for future program evaluations. Our 1997 review of agencies’ draft strategic plans found that a significant amount of work remained to be done by executive branch agencies if their strategic plans were to fulfill the requirements of GPRA, serve as a basis for guiding agencies, and help congressional and other policymakers make decisions about activities and programs. Our assessment of 27 agencies’ initial draft strategic plans revealed several critical strategic planning issues that needed to be addressed. These planning issues were as follows: Most of the draft plans did not adequately link required elements in the plans, such as strategic goals to annual performance goals. Long-term strategic goals often tended to have weaknesses. Many agencies did not fully develop strategies explaining how their long-term strategic goals would be achieved. Most agencies did not reflect in their draft plans the identification and planned coordination of activities and programs that cut across multiple agencies. The draft strategic plans did not adequately address program evaluations. We noted that Congress anticipated that it may take several planning cycles to perfect the process and that strategic plans would be continually refined as various planning cycles occur. We also recognized that developing a strategic plan is a dynamic process and that agencies, with input from OMB and Congress, were continuing to improve their plans. Agencies have now had 6 years to refine their strategic planning processes. Although the six strategic plans we looked at for this review reflected many new and continuing strengths as well as improvements over the 1997 initial drafts, we continued to find certain persistent weaknesses. As depicted in table 1, of the six elements required by GPRA, the plans generally discussed all but one—program evaluation, an area in which we have found capacity is often lacking in federal agencies. Although the strategic plans generally listed the program evaluations agencies planned to complete over the planning period, they generally did not address how the agencies planned to use their evaluations to establish new or revise existing strategic goals, as envisioned by GPRA. Finally, although not required by GPRA, the strategic plans would have benefited from more complete discussions of how agencies planned to coordinate with other entities to address common challenges or achieve common or complementary goals. Appendix III provides a more detailed discussion of (1) the required and other useful elements we reviewed to assess strategic plan strengths and weaknesses and (2) changes in the quality of the six agencies’ strategic plans we reviewed. Consistent with our review of agencies’ 1997 strategic plans, the recent strategic plans we reviewed generally contained mission statements that were results oriented, distinct from other agencies, and covered the agencies’ major activities. DOT’s mission statement had improved by reflecting additional language from its enabling legislation that we recommended adding during our 1997 review. Still improvement could be made in this area as is shown by DOE’s mission statement. DOE’s mission was results oriented but did not address the department’s activities related to energy supply and conservation. Our review of the current strategic plans also revealed improvements in the development of agencies’ long-term, strategic goals—essential for results- oriented management. Although GPRA does not require that all of an agency’s long-term, strategic goals be results oriented, the intent of GPRA is to have agencies focus their strategic goals on results to the extent feasible. In addition, as required by GPRA, the goals should be expressed in a manner that could be used to gauge success in the future and should cover an agency’s major functions or activities. All of the strategic plans we reviewed contained long-term, strategic goals that demonstrated improvements in the quality of their 1997 goals. Agencies’ long-term strategic goals generally covered their missions, were results oriented, and were expressed in a manner that could be used to gauge future success. For example, SBA improved the quality of its long-term goals by focusing more on key outcomes to be achieved and less on process improvements, as was the case in its 1997 plan. In some cases, we observed strategic goals that addressed the agency’s organizational capacity to achieve results, such as SSA’s long-term goal to strategically manage and align staff to support its mission. We also found improvements in how agencies’ current plans addressed performance and accountability challenges we had identified, a key weakness we identified in our earlier review. Each of the agency plans we reviewed discussed the long-term goals and strategies to address the challenges that we had identified. For example, Education’s strategic plan contained a long-term strategic goal to modernize the Federal Student Assistance programs and address identified problems in this area, which we have designated as high risk since 1990. SSA noted that it considered GAO-identified performance and accountability challenges when it determined its strategic goals and objectives, however not all of the challenges are clearly addressed in the plan. A third area of improvement we observed was in the description of the strategies agencies planned to use to achieve their long-term strategic goals. In our review of agencies’ 1997 draft strategic plans, we found that many agencies did not fully develop strategies explaining how their long- term strategic goals would be achieved. In contrast, all six of the current strategic plans we reviewed contained strategies that appeared logically linked to achieving the agencies’ long-term goals. Other strengths and improvements we observed in meeting GPRA’s basic requirements involved the reporting of external factors that could affect the achievement of the long-term goals and the identification of crosscutting activities, although as indicated below these discussions could be improved. The six agencies reviewed for this report each reported on external factors in current strategic plans. For example, for each of the strategic objectives in DOT’s strategic plan, DOT lists factors external to its control and how those factors could affect the achievement of its objectives. Although not a requirement, some of the better plans we reviewed discussed strategies to ameliorate the effect of external factors. For example, for an external factor on teacher certification under a goal on reading, Education’s plan states that the agency “will work with the states and national accreditation bodies to encourage the incorporation of research-based reading instruction into teacher certification requirements.” We have frequently reported that a focus on results, as envisioned by GPRA, implies that federal programs contributing to the same or similar results should be closely coordinated to ensure that goals are consistent and, as appropriate, program efforts are mutually reinforcing. This means that federal agencies are to look beyond their organizational boundaries and coordinate with other agencies to ensure that their efforts are aligned. During our 1997 review, we found that most agencies did not reflect in their draft plans the identification and planned coordination of activities and programs that cut across multiple agencies. In contrast, each of the six current agency strategic plans that we reviewed identified at least some activities and programs that cut across multiple agencies. For example, SBA’s 1997 plan contained no evidence of how the agency coordinated with other agencies, but the current plan contained a separate section describing crosscutting issues in the areas of innovation and research assistance, international trade assistance, business development assistance, veterans affairs, and disaster assistance. First, consistent with our 1997 review, the strategic plans we reviewed did not adequately link required elements in the plans. Although all of the agencies we reviewed provided some information on the relationship between their long-term and annual goals, the extent of information provided on how annual goals would be used to measure progress in achieving the long-term goals varied greatly. In the case of DOE, the plan provides a very brief description of the overall relationship between its long-term and annual goals with examples, but does not demonstrate how it will assess progress for each of its long-term goals and objectives. Another plan, DOT’s, refers the reader to the annual performance plan for information about annual goals. We have reported that this linkage is critical for determining whether an agency has a clear sense of how it will assess progress toward achieving its intended results. Second, although the agencies’ descriptions of their strategies had improved since our initial reviews, with few exceptions, their strategies generally did not include information on how the agencies plan to align their activities, core processes, human capital, and other resources to support their mission-critical outcomes and whether they have the right mix of activities, skills, and resources to achieve their goals. Such information is critical to understanding the viability of the strategies. Furthermore, none of the agencies discussed alternative strategies they had considered in developing their plans. Without such discussions, it is unclear whether agency planning processes were truly strategic or simply a recasting of existing activities, processes, etc. HUD was the only agency that provided any details of how it intended to coordinate with other agencies to achieve common or complementary goals for its crosscutting programs or activities. For example, to support its goal of “Equal Opportunity in Housing,” HUD’s plan states that HUD and the Department of Justice continue to coordinate their fair housing enforcement activities, especially with respect to responding quickly and effectively to Fair Housing Act complaints that involve criminal activity (e.g., hate crimes), a pattern and practice of housing discrimination, or the legality of state and local zoning or other land use laws or ordinances. We have reported that mission fragmentation and program overlap are widespread throughout the federal government. As such, interagency coordination is important for ensuring that crosscutting programs are mutually reinforcing and efficiently implemented. Finally, the draft strategic plans did not adequately address program evaluations. In combination with an agency’s performance measurement system, program evaluations can provide feedback to the agency on how well its activities and programs contributed to achieving strategic goals. For example, evaluations can be a potentially critical source of information for Congress and others in assessing (1) the appropriateness and reasonableness of goals; (2) the effectiveness of strategies by supplementing performance measurement data with impact evaluation studies; and (3) the implementation of programs, such as identifying the need for corrective action. Evaluations are important because they potentially can be critical sources of information for ensuring that goals are reasonable, strategies for achieving goals are effective, and that corrective actions are taken in program implementation. Five out of the six current plans that we reviewed included a discussion of program evaluations, however for most of these plans the discussions lacked critical information required by GPRA, such as a discussion of how evaluations were used to establish strategic goals or a schedule of future evaluations. For example, DOE’s plan stated that internal, GAO, and Inspector General (IG) evaluations were used as resources to develop its draft strategic plan, but specific program evaluations were not identified. According to our review of agencies’ first annual performance plans, which presented agencies’ annual performance goals for fiscal year 1999, we found that substantial further development was needed for these plans to be useful in a significant way to congressional and other decision makers. Most of the fiscal year 1999 plans that we reviewed contained major weaknesses that undermined their usefulness in that they (1) did not consistently provide clear pictures of agencies’ intended performance, (2) generally did not relate strategies and resources to performance, and (3) provided limited confidence that agencies’ performance data will be sufficiently credible. Although all of the fiscal year 1999 plans contained valuable information for decision makers, their weaknesses caused their usefulness to vary considerably within and among plans. As shown in table 2, our current review of agencies’ fiscal year 2004 performance plans found that five agencies—Education, HUD, SBA, SSA, and DOT—improved their efforts to provide a clear picture of intended performance, with SSA and DOT being the clearest. Furthermore, the same five agencies improved the specificity of the strategies and resources they intended to use to achieve their performance goals, with DOT being the most specific. Finally, the same five agencies—Education, HUD, SBA, SSA, and DOT—made improvements in the area of greatest weakness— reporting on how they will ensure performance data will be credible. However, only DOT’s plan provided a full level of confidence that the performance data the agency intended to collect would be credible. Appendix IV provides a more detailed discussion of (1) the required and other useful elements we reviewed to assess the clarity of the picture of intended performance, the specificity of the strategies and resources, and the level of confidence in the performance data and (2) changes in the quality of the six agencies’ annual performance plans we reviewed. At the most basic level, an annual performance plan is to provide a clear picture of intended performance across the agency. Such information is important to Congress, agency managers, and others for understanding what the agency is trying to achieve, identifying subsequent opportunities for improvement, and assigning accountability. Our current review of agencies’ fiscal year 2004 performance plans found that five of the six agencies provided a clearer picture of intended performance than their fiscal year 1999 plans did, although only two of the 2004 plans—DOT’s and SSA’s—received the highest rating possible. As shown in table 2, except for DOT, the six agencies we reviewed for this report initially provided a limited picture of intended performance. Most of the fiscal year 1999 performance plans we previously reviewed had at least some objective, quantifiable, and measurable goals, but few plans consistently included a comprehensive set of goals that focused on the results that programs were intended to achieve. Moreover, agencies did not consistently follow OMB’s guidance that goals for performance and accountability challenges be included in the plans. Agencies’ plans generally showed how their missions and strategic goals were related to their annual performance goals and covered all of the program activities in the agencies’ budget requests. In addition, many agencies took the needed first step of identifying their crosscutting efforts, with some including helpful lists of other agencies with which they shared a responsibility for addressing similar national issues. However, the plans generally did not go further to describe how agencies expected to coordinate their efforts with other agencies. The fiscal year 2004 plans improved the picture of performance by making annual goals and performance measures more results oriented, objective, and quantifiable. For example, Education’s plan included a measure for the number of states meeting their eighth grade mathematics achievement targets under the long-term goal to improve mathematics and science achievement for all students. We previously criticized Education’s 1999 plan for lacking such outcome-oriented measures. Another overall improvement we observed was that all of the plans described intended efforts to address performance and accountability challenges we and others had previously identified. For instance, to address the governmentwide high-risk area of strategic human capital management, HUD states that to develop its staff capacity, it will complete a comprehensive workforce analysis in 2004 to serve as the basis to fill mission critical skill gaps through succession planning, hiring, and training initiatives in a 5-year human capital management strategy. The clarity of DOE’s plan remained limited because its annual goals were not clearly linked to its mission, the long-term goals in its strategic plan, or the program activities in its budget request. Although five of the six agencies improved the clarity of the picture of intended performance, improvement is still needed in reporting on crosscutting efforts. In both the 1999 and 2004 plans, many agencies identified their crosscutting efforts, with some including helpful lists of other agencies with which they shared a responsibility for addressing similar national issues. Our review of fiscal year 2004 plans shows that the six agencies we reviewed still did not discuss how they expected to coordinate with other agencies to address common challenges or to achieve common or complementary performance goals. As we have reported previously, improved reporting on crosscutting efforts can help Congress use the annual performance plan to evaluate whether the annual goals will put the agency on a path toward achieving its mission and long- term strategic goals. In addition, the plans can aid in determining efforts to reduce significant program overlap and fragmentation that can waste scarce resources, confuse and frustrate program customers, and limit overall program effectiveness. None of the six agencies’ plans indicated an intention to request waivers of specific administrative procedural requirements and controls that may be impeding an agencies’ ability to achieve results. This provision of GPRA allows agencies greater managerial flexibility in exchange for accountability for results. We previously reported on the results of the pilot project to implement this provision of GPRA and found that the pilot did not work as intended. OMB did not designate any of the seven departments and one independent agency that submitted a total of 61 waiver proposals as GPRA managerial accountability and flexibility pilots. For about three-quarters of the waiver proposals, OMB or other central management agencies determined that the waivers were not allowable for statutory or other reasons or that the requirement for which the waivers were proposed no longer existed. For the remaining proposals, OMB or other central management agencies approved waivers or developed compromises by using authorities that were already available independent of GPRA. To judge the reasonableness of an agency’s proposed strategies and resources, congressional and other decision makers need complete information on how the proposed strategies and resources will contribute to the achievement of agency goals. Agencies generally improved their plans by better relating strategies and resources to performance. Education’s, HUD’s, SBA’s, and SSA’s 1999 plans had a limited discussion, while DOE’s and DOT’s 1999 plans had a general discussion. In 2004, five of the six plans—Education’s, DOE’s, HUD’s, SBA’s, and SSA’s—provided general discussions of how their strategies and resources would contribute to achieving their performance goals. DOT’s 2004 plan improved to include a specific discussion. Our review of the 1999 plans found that most agencies’ performance plans did not provide clear strategies that described how performance goals would be achieved. In contrast, the 2004 performance plans we reviewed generally provided lists of the agencies’ current array of programs and initiatives. Several plans provided a perspective on how these programs and initiatives were necessary or helpful for achieving results. For example, DOE and HUD included in their plans a “means and strategies” section for each of their goals that described how the goal would be achieved. One strategy DOE identified to meet its goal of contributing unique, vital facilities to the biological environmental sciences was to conduct peer reviews of the facilities to assess the scientific output, user satisfaction, the overall cost-effectiveness of each facility’s operations, and their ability to deliver the most advanced scientific capability. In addition, each of the agencies’ plans identified the external factors that could influence the degree to which goals are achieved. Some of the better plans, such as DOT’s and SBA’s, provided strategies to mitigate the negative factors or take advantage of positive factors, as appropriate. For example, for its transportation accessibility goals, DOT’s plan states that as the population ages, more people will require accessible public transit, for which states and local agencies decide how best to allocate federally provided resources. One of the strategies DOT intends to employ to address this external factor is the “Special Needs of Elderly Individuals and Individuals with Disabilities” grant program. The plan states the grant program will help meet transportation needs of the elderly and persons with disabilities when regular transportation services are unavailable, insufficient, or inappropriate to meet their needs. Agencies’ 2004 plans did not consistently describe all the resources needed and how they would be used to achieve agency goals. Our review of agencies’ fiscal year 1999 plans found that most did not adequately describe—or reference other appropriate documents that describe—the capital, human, information, and financial resources needed to achieve their agencies’ performance goals. The 2004 plans we reviewed generally described the funding levels needed to achieve their performance goals overall and in some cases broke out funding needs by high-level performance goal. For example, SSA’s plan provides a general perspective on the financial resources needed to achieve its performance goals because it provides budget information by account and program activity. However, the plan is neither structured by budget program activity or account, nor does it provide a crosswalk between the strategic goals and budget program accounts. In contrast, HUD’s plan presented its requested funding and staffing levels at the strategic goal level, but did not present budget information at the level of its annual goals. In addition, although the plans make brief mention of nonfinancial resources, such as human capital, information technology, or other capital investments, little information is provided on how such resources would be used to achieve performance goals. Credible performance information is essential for accurately assessing agencies’ progress towards the achievement of their goals and, in cases where goals are not met, identifying opportunities for improvement or whether goals need to be adjusted. Under GPRA, agencies’ annual performance plans are to describe the means that will be used to verify and validate performance data. To help improve the quality of agencies’ performance data, Congress amended GPRA through the Reports Consolidation Act of 2000 to require that agencies assess the completeness and reliability of the performance data in their performance reports. Agencies were also required to discuss in their report any material inadequacies in the completeness and reliability of their performance data and discuss actions to address these inadequacies. Meeting these new requirements suggests the need for careful planning to ensure that agencies can comment accurately on the quality of the performance data they report to the public. As shown in table 2, although five of the six agencies we reviewed improved in reporting how they plan to ensure that performance data will be credible, only one agency—DOT—improved enough over its 1999 plan to provide a full level of confidence in the credibility of its performance data. Four agencies—Education, HUD, SBA, and SSA—improved enough to provide a general level of confidence. However, DOE provided the same limited level of confidence in the credibility of the performance data as in its 1999 plan. Regarding all 24 of the fiscal year 1999 performance plans we reviewed, we found most provided only superficial descriptions of procedures that agencies intended to use to verify and validate performance data. Moreover, in general, agencies’ performance plans did not include discussions of documented limitations in financial and other information systems that may undermine efforts to produce high-quality data. As we have previously noted, without such information, and strategies to address those limitations, Congress and other decision makers cannot assess the validity and reliability of performance information. We found that each of the 2004 plans we reviewed contained some discussion of the procedures the agencies would use to verify and validate performance information, although in some cases the discussion was inconsistent or limited. For example, the discussions of SBA’s verification and validation processes for its indicators in the 2004 plan were generally one- or two-sentence statements. SBA also noted that it does not independently verify some of the external data it gathers or that it does not have access to the data for this purpose. In contrast, the DOT plan referred to a separate compendium available on-line that provides source and accuracy statements, which give more detail on the methods used to collect performance data, sources of variation and bias in the data, and methods used to verify and validate the data. In addition, all of the agencies except DOE discussed known limitations to performance data in their plans. These agencies’ plans generally provided information about the quality of each performance measure, including any limitations. According to DOE officials, DOE’s plan generally does not discuss data limitations because the department selected goals for which data are expected to be available and therefore did not anticipate finding any limitations. However, in our 2003 Performance and Accountability Series report on DOE, we identified several performance and accountability challenges where data were a concern, such as the need for additional information on the results of contractors’ performance to keep projects on schedule and within budget. DOE’s contract management continues to be a significant challenge for the department and remains at high risk. Finally, the remaining five agencies also discussed plans to address limitations to the performance data. For example, DOT’s plan provided a general discussion of the limitations to the internal and external sources of data used to measure performance. Detailed discussions were contained in an appendix to the plan and separate source and accuracy statements. This information had been lacking in its 1999 plan. Education, HUD, SBA, and SSA also provided information on limitations to their performance data and plans for improvement. Key to improving accountability for results as Congress intended under GPRA, annual performance reports are to document the results agencies have achieved compared to the goals they established. To be useful for oversight and accountability purposes, the reports should clearly communicate performance results, provide explanations for any unmet goals as well as actions needed to address them, and discuss known data limitations as well as how the limitations are to be addressed in the future. Compared to our reviews of the six agencies’ fiscal year 1999 performance reports, we identified a number of strengths and improvements as well as areas that continued to need improvement. Because the scope of our review of the fiscal year 2002 reports was broader than that for the fiscal year 1999 reports we previously reviewed, we were unable to make specific comparisons for the three characteristics we used to assess the fiscal year 2002 reports. However, we discuss comparative information on aspects of the reports where available. Table 3 shows the results of our assessment of the six agencies’ annual performance reports for fiscal year 2002. Appendix V provides a more detailed discussion of (1) the required and other useful elements we reviewed to assess the clarity of the picture of performance, the clarity of the linkage between costs and performance, and the level of confidence in the performance data and (2) changes in the quality of the six agencies’ annual performance plans we reviewed. The six agency reports that we reviewed contained a number of strengths, some of which we can describe as improvements over the reports on fiscal year 1999 performance. A key strength of four of the 2002 reports (Education, HUD, DOT, SSA) was a discussion of the relationship between the strategic plan, performance plan, and performance report. For example, SSA’s report identified relevant results that were linked to its strategic objective to deliver “citizen-centered, world-class service,” such as maintaining the accuracy, timeliness, and efficiency of service to people applying for its benefit programs. The clarity of the DOE and SBA reports was limited by not clearly relating agency performance results to strategic and annual performance goals. For example, the structure of SBA’s report reflected the objectives in its draft 2003 to 2008 strategic plan rather than those in its 2002 performance plan, making it difficult to assess progress against the original 2002 objectives. Furthermore, although there is no “right” number of performance measures to be used to assess progress, a number of the plans allowed for an easier review of results by limiting the overall number of measures presented or by highlighting key performance measures of greatest significance to their programs. For example, SBA discussed a total of 19 performance goals and DOT discussed a total of 40. Although SSA discussed a total of 69 performance goals, the report highlighted its progress in achieving 14 key goals. In contrast, Education, HUD, and DOE presented a total of 120, 184, and 260 measures, respectively. Furthermore, while Education and SSA each provided a table showing progress across all its measures, the other agencies did not provide such summary information. As we found in our earlier reviews, the six agencies’ fiscal year 2002 reports generally allowed for an assessment of progress made in achieving agency goals. Some of the reports made this assessment easier than others by providing easy-to-read summary information. For example, SSA provided a table at the beginning of the report that summarized the results for each of its 69 indicators with the following dispositions: met, not met, almost met, and data not yet available. Other reports, such as HUD’s, required an extensive review to make this assessment. In addition, to place current performance in context, each of the agencies’ reports contained trend information, as required by GPRA, which allowed for comparisons between current year and prior year performance. In addition, the majority of agencies maintained, or demonstrated improvements over, the quality of their 1999 reports in discussing the progress achieved in addressing performance and accountability challenges identified by agency IGs and GAO. For example, SBA’s report contained two broad overviews and an appendix describing the status of GAO audits and recommendations, as well as a description of the most serious management challenges SBA faces as identified by the agency’s IG. Unfortunately, many of the weaknesses we identified in the agencies’ fiscal year 2002 reports were similar to those we found in their fiscal year 1999 reports related to the significant number of performance goals (1) which were not achieved and lacked explanations or plans for achieving the goal in the future and (2) for which performance data were unavailable. Three of the six agencies we reviewed—HUD, SSA, and Transportation—did not consistently report the reasons for not meeting their goals. For example, Transportation provided explanations for only 5 of the 14 goals it did not meet. In addition, similar to our 1999 report findings, three of the six agencies we reviewed—HUD, SBA, and DOT—did not discuss their plans or strategies to achieve unmet goals in the future. For example, HUD reported “substantially meeting” only 47 percent of the performance targets in fiscal year 2002. However, although HUD provides various reasons for not meeting all its targets, it offers no information on plans or time frames to achieve the goals in the future. Finally, we continued to observe a significant number of goals for which performance data were unavailable. For example, performance data for 10 of SBA’s 19 performance goals were unavailable. In addition, the majority of the reports we reviewed did not include other GPRA requirements. The reports generally did not evaluate the performance plan for the current year relative to the performance achieved toward the performance goals in the fiscal year covered by the report. The reports also did not discuss the use or effectiveness of any waivers in achieving performance goals. In addition, for two of the agencies—DOE and SBA—program evaluation findings completed during the fiscal year were not summarized. As we have previously noted, such evaluations could help agencies understand the relationship between their activities and the results they hope to achieve. Although linking costs to performance goals is not a requirement of GPRA, both GPRA and the CFO Act emphasized the importance of linking program performance information with financial information as a key feature of sound management and an important element in presenting to the public a useful and informative perspective on federal spending. The committee report for GPRA suggested that developing the capacity to relate the level of program activity with program costs, such as cost per unit of result, cost per unit of service, or cost per unit of output, should be a high priority. In our survey of federal managers, this year we asked for the first time the extent to which federal managers had measures of cost- effectiveness for the programs they were involved with. Only 31 percent of federal managers we surveyed reported having such measures to a great or very great extent, lower than any of the other types of measures associated with GPRA we asked about by at least 12 percent (see fig. 3 in ch. 2). Under the PMA, the current administration has set an ambitious agenda for performance budgeting, calling for agencies to better align budgets with performance goals and focus on capturing full budgetary costs and matching those costs with output and outcome goals. All this suggests that agencies will need to develop integrated financial and performance management systems that will enable the reporting of the actual costs associated with performance goals and objectives along with presentations designed to meet other budgetary or financial purposes, such as the accounts and program activities found in the President’s Budget and responsibility segments found in financial statements. Of the six agencies we reviewed, only Education’s report clearly linked its budgetary information to the achievement of its performance goals or objectives. Education’s report laid out, using both graphics and text, the estimated appropriations associated with achieving each of its 24 objectives. In addition the report provided the staffing in full-time equivalent employment (FTEs) and an estimate of the funds from salaries and expenses contributing to the support of each of these objectives. SBA’s report contained crosswalks that showed the relationship between SBA’s strategic goals, outcome goals, performance goals, and programs. Because SBA shows the resources for each program, a reader can infer a relationship between SBA’s resources and performance goals. However, the linkage between resources and results would be clearer if results and resources were presented by performance goal as well. SSA provided a limited view of the costs of achieving its performance goals by providing the costs associated with four out of five of its strategic goals. However, as reported by the IG, SSA needs to further develop its cost accounting system, which would help link costs to performance. DOE also provided a limited view of the costs of achieving its performance goals by organizing its performance information by budget program activity and associated net costs. According to DOE officials, the department plans to link its individual performance measures to the costs of program activities in future reports. Neither HUD nor DOT provided information on the cost of achieving individual performance goals or objectives. To assess the degree to which an agency’s report provided full confidence that the agency’s performance information was credible, we examined the extent to which the reports discussed the quality of the data presented. As shown in table 3, only DOT’s report provided a full level of confidence in the quality of the data. The other agencies provided general or limited confidence in their data. All six agencies in our current review complied with the Reports Consolidation Act of 2000 by including assessments of the completeness and reliability of their performance data in their transmittal letters. In contrast, we found that only 5 of the 24 CFO Act agencies included this information in their fiscal year 2000 performance reports. Of the six agencies in our current review, only DOE provided this assessment in its fiscal year 2000 report. For example, the Secretary of DOT stated in the transmittal letter that the 2002 report “contains performance and financial data that are substantially complete and reliable.” However, only two of the six agencies also disclosed material inadequacies in the completeness and reliability of their performance data and discussed actions to address the inadequacies in their transmittal letters. For example, SBA stated in its transmittal letter that it is “working to improve the completeness and reliability of the performance data for the advice provided to small business through SBA’s resource partners.” SBA explained that data for this aspect of its performance are collected through surveys, which are inconsistent and not comparable, and for which client responses are difficult to obtain. SBA stated that it is working to improve the survey instruments it uses to obtain performance data. In addition to the requirements of the Reports Consolidation Act, we have previously reported on other practices that enhance the credibility of performance data that are not specifically required by GPRA. For instance, discussions of standards and methods used by agencies to assess the quality of their performance data in their performance reports provide decision makers greater insight into the quality and value of the performance data. None of the reports explicitly referred to a specific standard they used, however, DOE described its method for assuring data quality. The report states that the heads of DOE’s organizational elements certified the accuracy of their performance data. DOE subsequently reviewed the data for quality and completeness. Other useful practices that help foster transparency to the public and assist decision makers in understanding the quality of an agency’s data include: (1) discussion of data quality, including known data limitations and actions to address the limitations, and (2) discussion of data verification and validation procedures, including proposals to review data collection and verification and validation procedures. All six agencies’ reports described data limitations, although discussions were mostly brief and very high level. One exception was DOT, which directed readers to the DOT Web site to obtain an assessment of the completeness and reliability of its performance data and detailed information on the source, scope, and limitations of the performance data. HUD and SBA also discussed plans for addressing the limitations. For example, HUD stated that to address problems with its indicator on the number of homeowners who have been assisted with the Home Investment Partnership Program (HOME), HUD has established a team of managers, technical staff, and contractors to make a series of improvements to the Integrated Disbursement and Information System beginning in fiscal year 2003 that should reduce the need to clean up the data. Each of the six agencies’ reports also discussed the procedures they used to verify and validate their performance data. However, these discussions ranged from the very general description of the DOE method (noted previously), to the very detailed discussions provided by DOT. DOT provides an on-line compendium that discusses the source and accuracy of its data. Furthermore, DOT’s 2002 report also describes strategies being undertaken to address the quality of its data. The report states that a DOT intermodal working group addressed data quality issues by developing departmental statistical standards and by updating source and accuracy statements for all of DOT’s data programs. The working group also worked to improve quality assurance procedures, evaluate sampling and nonsampling errors, and develop common definitions for data across modes. While a great deal of progress has been made in making federal agencies more results oriented, numerous challenges still exist to effective implementation of GPRA. The success of GPRA depends on the commitment of top leadership within agencies, OMB, and Congress. However, according to federal managers surveyed, top leadership commitment to achieving results has not grown significantly since our 1997 survey. Furthermore, although OMB has recently shown an increased commitment to management issues, it significantly reduced its guidance to agencies on GPRA implementation compared to prior years, and it is not clear how the program goals developed through its PART initiative will complement and integrate with the long-term, strategic focus of GPRA. Obtaining leadership commitment to implement a strategic plan depends in part on the usefulness and relevance of agency goals and strategies to agency leaders, Congress, and OMB. However, GPRA’s requirement to update agency strategic plans every 3 years is out of sync with presidential and congressional terms and can result in updated plans that do not have the support of top administration leadership and key congressional stakeholders. As noted in chapter 2, more federal managers surveyed reported having results-oriented performance measures for their programs and we would expect to have seen similar increases in the use of this information for program management. However, we did not observe any growth in their reported use of this information for key management activities, such as adopting new program approaches or changing work processes. Additionally, managers noted human capital-related challenges that impede results-oriented management, including a lack of authority and training to carry out GPRA requirements, as well as a lack of recognition for the results achieved. Consistent with our previous work, federal managers in our focus groups reported that significant challenges persist in setting outcome-oriented goals, measuring performance, and collecting useful data. However, our survey data suggested that federal managers do not perceive issues, such as “difficulty distinguishing between the results produced by the program and results caused by other factors” and “difficulty obtaining data in time to be useful,” to be substantial hindrances to measuring performance or using performance information. Additionally, mission fragmentation and overlap contribute to difficulties in addressing crosscutting issues, particularly when those issues require a national focus, such as homeland security, drug control, and the environment. GAO has previously reported on a variety of barriers to interagency cooperation, such as conflicting agency missions, jurisdiction issues, and incompatible procedures, data, and processes. We have also reported that OMB could use the provision of GPRA that calls for OMB to develop a governmentwide performance plan to integrate expected agency- level performance. Unfortunately, this provision has not been fully implemented and the federal government lacks a tool, such as a strategic plan, that could provide a framework for a governmentwide reexamination of existing programs, as well as proposals for new programs. Finally, federal managers in our focus groups and political appointees we interviewed believed that Congress does not use performance information to the fullest extent to conduct oversight and to inform appropriations decisions. While there is concern regarding Congress’ use of performance information, it is important to make sure that this information is initially useful. As a key user of performance information, Congress needs to be considered a partner in shaping agency goals at the outset. GPRA provides Congress opportunities to influence agency performance goals through the consultation requirement for strategic plans and through Congress’ traditional oversight role. We have previously testified that perhaps the single most important element of successful management improvement initiatives is the demonstrated commitment of top leaders to change. This commitment is most prominently shown through the personal involvement of top leaders in developing and directing reform efforts. Organizations that successfully address their long-standing management weaknesses do not “staff out” responsibility for leading change. Top leadership involvement and clear lines of accountability for making management improvements are critical to overcoming organizations’ natural resistance to change, marshalling the resources needed in many cases to improve management, and building and maintaining the organizationwide commitment to new ways of doing business. Results from our surveys show that while the majority of managers continue to indicate top leadership demonstrates a strong commitment to achieving results, we have not seen a noteworthy improvement in the percentage of managers expressing this view. From our 1997 survey, we estimated about 57 percent of managers overall reported such commitment to a great or very great extent. On our 2003 survey, 62 percent of managers expressed a comparable view—a higher but not statistically significant increase. (See fig. 10.) As shown in figure 11, however, we continued to see a significant difference between the perceptions of SES and non-SES managers on this issue. That is, the percentage of SES managers reporting that top leadership demonstrated strong commitment to a great or very great extent in 2003 was 22 percent higher than for non-SES managers. We observed in our 1997 and 2000 reports on governmentwide implementation of GPRA that we would expect to see managers’ positive perceptions on items, such as the extent to which top leadership is committed to achieving results, become more prevalent and the gap between SES and non-SES managers begin to narrow as GPRA and related reforms are implemented; however, these changes do not appear to be happening as expected. Demonstrating the willingness and ability to make decisions and manage programs based on results and the ability to inspire others to embrace such a model are important indicators of leadership commitment to results- oriented management. However, in both our 1997 and 2000 surveys, only about 16 percent of managers reported that changes by management above their levels to the programs for which they were responsible were based on results or outcome-oriented performance information to a great or very great extent. In our 2003 survey, this indicator increased to 23 percent, a statistically significant increase from prior surveys. Twenty-eight percent of federal managers surveyed who expressed an opinion reported that the lack of ongoing top executive commitment or support for using performance information to make program/funding decisions hindered measuring performance or using performance information to a great or very great extent. Our interviews with 10 top political appointees from the Clinton and current Bush administrations indicated a high level of support and enthusiasm for effectively implementing the principles embodied in GPRA. For example, one appointee noted that GPRA focused senior management on a set of goals and objectives to allow the organization to understand what is important and how to deal with accomplishment at a macro-level, as well as provided a structure for problem solving. Another political appointee noted that GPRA has made it important to look at what you get out of the budget, not just what you put into it, while another concluded that GPRA brought about a fundamental rethinking of how they managed their programs and processes. Such indications of support for GPRA are promising. However, to support the transition to more results-oriented agency cultures, top agency management will need to make a more concerted effort to translate their enthusiasm for GPRA into actions that communicate to employees that top management cares about performance results and uses the information in its decision making. The need for strong, committed leadership extends to OMB as well. OMB has shown a commitment to improving the management of federal programs, both through its leadership in reviewing agency program performance using the PART tool as well as through the PMA, which calls for improved financial performance, strategic human capital management, competitive sourcing, expanded electronic government, and performance budget integration. Using the foundation of information generated by agencies in their strategic plans, annual performance plans, and program performance reports, OMB has used the PART tool to exercise oversight of selected federal programs by assessing program purpose and design, the quality of strategic planning, the quality of program management, and the extent to which programs can demonstrate results. PART provides OMB a lens through which to view performance information for use in the budget formulation process. PART, and OMB’s use of performance data in the budget formulation process, potentially can complement GPRA’s focus on increasing the supply of credible performance information by promoting the demand for this information in the budget formulation process. As we reported in chapter 2, more federal managers noted that OMB was paying attention to their agencies’ efforts under GPRA. (See fig. 6.) Additionally, OMB convened a performance measurement workshop in April 2003 to identify practical strategies for addressing common performance measurement challenges. As a result of this workshop, it produced a paper in June 2003 that included basic performance measurement definitions and concepts and common performance measurement problems that were discussed at the workshop. This was part of OMB’s continuing efforts to improve PART as an evaluation tool. However, there are areas where OMB could further enhance its leadership. OMB has stated that the PART exercise presents an opportunity to inform and improve on agency GPRA plans and reports and establish a meaningful, systematic link between GPRA and the budget process. OMB has instructed agencies that, in lieu of a performance plan, they are to submit a performance budget that includes information from the PART assessments, including all performance goals used in the assessment of program performance done under the PART process. The result is that program-specific performance measures developed through the PART review are to substitute for other measures developed by the agency through its strategic planning process. GPRA is a broad legislative framework that was designed to be consultative with Congress and other stakeholders and address the needs of many users of performance information—Congress to provide oversight and inform funding decisions, agency managers to manage programs and make internal resource decisions, and the public to provide greater accountability. Changing agency plans and reports for use in the budget formulation process may not satisfy the needs of these other users. Users other than OMB are not likely to find the information useful unless it is credible and valid for their purposes. PART’s program-specific focus may fit with OMB’s agency-by- agency budget reviews, but it is not well suited to achieving one of the key purposes of strategic plans—to convey agencywide, long-term goals and objectives for all major functions and operations. PART’s focus on program-specific measures does not substitute for the strategic, long-term focus of GPRA on thematic goals and department- and governmentwide crosscutting comparisons. To reach the full potential of performance management, agency planning and reporting documents need to reflect the full array of uses of performance information, which may extend beyond those needed for formulating the President’s Budget. However, it is not yet clear whether the results of those reviews, such as changes to agencies’ program performance measures, will complement and be integrated with the long- term, strategic goals and objectives agencies have established in consultation with Congress and other stakeholders under GPRA. OMB has not yet clearly articulated how PART is to complement GPRA. Focus group participants suggested that the administration and OMB needed to reinforce GPRA’s usefulness as a management tool for agencies. They also emphasized the need for OMB to help agencies understand how to integrate GPRA with other management initiatives, such as PART. As we noted in chapter 3, agencies’ plans and reports still suffer from persistent weaknesses and could improve in a number of areas, such as attention to issues that cut across agency lines, and better information about the quality of the data that underlie agency performance goals. However, OMB’s July 2003 guidance for the preparation and submission of strategic plans, annual performance plans, and annual performance reports is significantly shorter and less detailed than its 2002 guidance. For example, OMB no longer provides detailed guidance to agencies for the development of performance plan components. OMB’s 2002 guidance on the preparation and submission of annual performance plans is approximately 39 pages long; in its 2003 guidance, that discussion spans only 2 pages. The 2003 guidance in this area does not include entire sections found in the 2002 guidance, such as principles for choosing performance goals and indicators for inclusion in the annual plan, types of performance goals, crosscutting programs, and requirements for verifying and validating data. OMB needs to maintain and strengthen its leadership role in working with agencies to help them produce the highest quality GPRA documents through its formal guidance and reviews of strategic plan and report submissions. Focus group participants discussed the need for consistent guidance on how to implement GPRA. Furthermore, there is no evidence that agencies have institutional knowledge of GPRA requirements that would obviate the need for OMB’s guidance. New managers will need a consistent resource that provides practical guidance on what agencies need to include in their planning and reporting documents to comply with GPRA and reflect best practices. Consistent, explicit OMB guidance on preparing GPRA documents can help ensure that gains in the quality of GPRA documents are maintained and provide a resource for agencies to make further improvements in those documents. For example, guidance on how to discuss coordination of crosscutting programs or improvements to the credibility of performance data in agency performance plans goes hand-in-hand with OMB’s enhanced oversight of agency performance through the PART exercise. The success of GPRA depends on the commitment of top leadership within agencies, OMB, and Congress. Obtaining such leadership commitment depends in part on the usefulness and relevance of agency goals and strategies to these parties. GPRA requires an agency to develop a strategic plan at least every 3 years to cover the following 5-year period. Thus, there have been two required updates of strategic plans since the initial strategic plans were submitted for fiscal year 1997—fiscal year 2000 and fiscal year 2003. The fiscal year 2000 update occurred the year before a new presidential term began. According to our focus group participants—both the experts and federal managers—it makes little sense to require an update of a strategic plan shortly before a new administration is scheduled to take office. For example, changes in political leadership generally result in a new agenda with new objectives. Such changes force agencies to revise their plans, management initiatives, and strategies, which translates into additional GPRA-related work. A strategic plan that does not reflect the participation and buy-in of top administration leadership and key congressional stakeholders is unlikely to be successfully implemented. Therefore, GPRA’s requirement to update agency strategic plans according to a schedule that is out of sync with presidential and congressional terms means that effort may be wasted on plans that lack the support of top leadership. GPRA’s usefulness to agency leaders and managers as a tool for management and accountability was cited as a key accomplishment numerous times by focus group participants. However, a number of alternative views indicated use of performance information for key management decisions has been mixed. For example, one participant said they did not believe GPRA has been used as a tool yet, while another participant commented that only better managers take advantage of GPRA as a management tool. According to focus group participants, although many federal managers understand and use results-oriented management concepts in their day-to-day activities, such as strategic planning and performance measurement, they do not always connect these concepts to the requirements of GPRA. This view was strongly supported by our survey results. Prior to mentioning GPRA in our survey, we asked federal managers the extent to which they consider their agency’s strategic goals when engaging in key management tasks such as setting program activities, allocating resources, or considering changes in their programs. A relatively high percentage of managers—ranging from 66 to 79 percent—responded to a great or very great extent. However, when we asked similar questions about the extent to which they considered their agency’s annual performance goals as set forth in the agency’s GPRA annual performance plan for the same activities, the comparable responses were considerably lower, ranging from 22 to 27 percent. Because the benefit of collecting performance information is only fully realized when this information is actually used by managers, we asked them about the extent to which they used the information obtained from measuring performance for various program management activities. As shown in figure 12, for seven of the nine activities we asked about, the majority of managers who expressed an opinion reported using performance information to a great or very great extent in 2003. Across all nine activities, the percentage of managers saying they used performance information to a great or very great extent ranged from 41 percent for developing and managing contracts to 60 percent for allocating resources, setting individual job expectations, and rewarding staff. While we had observed a decline in the reported use of performance information to this extent for many of these activities between 1997 and 2000, our 2003 results increased to levels not significantly different from 1997 for all but one category—adopting new program approaches or changing work processes. This category of use continued to be significantly lower at 56 percent in 2003 than it was in 1997 at 66 percent. Although another category, coordinating program efforts with other internal or external organizations, shows a similar pattern of limited recovery, the difference between the 1997 and 2003 results is not statistically significant. We have reported that involving program managers in the development of performance goals and measures is critical to increasing the relevance and usefulness of this information to their day-to-day activities. Yet, our survey data indicate that participation in activities related to the development and use of performance information has also been mixed. In 2003, only 14 percent of managers believed to a great or very great extent that their agencies considered their contributions to or comments on their agency’s GPRA plans or reports. However, significantly more SES managers (43 percent) than non-SES managers (12 percent) expressed this view. Also, when compared to our 2000 survey when we first asked this question, the percentage of SES managers expressing this view in 2003 was significantly higher than in 2000 (32 percent). The percentage of non-SES managers was essentially unchanged from 2000 (10 percent). Furthermore, as shown in figure 13, overall around half or fewer of managers responded “yes” on our 2003 survey to questions about being involved in developing ways to measure whether program performance goals are being achieved (46 percent), gathering and analyzing data to measure whether programs were meeting their specific performance goals (51 percent), or using measures for program performance goals to determine if the agency’s strategic goals were being achieved (43 percent). None of these overall results were significantly different from our 1997 results. We did find, however, that significantly more SES managers responded “yes” on the 2003 survey (72 percent) than the 1997 survey (55 percent) with regard to being involved in using performance measurement information to determine if the agency’s strategic goals were being achieved when compared to our 1997 results. Managing people strategically and maintaining a highly skilled and energized workforce that is empowered to focus on results are critically important. Such human capital management practices are essential to the success of the federal government in the 21st century and to maximizing the value of its greatest asset—its people. Our survey results showed continuing challenges related to the adequacy of managerial decision making authority, training, and incentives. High-performing organizations seek to shift the focus of management and accountability from activities and processes to contributions and achieving results. In each of our three surveys, we asked managers about the amount of decision-making authority they had and the degree to which they were held accountable for results. As shown in figure 14, for 2003, an estimated 40 percent of federal managers overall reported that they had the decision-making authority they needed to help the agency accomplish its strategic goals to a great or very great extent. This was a statistically significant increase over our 1997 estimate of 31 percent. While there were more SES and non-SES managers expressing this view on our 2003 survey than the 1997 survey, it was the non-SES managers that showed the significant increase. Despite this promising trend, however, there continued to be substantial differences in 2003, as well as on the two previous surveys, between the responses of SES and lower-level managers on this question. Compared to the 57 percent of SES managers who reported having such authority to a great or very great extent in 2003, only 38 percent of non-SES managers reported having such authority to a great or very great extent. However, when asked the extent to which managers or supervisors at their levels were held accountable for the accomplishment of agency strategic goals, 57 percent responded to a great or very great extent in 2003. Unlike in other areas, where SES managers had significantly different views from non-SES managers, there was little difference in the area of accountability. (See fig. 15.) This 57 percent is significantly higher than the 40 percent of managers overall who indicated that they had comparable decision-making authority. However, in contrast to the question on authority, as shown in figure 14, where more SES managers than non-SES managers expressed the view that they had the authority, there was little difference, as shown in figure 15, between the two groups in their views about being held accountable for achieving agency strategic goals to a great or very great extent. As figures 14 and 15 further illustrate, roughly the same percentage of SES managers perceived to a great or very great extent that managers at their level had decision-making authority and accountability for achieving agency strategic goals. This result suggests that their authority was perceived to be on par with their accountability. In contrast, only 38 percent of non-SES managers perceived that managers at their levels had the decision-making authority they needed to a great or very great extent, while 57 percent perceived that they were held accountable to a comparable extent. Managers are hard-pressed to achieve results when they do not have sufficient authority to act. In our report containing the results of our 1997 survey, we noted that agencies needed to concentrate their efforts on areas where managers were not perceiving or experiencing progress, such as that concerning devolving decision-making authority to managers throughout their organizations. While authority for achieving results appears to be in a modestly upward trend, the balance between authority and accountability that fosters decision making to achieve results could be further improved, particularly among non-SES managers. We previously reported on the need for agencies to expend resources on effective training and professional development to equip federal employees to work effectively. Among the resources focus group participants cited as lacking included federal managers and staff with competencies and skills needed to plan strategically, develop robust measures of performance, and analyze what the performance data mean. Our 2003 Guide calls for training and development efforts to be strategically focused on improving performance toward the agency’s goals and put forward with the agency’s organizational culture firmly in mind. Throughout this process it is important that top leaders in the agencies communicate that investments in training and development are expected to produce clearly identified results. By incorporating valid measures of effectiveness into the training and development programs they offer, agencies can better ensure that they will adequately address training objectives and thereby increase the likelihood that desired changes will occur in the target population’s skills, knowledge, abilities, attitudes, or behaviors. Furthermore, if managers understand and support the objectives of training and development efforts, they can provide opportunities to successfully use the new skills and competencies on the job and model the behavior they expect to see in their employees. In response to our 2003 survey, fewer than half of managers answered “yes” when we asked them whether, during the past 3 years, their agencies had provided, arranged, or paid for training that would help them accomplish any of seven critical results-oriented management-related tasks. However, progress is indicated in our survey results. As shown in figure 16, more managers answered “yes” in 2003 on all seven training areas than in previous surveys. These increases were statistically significant for five of the tasks—setting program performance goals, using program performance information to make management decisions, linking program performance to the achievement of agency strategic goals, and implementing the requirements of GPRA. As with our 2000 survey results, the 2003 survey results continued to demonstrate that there is a positive relationship between agencies providing training and development on setting program performance goals and the use of performance information when setting or revising performance goals. For those managers who responded “yes” to training on setting performance goals, 60 percent also reported that they used information obtained from performance measurement when setting new or revising existing performance goals to a great or very great extent. In contrast, for those managers who responded “no” to training on setting performance goals, only 38 percent reported that they used information obtained from performance measurement for setting new or revising existing performance goals to a great or very great extent. The difference between these percentages is statistically significant. Effective training and development programs are an integral part of a learning environment that can enhance the federal government’s ability to attract and retain employees with the skills and competencies needed to achieve results. Training and developing new and current staff to fill new roles and work in different ways will be a crucial part of the federal government’s endeavors to meet its transformation challenges. Ways that employees learn and achieve results will also continue to transform how agencies do business and engage employees in further innovation and improvements. Another fundamental aspect of the human capital management challenge agencies face is providing the incentives to their employees to encourage results-oriented management. Monetary and nonmonetary incentives can be used as a method for federal agencies to reward employees and to motivate them to focus on results. Overall, an increasing but still small percentage of managers reported in 1997, 2000, and 2003 that employees in their agencies received positive recognition to a great or very great extent for helping agencies accomplish their strategic goals. In 1997, 26 percent of federal managers reported such an extent of positive recognition as compared to 37 percent in 2003, a statistically significant increase. Interestingly, this improvement is seen in the responses of non-SES managers. As shown in figure 17, the percentage of SES managers expressing this view stayed at about the same level over the three surveys, while the percentage of non-SES managers holding this view was significantly higher in 2003 than in 1997. Even with this improvement on the part of the responses from non-SES managers, significantly more SES managers (47 percent) than non-SES managers (36 percent) expressed this perception to a comparable extent in 2003. Unfortunately, most existing federal performance appraisal systems are not designed to support a meaningful performance-based pay system in that they fail to link institutional, program, unit, and individual performance measurement and reward systems. In our view, one key need is to modernize performance management systems in executive agencies so that they link to the agency’s strategic plan, related goals, and desired outcomes and are therefore capable of adequately supporting more performance- based pay and other personnel decisions. We have reported federal agencies can develop effective performance management systems by implementing a selected, generally consistent set of key practices. These key practices helped public sector organizations both in the United States and abroad create a clear linkage—“line of sight”—between individual performance and organizational success and, thus, transform their cultures to be more results oriented, customer- focused, and collaborative in nature. Examples of such practices include aligning individual performance expectations with organizational goals, connecting performance expectations to crosscutting goals, linking pay to individual and organizational performance, and making meaningful distinctions in performance. Beyond implementing these key practices, high-performing organizations understand that their employees are assets whose value to the organization must be recognized, understood, and enhanced. They view an effective performance management system as an investment to maximize the effectiveness of people by developing individual potential to contribute to organizational goals. To maximize this investment, an organization’s performance management system is designed, implemented, and continuously assessed by the standard of how well it helps the employees help the organization achieve results and pursue its mission. In prior reports, we have described difficulties faced by federal managers in developing useful, outcome-oriented measures of performance and collecting data indicating progress achieved. One of the most persistent challenges has been the development of outcome-oriented performance measures. Additionally, it is difficult to distinguish the impact of a particular federal program from the impact of other programs and factors, thus making it difficult to attribute specific program performance to results. The lack of timely and useful performance information can also hinder GPRA implementation. In the past, we have noted that federal managers found meaningful performance measures difficult to develop. Focus group participants and survey respondents noted that outcome-oriented performance measures were especially difficult to establish when the program or line of effort was not easily quantifiable. The challenge of the “complexity of establishing outcome-oriented goals and measuring performance” was cited by six of the eight focus groups as one of the key challenges that managers face in implementing GPRA. Focus group participants agreed that they often felt as if they were trying to measure the immeasurable, not having a clear understanding of which performance indicators could accurately inform the agency how it is carrying out a specific activity. Managers from agencies engaged in basic science research and development and grant- making functions noted that this effort was particularly difficult for them because federal programs, especially those that are research-based, often take years to achieve the full scope of their goals. On our most recent survey, we estimated that 36 percent of federal managers who had an opinion indicated that the determination of meaningful measures hindered the use of performance information or performance measurement to a great or very great extent. While this number was significantly lower than the percentage of managers expressing the comparable view on the 1997 or 2000 survey and may reflect some lessening of this as a hindrance to some managers, it nonetheless continues to be among those items having the largest percentage of managers citing it as a substantial hindrance. In our June 1997 report on GPRA, we noted that “the often limited or indirect influence that the federal government has in determining whether a desired result is achieved complicates the effort to identify and measure the discrete contribution of the federal initiative to a specific program result.” This occurs primarily because many federal programs’ objectives are the result of complex systems or phenomena outside the program’s control. In such cases, it is particularly challenging for agencies to confidently attribute changes in outcomes to their program—the central task of program impact evaluation. This is particularly challenging for regulatory programs, scientific research programs, and programs that deliver services to taxpayers through third parties, such as state and local governments. We have reported that determining the specific outcomes resulting from federal research and development has been a challenge that will not be easily resolved. Due to the difficulties in identifying outcomes, research and development agencies typically have chosen to measure a variety of proxies for outcomes, such as the number of patents resulting from federally funded research, expert review and judgments of the quality and importance of research findings, the number of project-related publications or citations, and contributions to expanding the number of research scientists. We have also reported that implementing GPRA in a regulatory environment is particularly challenging. Although federal agencies are generally required to assess the potential benefits and costs of proposed major regulatory actions, they generally do not monitor the benefits and costs of how these and other federal programs have actually performed. For example, in the case of the Environmental Protection Agency (EPA), to determine if existing environmental regulations need to be retained or improved, we previously recommended that EPA study the actual costs and benefits of such regulations. In the past, regulatory agencies have cited numerous barriers to their efforts to establish results-oriented goals and measures. These barriers included problems in obtaining data to demonstrate results, accounting for factors outside of the agency’s control that affect results, and dealing with the long time periods often needed to see results. Our prior work discussed best practices for addressing challenges to measuring the results of regulatory programs. In particular, to address the challenge of discerning the impact of a federal program, when other factors also affect results, we suggested agencies “establish a rationale of how the program delivers results.” Establishing such a rationale involves three related practices: (1) taking a holistic or “systems” approach to the problem being addressed, (2) building a program logic model that described how activities translated to outcomes, and (3) expanding program assessments and evaluations to validate the model linkages and rationale. We have also reported on the difficulties encountered in meeting GPRA reporting requirements for intergovernmental grant programs. Programs that do not deliver a readily measurable product or service are likely to have difficulty meeting GPRA performance measurement and reporting requirements. Intergovernmental grant programs, particularly those with the flexibility inherent in classic block grant design, may be more likely to have difficulty producing performance measures at the national level and raise delicate issues of accountability. Although most flexible grant programs we reviewed reported simple activity or client counts, relatively few of them collected uniform data on the outcomes of state or local service activities. Collecting such data requires conditions (such as uniformity of activities, objectives, and measures) that do not exist under many flexible program designs, and even where overall performance of a state or local program can be measured, the amount attributable to federal funding often cannot be separated out. Focus group participants also suggested that they faced challenges in obtaining timely performance data from relevant partner organizations and in identifying what the federal government’s contribution has been to a specific outcome. Furthermore, survey respondents provided some corroboration for these views. Across all three of our surveys, we estimate that roughly a quarter of all federal managers reported this difficulty— distinguishing between the results produced by the program they were involved with and results caused by other factors—as a substantial hindrance. In response to a survey question about what the federal government could do to improve its overall focus on managing for results, one respondent noted: “Defining meaningful measures for the work we do is extremely difficult; and even if they could be defined, performance and accomplishment is (sic) dependent on so many factors outside our control that it is difficult, if not impossible, to make valid conclusions.” In February 2000, we reported that intergovernmental programs pose potential difficulties in collecting timely and consistent national data. We also noted that agencies had limited program evaluation capabilities and weaknesses in agencies’ financial management capabilities make it difficult for decision makers to effectively assess and improve many agencies’ financial performance. On the basis of our current findings, these issues still exist. Federal managers who participated in our focus groups cited difficulties in gathering data from state or local entities, as well as statutory limitations regarding the nature and breadth of data that they were permitted to collect. However, in our 2003 survey, only 27 percent of federal managers indicated that obtaining data in time to be useful was a substantial hindrance; 31 percent expressed a comparable view with regard to obtaining valid or reliable data. Focus group participants also noted that OMB’s accelerated time frames for reporting performance information will contribute to the challenge of producing complete, timely information in their agencies’ performance reports. Over the past 2 fiscal years, OMB has moved the deadline for submission of agencies’ performance reports (now performance and accountability reports) back from the statutory requirement of March 31; for fiscal year 2003 data, the deadline is January 30, 2004. In fiscal year 2004, these reports will be due on November 15, 2004. According to the managers, individual agencies may work on different time frames based partially on the population they serve or the stakeholders they must work with, such as state or local agencies. This “one size fits all” approach does not take such differences into account. Additionally, OMB requires agencies to report on their performance data quarterly; managers noted that this was particularly difficult for outcomes that may be achieved over extended periods of time, such as outcomes associated with basic science. As we have previously reported, measuring the performance of science-related projects can be difficult because a wide range of factors determine if and how a particular research and development project will result in a commercial application or have other benefits. Efforts to cure diseases or pursue space exploration are difficult to quantify and break down into meaningful quarterly performance measures. Crosscutting issues continue to be a challenge to GPRA implementation. Mission fragmentation and program overlap are widespread across the federal government. Moreover, addressing this challenge is essential to the success of national strategies in areas such as homeland security, drug control, and the environment. We have reported that agencies could use the annual performance planning cycle and subsequent annual performance reports to highlight crosscutting program efforts and to provide evidence of the coordination of those efforts. Our review of six agencies’ strategic and annual performance plans showed some improvement in addressing their crosscutting program efforts, but a great deal of improvement is still necessary. Few of the plans we reviewed attempted the more challenging task of discussing planned strategies for coordination and establishing complementary performance goals and complementary or common performance measures. For example, SSA’s 2004 performance plan makes some mention of the agency’s efforts to coordinate with other agencies to preserve the integrity of the Social Security number as a personal identifier, but there are very few details about this important component of its mission. Previous GAO reports and agency managers identified several barriers to interagency coordination. First, missions may not be mutually reinforcing or may even conflict, making reaching a consensus on strategies and priorities difficult. In 1998 and 1999, we found that mission fragmentation and program overlap existed in 12 federal mission areas, ranging from agriculture to natural resources and the environment. Implementation of federal crosscutting programs is often characterized by numerous individual agency efforts that are implemented with little apparent regard for the presence of related activities. Second, we reported on agencies’ interest in protecting jurisdiction over missions and control over resources. Focus group participants echoed this concern, noting that there can be “turf battles” between agencies, where jurisdictional boundaries, as well as control over resources, are hotly contested. Finally, incompatible procedures, processes, data, and computer systems pose difficulties for agencies to work across agency boundaries. For example, we reported how the lack of consistent data on federal wetlands programs implemented by different agencies prevented the government from measuring progress toward achieving the governmentwide goal of no net loss of the nation’s wetlands. We have previously reported and testified that GPRA could provide OMB, agencies, and Congress with a structured framework for addressing crosscutting program efforts. OMB, for example, could use the provision of GPRA that calls for OMB to develop a governmentwide performance plan to integrate expected agency-level performance. Unfortunately, this provision has not been fully implemented. OMB issued the first and only such plan in February 1998 for fiscal year 1999. In our review of the plan, we found that it included a broad range of governmentwide management objectives and a mission-based presentation of key performance goals based on agency performance plans and the plan’s framework should ultimately allow for a cohesive presentation of governmentwide performance. However, the specific contents of this initial plan did not always deliver an integrated, consistent, and results-oriented picture of fiscal year 1999 federal government performance goals. OMB officials we interviewed at the time stressed that developing the governmentwide plan was viewed as an essential and integral component of the President’s budget and planning process. From OMB’s perspective, both the plan and the budget submission were intended to serve as communication tools for a range of possible users. In their opinion, the plan added value by reflecting a governmentwide perspective on policy choices made throughout the budget formulation process. OMB acknowledged that the plan itself did not serve to change the process through which decisions on government priorities were made, but enhanced it by placing a greater emphasis on results. As one official described it, the governmentwide performance plan was a derivative document, reflecting the budget and management decisions made throughout the process of formulating the President’s budget submission. However, we found that focusing broadly on governmentwide outcomes should be a central and distinguishing feature of the federal government performance plan. To be most effective and supportive of the purposes of GPRA, the governmentwide plan must be more than a compilation of agency-level plans; integration, rather than repetition, must be its guiding principle. OMB has not issued a distinct governmentwide performance plan since fiscal year 1999. Most recently, the President’s fiscal year 2004 budget focused on describing agencies’ progress in addressing the PMA and the results of PART reviews of agency programs. Although such information is important and useful, it does not provide a broader and more integrated perspective of planned performance on governmentwide outcomes. Additionally, the fiscal year 2004 budget identified budget requests and performance objectives by agency, such as the U.S. Department of Defense, as opposed to crosscutting governmentwide themes. From this presentation, one could assume that the only activities the U.S. government planned to carry out in support of national defense were those listed under the chapter “Department of Defense.” However, the chapter of the fiscal year 2004 budget discussing “the Department of State and International Assistance Programs,” contains a heading titled, “Countering the Threat from Weapons of Mass Destruction.” And while OMB may have a technical reason for not classifying this task as being related to national defense or homeland security, it is unclear that a lay reader could make that distinction. The fiscal year 2005 budget also identified budget requests by agency, not by crosscutting theme. Without such a governmentwide focus, OMB is missing an opportunity to assess and communicate the relationship between individual agency goals and outcomes that cut across federal agencies and more clearly relate and address the contributions of alternative federal strategies. The governmentwide performance plan also could help Congress and the executive branch address critical federal performance and management issues, including redundancy and other inefficiencies in how we do business. It could also provide a framework for any restructuring efforts. A strategic plan for the federal government, supported by key national indicators to assess the government’s performance, position, and progress, could provide an additional tool for governmentwide reexamination of existing programs, as well as proposals for new programs. If fully developed, a governmentwide strategic plan could potentially provide a cohesive perspective on the long-term goals of the federal government and provide a much needed basis for fully integrating, rather than merely coordinating, a wide array of federal activities. Successful strategic planning requires the involvement of key stakeholders. Thus, it could serve as a mechanism for building consensus. Further, it could provide a vehicle for the President to articulate long-term goals and a road map for achieving them. In addition, a strategic plan could provide a more comprehensive framework for considering organizational changes and making resource decisions. Developing a strategic plan for the federal government would be an important first step in articulating the role, goals, and objectives of the federal government. It could help provide critical horizontal and vertical linkages. Horizontally, it could integrate and foster synergies among components of the federal government as well as help to clarify the role of the federal government vis-à-vis other sectors of our society. Vertically, it could provide a framework of federal missions and goals within which individual federal agencies could align their own missions and goals that would cascade down to individual employees. The development of a set of key national indicators could be used as a basis to inform the development of the governmentwide strategic and annual performance plans. The indicators could also link to and provide information to support outcome- oriented goals and objectives in agency-level strategic and annual performance plans. Focus group members believed that one of the main challenges to GPRA implementation was the reluctance of Congress to use that information when making decisions, especially appropriations decisions. This concern was cited as a significant challenge in each of the focus groups, and was one of the top three “challenges” in five of the eight focus groups. In some cases, managers in our focus groups noted that this lack of usage was a significant disincentive to doing a good job in preparing GPRA plans and reports. Agency managers made the following criticisms regarding the perceived lack of congressional use of performance information: appropriators have not bought into GPRA, so there is no incentive to do failure of congressional leadership in developing and using performance appropriators do not use performance data or tools to make decisions, GPRA does not drive public policy decisions. Results from our survey provide some further information in support of this view. On our 2003 survey, when we asked federal managers about the extent to which they thought congressional committees paid attention to agency efforts under GPRA, only 22 percent of federal managers responded in the great to very great categories. This result was not significantly different from the results we observed on our 2000 survey when we asked this question about three specific types of congressional committees— authorization, appropriation, and oversight. On the 2000 survey, only 18 percent of federal managers held a similar view concerning authorizing committees, 19 percent for appropriations committees, and 20 percent for oversight committees. As we noted earlier, when this item was asked in relation to OMB, there was a significant increase in the percentage of managers responding to a great or very great extent from 2000 to 2003. The 31 percent of managers who viewed OMB as paying attention to a great or very great extent in 2003 was significantly higher than the 22 percent holding a comparable view of congressional committees. Although managers expressed these concerns about the use of this information, a recent review by the CRS suggested that Congress uses performance information to some extent, as evidenced by citations in legislation and committee reports. For example, in the 106th Congress (1999-2000), 42 public laws contained statutory language relating to GPRA and performance measures, and 118 legislative reports contained GPRA- associated passages. As shown in figure 18, across all three of our surveys, only a minority of federal managers governmentwide viewed the lack of ongoing congressional commitment for using performance information as a hindrance to a great or very great extent. While there is concern regarding Congress’ use of performance information, it is important to make sure that this information is initially useful. One of GPRA’s purposes is to respond to a need for accurate, reliable information for congressional decision making. In 2000, we reported that congressional staffs stated that they were looking for recurring information on spending priorities within programs; the quality, quantity, and efficiency of program operations; the populations served or regulated; as well as programs’ progress in meeting their objectives. For example, learning who benefits from a program can help in addressing questions about how well services are targeted to those most in need. Some of these recurring needs were met through formal agency documents, such as annual performance plans. However, some information the agencies provided did not fully meet the congressional staffs’ needs because the presentation was not clear, directly relevant, or sufficiently detailed. For example, congressional staffs wanted to see more direct linkages among the agencies’ resources, strategies, and goals. In other cases, the information was not readily available to the congressional staffs, either because it had not been requested or reported, or because staff were not informed that it was available. As a key user of performance information, Congress also needs to be considered a partner in shaping agency goals at the outset. For example, through the strategic planning requirement, GPRA requires federal agencies to consult with Congress and key stakeholders to reassess their missions and long-term goals as well as the strategies and resources they will need to achieve their goals. GPRA also provides a vehicle for Congress to explicitly state its performance expectations in outcome-oriented terms when establishing new programs or in exercising oversight of existing programs that are not achieving desired results. Congress could use authorizing and appropriations hearings to determine if agency programs have clear performance goals, measures, and data with which to track progress and whether the programs are achieving their goals. If goals and objectives are unclear or not results oriented, Congress could use legislation to articulate the program outcomes it expects agencies to achieve. This would provide important guidance to agencies that could then be incorporated in agency strategic and annual performance plans. As we have shown in this report, in the 10 years since the enactment of GPRA, significant progress has been made in instilling a focus on results in the federal government. First, GPRA statutory requirements laid a foundation for results-oriented management in federal agencies. Expert and agency focus group participants cited the creation of this statutory foundation as one of the key accomplishments of GPRA. Since GPRA began to be implemented governmentwide in fiscal year 1997, we have observed significant increases in the percentage of federal managers who reported having results-oriented performance measures for their programs. Focus group participants’ views on whether GPRA has had a positive effect on the federal government’s ability to deliver results to the American public were mixed. For example, the information gathered and reported for GPRA allows agencies to make better-informed decisions, which improves their ability to achieve results. In addition, GPRA has made the results of federal programs more transparent to the public. Other participants stated that while certain aspects of GPRA-related work have been positive, agencies’ ability to deliver results and public awareness of their activities cannot be exclusively attributed to GPRA. Second, GPRA has increased the connection between resources and results by creating more formal linkages between agency performance goals and objectives and the program activities in the budget. Over the first 4 years of agency efforts to implement GPRA, we observed that agencies continued to tighten the required linkage between their performance plans and budget requests. However, much remains to be done in this area. For example, we have not observed notable increases in federal managers’ perceptions about their personal use of plans or performance information when allocating resources, or about the use of performance information when funding decisions are made about their programs. However, it should be noted that we estimate a majority have positive perceptions about the use of performance information to allocate resources. Third, GPRA has provided a foundation for examining agency missions, performance goals and objectives, and the results achieved. We have seen improvements in the quality of agency strategic plans, annual performance plans, and performance reports since initial efforts. However, few of the six agencies we reviewed in this report produced GPRA planning and reporting documents that met all of our criteria for the highest level of quality. Most of these agencies continued to miss opportunities to present clear pictures of their intended and actual performance results in their GPRA plans and reports and to show how resources are aligned with actual performance results. Furthermore, most of the agencies we reviewed did not provide a full level of confidence in the credibility of their performance data. Performance-based management, as envisioned by GPRA, requires transforming organizational cultures to improve decision making, maximize performance, and assure accountability. This transformation is not an easy one and requires investments of time and resources as well as sustained leadership commitment and attention. Challenges to successful implementation of GPRA include inconsistent top leadership commitment to creating a focus on results; an approach to setting goals and developing strategies for achieving critical outcomes that creates individual agency stovepipes rather than an integrated, holistic governmentwide approach; getting federal managers to make greater use of performance information to manage their programs and providing them authority to act that is commensurate with their accountability for results; difficulty in establishing meaningful measures of outcomes and assessing results of federal programs that are carried out by nonfederal entities; and untimely performance data. The challenges identified in this report are not new—most have not changed significantly since we first reported on governmentwide implementation of GPRA. However, we have frequently reported on approaches that agencies, OMB, and Congress could use to address the challenges. These approaches include strengthening the commitment of top leadership to creating and sustaining a focus on results; taking a governmentwide approach to achieving outcomes that are crosscutting in nature; improving the usefulness of performance information to managers, Congress, and the public; and improving the quality of performance measures and data. Collectively, these approaches form the agenda that federal agencies, OMB, and Congress will need to follow to bring about a more sustainable, governmentwide focus on results. Successfully addressing the challenges that federal agencies face requires leaders who are committed to achieving results, who recognize the importance of using results-oriented goals and quantifiable measures, and who integrate performance-based management into the culture and day-to- day activities of their organizations. Top leadership must play a critical role in creating and sustaining high-performing organizations. Without the clear and demonstrated commitment of agency top leadership—both political and career—organizational cultures will not be transformed, and new visions and ways of doing business will not take root. To be positioned to address the array of challenges faced by our national government, federal agencies will need to transform their organizational cultures so that they are more results oriented, customer-focused, and collaborative. Leading public organizations here in the United States and abroad have found that strategic human capital management must be the centerpiece of any serious change management initiative and efforts to transform the cultures of government agencies. Performance management systems are integral to strategic human capital management. Such systems can be key tools to maximizing performance by aligning institutional performance measures with individual performance and creating a “line of sight” between individual and organizational goals. Leading organizations use their performance management systems as a key tool for aligning institutional, unit, and employee performance; achieving results; accelerating change; managing the organization day to day; and facilitating communication throughout the year so that discussions about individual and organizational performance are integrated and ongoing. Furthermore, achieving this cultural transformation requires people to have the knowledge and skills to develop and use performance information to improve program performance. Our survey data indicated a significant relationship between those managers who reported they received training on setting performance goals and those who used performance information when setting or revising performance goals. However, federal agencies have not consistently showed a commitment to investing in needed training and development opportunities to help ensure that managers and employees have the requisite skills and competencies to achieve agency goals. The commitment to focusing on and using performance information needs to extend to OMB and Congress as well. Through the administration’s PMA and PART initiatives, OMB has clearly placed greater emphasis on management issues over the past several years. However, the focus of such oversight needs to extend beyond the emphasis on formulating the President’s Budget to include an examination of the many challenges agencies face that may be contributing to poor performance. In spite of the persistent weaknesses we found in agencies’ strategic plans and annual performance plans and reports, OMB significantly reduced the scope of its guidance to agencies on how to prepare these documents. By emphasizing a focus on resource allocation through its PART exercise and providing less information on how to comply with GPRA, OMB may be sending a message to agencies that compliance with GPRA is not important. Without strong leadership from OMB, the foundation of performance information that has been built could deteriorate. OMB leadership is critical to addressing the continuing challenges presented in GPRA implementation and the transformation of the federal government to an increasingly results-oriented culture. OMB, as the primary focal point for overall management in the federal government, can provide the needed impetus by providing guidance, fostering communication among agencies, and forming intragovernmental councils and work groups tasked with identifying potential approaches and solutions to overcoming the persistent challenges to results-oriented management. Congress can also play a decisive role in fostering results-oriented cultures in the federal government by using information on agency goals and results at confirmation, oversight, authorization, and appropriation hearings. Consistent congressional interest in the status of an agency’s GPRA efforts, performance measures, and uses of performance information to make decisions, will send an unmistakable message to agencies that Congress expects GPRA to be thoroughly implemented. We also found that timing issues may affect the development of agency strategic plans that are meaningful and useful to top leadership. The commitment of top leadership within agencies, OMB, and Congress is critical to the success of strategic planning efforts. A strategic plan should reflect the policy priorities of an organization’s leaders and the input of key stakeholders if it is to be an effective management tool. However, GPRA specifies time frames for updating strategic plans that do not correspond to presidential or congressional terms. As a result, an agency may be required to update its strategic plan a year before a presidential election and without input from a new Congress. If a new president is elected, the updated plan is essentially moot and agencies must spend additional time and effort revising it to reflect new priorities. Our focus group participants, including GPRA experts, strongly agreed that this timing issue should be addressed by adjusting time frames to correspond better with presidential and congressional terms. Mission fragmentation and program overlap are widespread throughout the federal government. We have noted that interagency coordination is important for ensuring that crosscutting program efforts are mutually reinforcing and efficiently implemented. Our review of six agencies’ strategic and annual performance plans along with our previous work on crosscutting issues has demonstrated that agencies’ still present their goals and strategies in a mostly stovepiped manner. They have generally not used their plans to communicate the nature of their coordination with other agencies, in terms of the development of common or complementary goals and objectives or strategies jointly undertaken to achieve those goals. We have also reported that GPRA could provide a tool to reexamine federal government roles and structures governmentwide. GPRA requires the President to include in his annual budget submission a federal government performance plan. Congress intended that this plan provide a “single cohesive picture of the annual performance goals for the fiscal year.” The governmentwide performance plan could help Congress and the executive branch address critical federal performance and management issues, including redundancy and other inefficiencies in how we do business. It could also provide a framework for any restructuring efforts. Unfortunately, this provision has not been fully implemented. Instead, OMB has used the President’s Budget to present high-level information about agencies and certain program performance issues. The agency-by- agency focus of the budget does not provide the integrated perspective of government performance envisioned by GPRA. If the governmentwide performance plan were fully implemented, it could provide a framework for such congressional oversight. For example, in recent years, OMB has begun to develop common measures for similar programs, such as job training. By focusing on broad goals and objectives, oversight could more effectively cut across organization, program, and other traditional boundaries. Such oversight might also cut across existing committee boundaries, which suggests that Congress may benefit from using specialized mechanisms to perform oversight (i.e., joint hearings and special committees). A strategic plan for the federal government, supported by key national indicators to assess the government’s performance, position, and progress, could provide an additional tool for governmentwide reexamination of existing programs, as well as proposals for new programs. If fully developed, a governmentwide strategic plan can potentially provide a cohesive perspective on the long-term goals of the federal government and provide a much needed basis for fully integrating, rather than merely coordinating, a wide array of federal activities. Successful strategic planning requires the involvement of key stakeholders. Thus, it could serve as a mechanism for building consensus. Further, it could provide a vehicle for the President to articulate long-term goals and a road map for achieving them. In addition, a strategic plan can provide a more comprehensive framework for considering organizational changes and making resource decisions. Developing a strategic plan for the federal government would be an important first step in articulating the role, goals, and objectives of the federal government. It could help provide critical horizontal and vertical linkages. Horizontally, it could integrate and foster synergies among components of the federal government as well as help to clarify the role of the federal government vis-à-vis other sectors of our society. Vertically, it could provide a framework of federal missions and goals within which individual federal agencies could align their own missions and goals that would cascade down to individual employees. The development of a set of key national indicators could be used as a basis to inform the development of governmentwide strategic and annual performance plans. The indicators could also link to and provide information to support outcome- oriented goals and objectives in agency-level strategic and annual performance plans. We have found that leading organizations that progressed the farthest to results-oriented management did not stop after strategic planning and performance measurement. They applied their acquired knowledge and data to identify gaps in their performance, report on that performance, and finally use that information to improve their performance to better support their missions. Performance data can have real value only if they are used to identify the gap between an organization’s actual performance level and the performance level it has identified as its goal. Once the performance gaps are identified for different program areas, managers can determine where to target their resources to improve overall mission accomplishment. When managers are forced to reduce their resources, the same analysis can help them target reductions to keep to a minimum the impact on their organization’s overall mission. Under GPRA, agencies produce a single strategic plan, annual performance plan, and annual performance report. However, there are many potential consumers of agencies’ performance information—Congress, the public, and the agency itself. One size need not fit all. Clearly, an agency will need more detailed information on its programs for operational purposes than would be suitable for external audiences. Of the six agencies’ performance reports we reviewed, some of them provided useful summary tables or information that provided overall snapshots of performance or highlighted progress in achieving key goals. Other reports that lacked such a summary made it difficult to assess the progress achieved. To improve the prospect that agency performance information will be useful to and used by these different users, agencies need to consider the different information needs and how to best tailor their performance information to meet those needs. For example, we have reported that, although many information needs were met, congressional staff also identified gaps in meeting their information needs. Key to addressing these information gaps was improving communication between congressional staff and agency officials to help ensure that congressional information needs are understood, and that, where feasible, arrangements are made to meet them. Improved two-way communication might also make clear what information is and is not available, as well as what is needed and what is not needed. This might entail the preparation of simplified and streamlined plans and reports for Congress and other external users. Another challenge that limits the usefulness of agency performance reports is the lack of timely data on performance. For the six performance reports we reviewed we continued to observe a significant number of goals for which performance data were unavailable. Policy decisions made when designing federal programs, particularly intergovernmental programs, may make it difficult to collect timely and consistent national data. In administering programs that are the joint responsibility of state and local governments, Congress and the executive branch continually balance the competing objectives of collecting uniform program information to assess performance with giving states and localities the flexibility needed to effectively implement intergovernmental programs. Another key challenge to achieving a governmentwide focus on results is that of developing meaningful, outcome-oriented performance goals and collecting performance data that can be used to assess results. Performance measurement under GPRA is the ongoing monitoring and reporting of program accomplishments, particularly progress toward preestablished goals. It tends to focus on regularly collected data on the level and type of program activities, the direct products and services delivered by the programs, and the results of those activities. For programs that have readily observable results or outcomes, performance measurement may provide sufficient information to demonstrate program results. In some programs, however, outcomes are not quickly achieved or readily observed, or their relationship to the program is uncertain. In such cases, more in-depth program evaluations may be needed, in addition to performance measurement, to examine the extent to which a program is achieving its objectives. Given the difficult measurement challenges we have identified, it is all the more important that agency strategic planning efforts include the identification of the most critical evaluations that need to take place to address those challenges. However, our previous work has raised concerns about the capacity of federal agencies to produce evaluations of program effectiveness. Few of the agencies we reviewed deployed the rigorous research methods required to attribute changes underlying outcomes to program activities. Yet we have also seen how some agencies have profitably drawn on systematic program evaluations to improve their measurement of program performance or understanding of performance and how it might be improved. Our review of six agencies’ strategic plans and performance reports in this report revealed weaknesses in their discussions of program evaluation. Most of the strategic plans lacked critical information required by GPRA, such as a discussion of how evaluations were used to establish strategic goals or a schedule of future evaluations. Furthermore, two of the six performance reports did not summarize the results of program evaluations completed that year, as required. Our work has also identified substantial, long-standing limitations in agencies’ abilities to produce credible data and identify performance improvement opportunities that will not be quickly or easily resolved. According to our review, five of six agencies’ annual performance plans showed meaningful improvements in how they discussed the quality of performance data. However, only DOT’s performance plan and report contained information that provided a full level of confidence in the credibility of its performance data. In particular, the plans and reports did not always provide detailed information on how the agencies verified and validated their performance data. To provide a broader perspective and more cohesive picture of the federal government’s goals and strategies to address issues that cut across executive branch agencies, we recommend that the Director of OMB fully implement GPRA’s requirement to develop a governmentwide performance plan. To achieve the greatest benefit from both GPRA and PART, we recommend that the Director of OMB articulate and implement an integrated and complementary relationship between the two. GPRA is a broad legislative framework that was designed to be consultative with Congress and other stakeholders, and allows for varying uses of performance information. PART looks through a particular lens for a particular use—the executive budget formulation process. To improve the quality of agencies’ strategic plans, annual performance plans, and performance reports and help agencies meet the requirements of GPRA, we recommend that the Director of OMB provide clearer and more consistent guidance to executive branch agencies on how to implement GPRA. Such guidance should include standards for communicating key performance information in concise as well as longer formats to better meet the needs of external users who lack the time or expertise to analyze lengthy, detailed documents. To help address agencies’ performance measurement challenges, we recommend that the Director of OMB engage in a continuing dialogue with agencies about their performance measurement practices with a particular focus on grant-making, research and development, and regulatory functions to identify and replicate successful approaches agencies are using to measure and report on their outcomes, including the use of program evaluation tools. Additionally, we recommend that the Director of OMB work with executive branch agencies to identify the barriers to obtaining timely data to show progress against performance goals and the best ways to report information where there are unavoidable lags in data availability. Interagency councils, such as the President’s Management Council and the Chief Financial Officers’ Council, may be effective vehicles for working on these issues. To facilitate the transformation of agencies’ management cultures to be more results-oriented, we recommend that the Director of OMB work with agencies to ensure they are making adequate investments in training on performance planning and measurement, with a particular emphasis on how to use performance information to improve program performance. To ensure that agency strategic plans more closely align with changes in the federal government leadership, Congress should consider amending GPRA to require that updates to agency strategic plans be submitted at least once every 4 years, 12-18 months after a new administration begins its term. Additionally, consultations with congressional stakeholders should be held at least once every new Congress and interim updates made to strategic and performance plans as warranted. Congress should consider using these consultations along with its traditional oversight role and legislation as opportunities to clarify its performance expectations for agencies. This process may provide an opportunity for Congress to develop a more structured oversight agenda. To provide a framework to identify long-term goals and strategies to address issues that cut across federal agencies, Congress also should consider amending GPRA to require the President to develop a governmentwide strategic plan. We provided a copy of the draft report to OMB for comment. OMB’s written comments are reprinted in appendix VIII. In general, OMB agreed with our findings and conclusions. OMB agreed to implement most of our recommendations, noting that these recommendations will enhance its efforts to make the government more results oriented. OMB agreed to (1) work with agencies to ensure they are provided adequate training in performance management, (2) revise its guidance to clarify the integrated and complementary relationship between GPRA and PART, and (3) continue to use PART to improve agency performance measurement practices and share those practices across government. In response to our recommendation that OMB fully implement GPRA’s requirement to develop a governmentwide performance plan, OMB stated that the President’s Budget represents the executive branch’s governmentwide performance plan. However, the agency-by-agency focus of the budget over the past few years does not provide an integrated perspective of government performance, and thus does not meet GPRA’s requirement to provide a “single cohesive picture of the annual performance goals for the fiscal year.” In response to our matter for congressional consideration that Congress should consider amending GPRA to require the President to develop a governmentwide strategic plan, OMB noted that the budget serves as the governmentwide strategic plan. However, in our opinion, the President’s Budget focuses on establishing agency budgets for the upcoming fiscal year. Unlike a strategic plan, it provides neither a long-term nor an integrated perspective on the federal government’s activities. A governmentwide strategic plan should provide a cohesive perspective on the long-term goals of the federal government and provide a basis for fully integrating, rather than primarily coordinating, a wide array of federal activities. We provided relevant sections of the draft report to Education, DOE, HUD, SBA, SSA, and DOT. Education and SBA did not provide any comments, while DOT provided minor technical comments. Written comments from DOE, HUD, and SSA are reprinted in appendixes IX, X, and XI, respectively, along with our responses. DOE disagreed with portions of our analyses of its 2004 Annual Performance Plan and its 2002 Performance and Accountability Report. Our analysis of DOE’s documents was based on specific criteria (see appendixes IV and V for details) and was characterized in relation to our reviews of the other five agencies’ documents. We modified or clarified certain characterizations in response to DOE comments, but for the most part found that our characterizations were appropriate. SSA generally agreed with our observations and agreed to incorporate them in its future planning efforts. SSA made several points of clarification and disagreed with our observation that its performance and accountability report does not clearly state how program evaluations were used to answer questions about program performance and results and how they can be improved. SSA noted that its evaluations rely on surveys, and these surveys form the basis for its efforts to deliver high-quality service. SSA also noted that it lists other evaluations that are of great importance to its ongoing operations. We do not discount the usefulness of SSA’s surveys in assessing its day-to-day management of programs. Rather, we believe that it would be helpful for SSA to clearly identify the range of evaluations conducted and how each of them contributed to improved program performance. HUD noted that all of the areas we suggested for further improvement are under consideration for improvement. However, they disagreed with us on two observations related to the strategic plan: (1) that the link between its long-term and intermediate goals is difficult to discern and (2) that it did not explain how it used the results of program evaluations to update the current plan and did not include a schedule for future evaluations. On the basis of OMB guidance for preparing strategic plans and the criteria we used to evaluate all six agencies’ strategic plans (see app. III for more detail), we maintain that these two observations are valid and require further attention. HUD also disagreed with how we presented the performance information in its summary report cards (see fig. 22). HUD noted that many of the results were explained in the individual indicator write-ups that followed the summary information. Our analysis of HUD’s information included qualitative aspects of how the information was presented, such as its usefulness to inform the average reader with little or no exposure to the subject matter, and the extent to which HUD presented a complete summary of performance information in a user-friendly format. Technical comments from DOE, HUD, and SSA were incorporated, as appropriate. | Now that the Government Performance and Results Act (GPRA) has been in effect for 10 years, GAO was asked to address (1) the effect of GPRA in creating a governmentwide focus on results and the government's ability to deliver results to the American public, (2) the challenges agencies face in measuring performance and using performance information in management decisions, and (3) how the federal government can continue to shift toward a more results-oriented focus. GPRA's requirements have established a solid foundation of results-oriented performance planning, measurement, and reporting in the federal government. Federal managers surveyed by GAO reported having significantly more of the types of performance measures called for by GPRA. GPRA has also begun to facilitate the linking of resources to results, although much remains to be done in this area to increase the use of performance information to make decisions about resources. We also found agency strategic and annual performance plans and reports we reviewed have improved over initial efforts. Although a foundation has been established, numerous significant challenges to GPRA implementation still exist. Inconsistent top leadership commitment to achieving results within agencies and Office of Management and Budget (OMB) can hinder the development of results-oriented cultures in agencies. Furthermore, in certain areas, federal managers continue to have difficulty setting outcome-oriented goals, collecting useful data on results, and linking institutional, program, unit, and individual performance measurement and reward systems. Finally, there is an inadequate focus on addressing issues that cut across federal agencies. OMB, as the focal point for management in the federal government, is responsible for overall leadership and direction in addressing these challenges. OMB has clearly placed greater emphasis on management issues during the past several years. However, it has showed less commitment to GPRA implementation in its guidance to agencies and in using the governmentwide performance plan requirement of GPRA to develop an integrated approach to crosscutting issues. In our view, governmentwide strategic planning could better facilitate the integration of federal activities to achieve national goals. |
The TAA Reform Act established the HCTC to help certain individuals pay for health coverage by establishing a tax credit for 65 percent of the premium cost for qualified coverage. Individuals receive the HCTC in two ways—either in advance on a monthly basis or after the end of the year when they file their federal income taxes. Individuals are not required to itemize deductions or to owe federal income taxes in order to receive the HCTC. IRS provides the end-of-year HCTC to the individual, while tax credits claimed in advance are paid to the health plan in the form of a premium payment. For the advance credit, the HCTC program remits payments directly to the health plan; however, the individual must pay the full premium out of pocket until enrollment is complete. Individuals receiving the HCTC in advance may claim the credit at the end of the year for any months in which they were eligible for the HCTC but did not receive it in advance. Three groups of individuals may be eligible to receive the HCTC for themselves and their qualified family members: 1. TAA recipients. These are individuals who lost their jobs due to imports from or a shift in production to certain foreign countries. For workers to be eligible for TAA, Labor must certify petitions, filed by or on behalf of an employee group, indicating that the workers lost employment as a result of foreign competition. Once Labor has certified the petition, state workforce agencies determine individual worker eligibility for TAA benefits. To be eligible for the HCTC, TAA- eligible workers must first be eligible for a trade readjustment allowance, which extends income support after unemployment insurance is exhausted, and as a condition of receiving this income support must enroll in training to develop job skills for reemployment, or must receive a waiver from training. Because the trade readjustment allowance is not available to eligible workers until 60 or more days after the employee group files a petition to receive TAA certification from Labor, trade-affected workers cannot become eligible for the HCTC until this time. 2. Alternative trade adjustment assistance (ATAA) recipients. Individuals who qualify for this assistance have lost their jobs as a result of trade-related layoffs and found new jobs within 26 weeks at lower pay and earn $50,000 or less in their new jobs. The ATAA program, initiated in August 2003, provides certain workers who are aged 50 and over and lacking transferable job skills with a wage subsidy to help offset this salary reduction. Labor must certify that an employee group lost employment as a result of foreign competition and that ATAA applicants are included in this group. State workforce agencies are responsible for determining an individual’s eligibility for ATAA benefits. 3. PBGC beneficiaries. These individuals receive payments from PBGC because their pension plan was terminated when their former employer went bankrupt or experienced other severe financial difficulties. To be eligible for the HCTC, PBGC beneficiaries must be aged 55 or older and be either currently receiving benefits or have received a lump sum payment from PBGC after August 5, 2002. Unlike TAA-eligible individuals, PBGC beneficiaries do not have to be associated with trade-affected industries in order to receive the HCTC. In order to be eligible for the HCTC, individuals in these three groups must also be enrolled in qualified health coverage and meet certain other criteria. These criteria include that the individual cannot be eligible to be claimed as a dependent on someone else’s tax return; cannot be imprisoned on the first day of the month he or she seeks to receive the HCTC; and cannot be enrolled in other, nonqualified health coverage, such as Medicare or health coverage through the Department of Defense health system. The TAA Reform Act specifies 10 types of qualifying coverage that are eligible for the HCTC, including 3 automatic options that do not require any action on the part of the states and 7 options that only meet the definition of qualified health plans if a state elects to make them available and ensures that they meet certain criteria. The TAA Reform Act designates the following three options that are automatically qualified as coverage eligible for the HCTC: COBRA continuation plans. An eligible individual may use the HCTC for COBRA coverage. Under COBRA, employers with 20 or more employees must offer 18 to 36 months of continued health coverage to former employees and their dependents who lose health coverage under certain circumstances, such as when an employee is terminated or retires. Generally, health plans may charge individuals purchasing COBRA continuation coverage no more than 102 percent of the total premium. Spousal coverage. An eligible individual may claim the end-of-year HCTC for group market coverage obtained through a spouse’s employer, provided the employer contributed less than 50 percent toward the cost of coverage. The advance HCTC cannot be used to purchase coverage through a spouse’s employer. Individual market plans. An eligible individual may use the HCTC for individually purchased health coverage, provided that the coverage was purchased at least 30 days prior to the separation from employment that resulted in the individual becoming eligible to receive TAA benefits or PBGC pension payments. In addition to the three automatic options, the TAA Reform Act allows states to designate seven other coverage alternatives for HCTC recipients. Most states have chosen to designate one or more of the following three state-qualified options: Arrangements with insurers or other plan administrators. States may make arrangements with issuers of health insurance coverage (that is, health insurers), group health plans, employers, or other plan administrators to provide coverage eligible for the HCTC. States electing to provide state-qualified HCTC coverage through an arrangement with a health insurer may designate insurers offering either individual market or group health plans. State high-risk pools. Some states have established high-risk pools to provide health coverage to individuals unable to purchase coverage elsewhere, typically because of a preexisting health condition. To qualify for the HCTC, high-risk pools must (1) cover, without preexisting condition limits, individuals leaving group coverage who are eligible for guaranteed coverage under the Health Insurance Portability and Accountability Act of 1996 (HIPAA); and (2) offer premium rates and covered benefits consistent with the National Association of Insurance Commissioners Model Health Plan for Uninsurable Individuals Act in effect as of August 21, 1996. State-based continuation coverage, or mini-COBRA. Because the COBRA provisions only apply to plans maintained by employers with 20 or more workers, some states have enacted so-called mini-COBRA laws requiring insurers providing coverage to plans maintained by employers with fewer than 20 workers to offer continuation coverage to such plans. The other four types of coverage that states can designate as qualified plans are (1) a health coverage program for state employees, (2) a state- based health coverage program comparable to that offered for state employees, (3) an arrangement with a private-sector health care coverage purchasing pool (that is, a cooperative of employers or other groups or individuals that negotiate with one or more health plans), and (4) a state- operated health plan that does not receive any federal financial participation (thereby excluding Medicaid and the State Children’s Health Insurance Program). These seven state-qualified coverage options must provide qualified individuals—that is, individuals who have at least 3 months of prior creditable coverage at the time they seek to enroll in a state-qualified HCTC plan—four consumer protections. These consumer protections are (1) guaranteed issue, whereby insurers must guarantee enrollment and must permit the individual to remain enrolled as long as he or she pays premiums; (2) the prohibition of preexisting condition restrictions; (3) nondiscriminatory premiums, such that the premiums charged to HCTC enrollees may not be greater than the premiums for similar individuals not receiving the HCTC; and (4) benefits that are substantially the same as coverage provided to similar individuals who are not receiving the HCTC. While the fourth consumer protection requires the benefits to be similar to coverage offered to non-HCTC individuals, it does not specify what benefits must be included. The TAA Reform Act authorized states to use national emergency grants to help with costs related to the implementation of the HCTC and established grants to promote high-risk pools. National emergency grants. To help with HCTC expenses, states can apply for two types of national emergency grants: bridge grants and infrastructure grants. Bridge grants could be used to pay for up to 65 percent of the cost of health coverage for eligible individuals until the federal advance HCTC became available in August 2003. After August 2003, states were permitted to use remaining bridge grant funds to assist eligible individuals with paying their premiums during the HCTC enrollment process. Infrastructure grants were intended to assist states with start-up and administrative costs related to the HCTC. High-risk pool grants. To promote high-risk pools, states were offered new grants, called seed grants, to provide funds for the establishment of qualified high-risk pools, and operating grants, to reimburse states for up to 50 percent of losses incurred by high-risk pools meeting certain criteria. Seed grants also can be used to convert an existing high-risk pool to a qualified high-risk pool—that is, one that meets the requirements contained in the Public Health Service Act for individuals eligible for protections under HIPAA. Although IRS is responsible for administering the HCTC program, three federal departments—Treasury, Labor, and HHS—share responsibility for implementing the HCTC and grants to states contained in the TAA Reform Act. (See table 1.) To implement and administer the HCTC, Congress appropriated to IRS $70 million for fiscal year 2003, to remain available through fiscal year 2004, and $35 million for fiscal year 2004, to remain available through fiscal year 2005. Separate funding was provided for HCTC payments. In addition, PBGC—a federal corporation created by the Employee Retirement Income Security Act of 1974—is responsible for submitting, on a monthly basis, the names of PBGC beneficiaries potentially eligible for the HCTC to the HCTC program office. State responsibilities include identifying TAA individuals who are potentially eligible for the HCTC and, if the state so chooses, making state-qualified health coverage options available. Enrolling for the advance HCTC involves multiple entities, including federal agencies, a state workforce agency, and health plans. Potential eligibility begins with a qualifying event—either a worker loses employment as a result of foreign competition or a retiree’s pension plan is terminated. These individuals must then undergo an eligibility determination process for TAA or have PBGC assume payment of their pension. The enrollment process for HCTC can begin once a state sends to the HCTC program office the names of individuals receiving or eligible for income support through the trade readjustment allowance or PBGC sends a list of names of beneficiaries aged 55 or older. The HCTC program office mails an HCTC package to each of these individuals. Individuals may enroll for the advance HCTC if they meet the eligibility criteria, which include purchasing qualified health coverage. Once an individual successfully enrolls for the advance HCTC, the HCTC program office sends an invoice for the individual’s 35 percent share of the premium, and, when this payment is received, the remaining 65 percent is added and the full premium amount is forwarded to the participating health plan. Figure 1 provides an overview of the steps required for TAA recipients and PBGC beneficiaries to enroll for the advance HCTC and to have payments made to the qualifying health plan in which they enroll. End-of-year HCTC recipients must complete many, but not all, of the steps outlined above for advance HCTC enrollees. They must experience a qualifying event, be determined eligible for the trade readjustment allowance or PBGC payments, have their names sent to the HCTC program office by a state workforce agency or PBGC, and have qualified health coverage. Instead of enrolling with the HCTC program office, however, individuals claiming the end-of-year HCTC must submit required documents, which include proof of premium payment and a form designed for the HCTC, to the IRS along with their federal tax return. In addition, individuals who receive the advance HCTC may also claim the end-of-year HCTC for the months that they did not receive the advance HCTC, including months prior to August 2003, when the advance credit was first made available, and the months during the enrollment process before advance payments are made to their health plans. For 2003, 19,410 individuals received about $37 million in payments for themselves and dependents for the advance and end-of-year HCTC, the majority by filing for the credit on their end-of-year tax return. For July 2004, enrollment for the advance HCTC was about 13,200, about 60 percent of whom were PBGC beneficiaries. An HCTC program office survey in October 2003 (early in the implementation of the advance HCTC) indicated that advance HCTC enrollees were, on average, older and had lower incomes and educational attainment than nonenrollees, but both groups reported similar health status. Comparable data for end-of-year HCTC recipients and nonrecipients were not available. According to officials from states, qualified health plans, and a union, several factors may have limited the participation in the advance and end-of-year HCTC to date. These factors include the newness of the program, the fragmentation and complexity of the TAA certification and HCTC eligibility determination and enrollment processes, the length of time—typically 3 to 6 months—that the individual must pay the full premium while establishing eligibility for and enrolling in the advance payment, and the ongoing cost of the individual’s share of the premium once the advance HCTC payments have begun. For 2003, about $37 million was paid on behalf of 19,410 HCTC recipients, most of whom (12,594 individuals) claimed the HCTC solely on their end- of-year tax return. Many of these individuals may have received the HCTC to pay for qualified health insurance covering dependents as well as themselves, but data were not available on the number of dependents covered by the end-of-year HCTC. The advance HCTC became available in August 2003, and 3,696 individuals received both the advance HCTC—for the months beginning on or after August—and the end-of-year HCTC—for the months they paid 100 percent of their insurance premium. Another 3,120 individuals received the HCTC only in the form of an advance payment. (See fig. 2.) Of the $37 million paid, about $23.8 million was paid on behalf of those who filed solely for the end-of-year HCTC, $2.8 million for those receiving the advance HCTC only, and $10.7 million for those who claimed both forms of the credit. According to the HCTC program office, for 2003, about 24,000 taxpayers filed claims for the end- of-year HCTC, and about 8,000 of these claims were denied. Some of the individuals whose claims for the end-of-year credit were denied were not on the list of potentially eligible individuals prepared by the state workforce agencies and PBGC. In addition, some of those denied were age 65 or older. Enrollment for the advance HCTC increased from about 4,000 individuals at the start of the program to about 13,200 individuals in July 2004. (See table 2.) In this month, roughly 40 percent of enrollees were TAA recipients, while the remaining 60 percent were PBGC beneficiaries. Individuals also used the advance HCTC to cover their qualified family members. In May 2004, approximately 12,900 individuals were enrolled to receive the advance HCTC for themselves and about 7,800 family members. Nationwide, as of July 2004, Pennsylvania had the highest number of individuals enrolled for the advance HCTC (2,265), followed by North Carolina (1,636) and Ohio (1,090). Most individuals enrolled for the advance HCTC were clustered in nine states—Illinois, Indiana, Maryland, Michigan, North Carolina, Ohio, Pennsylvania, Virginia, and West Virginia. These nine states accounted for two-thirds of all individuals enrolled for the advance HCTC, although fewer than half of all potentially eligible individuals resided in these states. Several of these states recently experienced large trade-related layoffs at steel and textile companies. For example, Pillowtex, a household textile manufacturer headquartered in North Carolina, closed manufacturing and distribution facilities in North Carolina and Virginia and terminated more than 4,500 employees in July 2003. In April 2003, PBGC assumed pension plan payments for 95,000 workers and retirees from the Pennsylvania-headquartered Bethlehem Steel Corporation. (See app. I for the number of individuals enrolled for the advance HCTC by state.) Determining the actual rate of participation in the HCTC is difficult because reliable data on the total number of individuals actually eligible for the HCTC are not available. States and PBGC are responsible for identifying and reporting individuals who are eligible for TAA and PBGC benefits, while the responsibility for assessing the health coverage and tax eligibility HCTC criteria lies with the HCTC program office. Therefore, individuals identified by states and PBGC are considered only potentially eligible for the HCTC because IRS also needs to determine that they meet health coverage and tax criteria before receiving the HCTC. Some of the individuals identified by states and PBGC as potentially eligible may have other health coverage that would disqualify them from receiving the HCTC. For example, the October 2003 HCTC program office survey found that about half of those identified as TAA recipients or PBGC beneficiaries, but who were not enrolled for the advance HCTC, were in fact ineligible because they had other coverage, such as Medicare or through a spouse’s employer. Similarly, in the HCTC program office’s February 2004 survey, many respondents reported multiple reasons that made them ineligible for the HCTC, including being claimed as a dependent on someone else’s tax return, not meeting the age eligibility criteria, or having other health coverage from sources such as the military or the Federal Employees Health Benefits Program. Based on an HCTC program office survey of 1,200 respondents conducted in October 2003, advance HCTC enrollees were, on average, older, were less likely to have children, and had lower income than potentially eligible nonenrollees. Both groups, however, reported similar health status. Specifically, advance HCTC enrollees were an average of 4 years older than nonenrollees, had 12 percent lower household pretax income, and lower educational attainment than nonenrollees. There was no statistically significant difference in self-reported health status between enrollees and nonenrollees in the advance HCTC program. Seventy-four percent or more of enrollees and nonenrollees reported being in good health, while 3 percent of enrollees and 6 percent of nonenrollees rated their health as poor. (See table 3.) Demographic data for those who received the end-of- year HCTC were not available at the time of our analysis. According to officials we interviewed from states, participating qualified health plans, and a union representing affected workers, the number of individuals receiving the HCTC was lower than expected. We identified several factors that may help explain the limited number of individuals receiving the advance and end-of-year HCTC to date. In addition to the newness of the advance payment option, these factors included the fragmentation and complexity of the eligibility and enrollment process, the gap in time before the advance payments are available, and the affordability of the individual’s share of the premiums. State workforce agency and health plan officials reported that the process for trade-displaced workers to become eligible and enroll for the HCTC was fragmented and complex. Between the time workers lost employment and the time they enrolled for the advance HCTC, they interacted with two different federal agencies (Labor and IRS), their state’s workforce agency, and a health plan. Each entity performed a discrete part of the eligibility determination and enrollment process, without any single entity being responsible for overall coordination. In four of the eight states we reviewed, workforce officials reported that displaced workers seeking help with the advance HCTC often had to make multiple calls to different federal and state agencies. For example, a state workforce agency official reported that displaced workers who called the HCTC program office about the advance HCTC—prior to their name being sent from the state— were referred to Labor, which in turn referred them back to the state workforce agency. An official from another state workforce agency reported that the state workforce agency does not deal with health coverage issues, so displaced workers who called with questions or difficulties about their health plan were referred to the HCTC program office or the health plan. State and union officials reported that this level of fragmentation could be difficult to navigate, especially for individuals with limited education or those who worked in large companies and were accustomed to centrally coordinated benefits administration. Currently, individuals must navigate the eligibility and enrollment process largely on their own. State and health plan officials suggested developing a coordinated outreach strategy to help individuals who have difficulty with the advance HCTC enrollment process. For example, officials reported that HCTC information sessions attended by representatives from the PBGC, state workforce agencies, HCTC program, and qualified health plans were held in some states that had experienced large layoffs. According to officials, these information sessions helped bring all the key players together in one location and enabled individuals to walk from one station to the next and complete the enrollment process on the same day, if they chose to. State officials reported that the requirement that individuals first qualify for the trade readjustment allowance—income support available under the TAA program after unemployment insurance is exhausted—added to the time and complexity of the advance HCTC eligibility and enrollment process and could limit participation. Individuals cannot qualify for the trade readjustment allowance until at least 60 days after the petition for TAA certification has been filed with Labor. In addition, in order to qualify for this benefit, individuals must be in training or have a waiver from training, which must be recertified monthly by the state workforce agency. State officials said that removing the requirement to first qualify for the trade readjustment allowance would expedite the enrollment process and could enable additional dislocated workers to receive the advance HCTC. Another factor that complicates and could limit participation in the advance HCTC is the time required to enroll for the advance HCTC. In our survey of state workforce agencies conducted in March 2004, 30 states responded that TAA recipients had difficulty receiving the HCTC, and 17 of these 30 states reported that it took too long for eligible individuals to receive the advance HCTC because of the way the enrollment process was structured. The multiagency, multistep process for eligibility determination and enrollment resulted in a significant gap between the time individuals lost employment or their retirement plan was terminated and the time they began receiving the advance HCTC. It typically took from 4 to 6 months for newly displaced trade-affected workers to become eligible for and receive the first advance payment. (See fig. 3.) For new PBGC beneficiaries, the time required to become eligible for and receive the first advance payment typically was 3 to 6 months. The elapsed time in becoming eligible and enrolling for the advance HCTC also meant that in some instances individuals potentially eligible for the HCTC were required to make certain decisions that would affect future health coverage for themselves or their spouse before they knew whether they would be eligible to receive the advance HCTC. For example, some displaced workers are offered the option of paying for COBRA coverage at the time of separation from their employers, and individuals who enroll in COBRA may use the advance HCTC to pay 65 percent of their COBRA premiums once they have completed the advance HCTC enrollment process, which typically can take 3 to 6 months. Eligible individuals who decline COBRA coverage—such as for affordability concerns—or do not have COBRA as an option and become uninsured for more than 63 days risk losing guaranteed access to state-qualified health coverage and other consumer protections. Because it typically takes 3 to 6 months after losing employment before beginning to receive the advance HCTC, maintaining coverage for this 63-day period can be very expensive for displaced workers, and some may opt not to pay for this coverage in part because they have difficulty affording it. In our survey of state workforce agencies, 20 of the 30 states that said that TAA recipients had difficulty receiving the HCTC reported that breaks in coverage of 63 days or more are causing individuals to lose access to one or more consumer protections, such as guaranteed access to coverage or no preexisting condition exclusions. However, officials we interviewed from five state- qualified HCTC health plans reported that they have voluntarily extended one or more consumer protections to individuals with more than a 63-day break in coverage, for example offering all HCTC applicants guaranteed access to coverage and in some cases waiving preexisting condition exclusions for enrollees. Some of these health plan officials indicated that the decision to offer all HCTC applicants the same consumer protections was made for ease of administration, and this practice may be revoked in the future at the discretion of the plan. State, health plan, and union officials also expressed concern about gaps in HCTC program eligibility rules that can affect the spouses and other dependents of PBGC beneficiaries who enroll in Medicare. Specifically, when a PBGC beneficiary enrolls in Medicare, the beneficiary loses eligibility for the HCTC. According to current eligibility rules, the spouses and other dependents of these individuals also lose eligibility for the HCTC even if they are not yet eligible for Medicare. A union official reported that when some PBGC beneficiaries attended an HCTC information session and became aware of this rule, they expressed reservations about enrolling in the HCTC, stating that they needed more time to think about whether to apply. According to state workforce officials, health plan officials, and union representatives we contacted, the affordability of qualified HCTC coverage was another factor affecting participation rates. HCTC-eligible individuals have either lost employment, often involving a reduction in income, or retired and are receiving a fixed pension from PBGC. Research indicates that as premiums consume an increasing share of income, participation rates decline. For example, one study found that, among populations with incomes up to 300 percent of the federal poverty level, more than half of the target population would participate when premiums represent 1 percent of income, but only one-sixth would participate when premiums represent 5 percent of income. The affordability of qualified health coverage options can be problematic even with the HCTC. During the 1- to 3-month period before the health plan receives the first premium payment from the HCTC program, HCTC enrollees are required to pay 100 percent of the premium out of pocket, which for a single person would represent 36 percent and for two persons would represent 72 percent of the average monthly unemployment insurance benefit of about $1,128. The ongoing 35 percent share of the average HCTC premiums in mid-2004 for a health plan covering a single individual and a plan covering a single individual and one other family member would have required 13 percent and 25 percent, respectively, of the average monthly unemployment insurance benefit. In addition to these premium costs, HCTC enrollees must pay any deductibles, coinsurance, or copayments that are required by their health plan. In our survey of state workforce agencies, 24 of 30 states reporting that TAA recipients had difficulty receiving the HCTC said that the ability to pay premiums while waiting to receive the advance HCTC was a factor contributing to this difficulty. In addition, 22 of the 30 states indicated that the lack of affordable health coverage was a reason individuals may be having difficulty participating in HCTC. The state workforce, health plan, and union officials we interviewed reported that, even with a 65 percent subsidy, the remaining 35 percent share might cost too much to be affordable for many displaced workers and retirees. From August 2003 through April 2004, 60 percent of advance HCTC enrollees obtained coverage through automatically qualified health plans, primarily COBRA, and 40 percent of individuals receiving the advance HCTC purchased coverage through a state-qualified plan. Comparable data on the coverage purchased by end-of-year recipients were not available. More than two-thirds of the states designated state-qualified plans, with most states choosing to provide coverage through arrangements with insurers or high-risk pools. The types of benefits available for purchase with the HCTC varied both within and across the different automatic and state-qualified coverage options. For example, COBRA plans, which were a continuation of employer-sponsored group market coverage, tended to offer lower deductibles than state-qualified high-risk pools and more comprehensive benefits than the coverage provided through arrangements with insurers, most of which were individual market plans. The cost of HCTC coverage for advance credit enrollees varied widely depending on the number of people covered, the type of coverage purchased, and whether the HCTC enrollee was a TAA recipient or a PBGC beneficiary. The cost of HCTC coverage was also affected by the different ways in which premiums are set in the group and individual market. Cumulatively, from the time the advance credit became available in August 2003 through April 2004, the majority (60 percent) of advance HCTC enrollees obtained coverage through one of the automatically qualified coverage options specified in the TAA Reform Act. Most HCTC enrollees (56 percent) used the advance HCTC to purchase COBRA coverage, while 4 percent remained enrolled in the individual market plans they held 30 days prior to the separation from employment that resulted in their becoming eligible for TAA benefits or PBGC payments (see fig. 4). Nationwide, about two-thirds of TAA recipients enrolled for the advance HCTC purchased COBRA coverage, whereas about one-half of PBGC beneficiaries enrolled for the advance HCTC selected COBRA plans and one-half selected state-qualified plans. Only a small percentage of advance HCTC enrollees of either type purchased automatically qualified individual market coverage. (See fig. 5.) As of July 2004, 36 states had designated state-qualified HCTC coverage options, and about 84 percent of all individuals identified as potentially eligible to receive the HCTC lived in these states. Most states providing state-qualified coverage did so through arrangements with one or more insurers (18 states) or high-risk pools (17 states). Three states (Indiana, Maryland, and Texas) designated both their high-risk pool and an arrangement with an insurer as state-qualified HCTC plans. Thirteen states designated mini-COBRA plans, and in 4 of these 13 states (Kentucky, Missouri, New Jersey, and Wisconsin) mini-COBRA plans were the only state-qualified coverage option available. Federal officials reported that few individuals eligible to receive the HCTC had access to mini-COBRA coverage because the number of TAA recipients and PBGC beneficiaries whose former employer had fewer than 20 employees—thereby making them eligible for mini-COBRA coverage—was estimated to be very small. (See app. II for a list of state-qualified HCTC coverage options by state.) According to the HCTC program office, 15 states—whose combined population represented less than one-fifth of all individuals potentially eligible to receive the HCTC—had yet to make a state-qualified HCTC plan available as of July 2004. Three of these states—Arizona, Idaho, and Washington—have designated state-qualified plans, but these plans were not open to enrollment as of July 2004. Among states that have not designated a state-qualified plan, California had the largest number of potentially eligible individuals. State workforce and insurance department officials in California reported that because no health plans in the state had agreed to participate in the HCTC program, potentially eligible individuals without access to COBRA or another automatically qualified coverage option were unable to use the HCTC because they could not purchase qualified coverage. In the 15 states that did not make a state-qualified HCTC plan available, some potentially eligible individuals may not have been able to use the HCTC to purchase automatically qualified coverage. Although the extent to which this has occurred is unknown, there are several reasons why potentially eligible individuals in these states may be unable to receive the HCTC. First, if a former employer discontinued its employee health coverage, individuals potentially eligible for the HCTC would not likely have access to a COBRA plan. According to a Commonwealth Fund study, federal officials estimate that between 40 percent and 60 percent of individuals eligible to receive the HCTC likely do not have access to COBRA coverage. In addition, individuals who have COBRA coverage and are eligible to receive the HCTC for longer than the 18 to 36 months that COBRA is available will also need to enroll in another form of qualified coverage when their COBRA benefits expire in order to maintain the HCTC. Second, individuals with coverage through their spouses’ employer may not qualify for the HCTC because many companies that offer health coverage contribute more than 50 percent toward the cost of their workers’ health coverage premium—both for the cost of coverage for an individual worker and for the cost of family coverage. In 2003, for example, the average percentage of total premiums paid by employers for family coverage was 73 percent. Third, HCTC program office officials reported that only a small percentage of individuals were likely to have purchased coverage in the individual market at least 30 days prior to the separation from employment that resulted in their becoming eligible for TAA benefits or PBGC payments. While these officials could not provide a precise estimate, a national survey reported that fewer than 6 percent of all working Americans purchased individual market coverage in 2002. The benefits offered to HCTC recipients varied across coverage types and from plan to plan. In the seven states we reviewed that designated state- qualified health plans, we found that COBRA coverage generally included lower deductibles than high-risk pools and offered more comprehensive benefits than arrangements with insurers. When health plans offered a choice among benefit packages or deductible amounts, HCTC recipients typically selected more comprehensive benefits and lower deductibles. COBRA benefits are typically identical to the benefits provided to working individuals covered by an employer’s group market health plan. The majority of health plans offered by employers in 2003 provided coverage for mental health services and prescription drugs, with preferred provider organization (PPO) health plans having an average annual deductible of $275. (See table 4.) In addition, the Pregnancy Discrimination Act requires employers with 15 or more employees to cover expenses for maternity services on the same basis as coverage for other medical conditions. The majority of the 36 states that designated state-qualified health plans did so through arrangements with one or more insurers selling individual market coverage. Of the 7 states we reviewed with state-qualified health plans, 6 provided state-qualified HCTC coverage through an arrangement with one or more insurers, all of which sold coverage in the individual market (see table 5). Health coverage purchased in the individual market typically includes more restrictions on covered benefits and higher deductibles than group market coverage offered through an employer. In the six states we reviewed that designated arrangements with insurers as state-qualified plans, we typically found higher deductibles and one or more restrictive benefit limitations for maternity care, mental health coverage, and prescription drugs than would be typical for employer-sponsored group market coverage, including COBRA plans. Limitations on these benefits included lower maximums on annual or lifetime coverage, higher cost sharing, or, in some cases, no coverage at all. For example: One state-qualified HCTC health plan in Texas did not offer any coverage for maternity care except for treatment of pregnancy-related complications. One state-qualified HCTC plan in Ohio limited mental health coverage to 10 days of inpatient coverage and 10 outpatient visits per year. State-qualified health plans in Maryland, New York, and Pennsylvania required a separate deductible for prescription drug coverage, while one state-qualified health plan in Ohio did not provide coverage for brand name prescription drugs. Appendix III provides more information on the variation in benefits across state-qualified HCTC plans in the seven states we reviewed that had state- qualified plans. State-qualified HCTC plans provided through arrangements with insurers in four of these six states offered HCTC recipients a choice of deductibles—ranging from $250 to $5,000—while plans with no deductible were available in New York and some counties in Pennsylvania. When offered a choice among deductible amounts, the majority of HCTC recipients in these four states generally purchased coverage with the lowest deductibles available, typically $1,000 or less. (See table 6.) Three of the seven states we reviewed that had state-qualified health plans designated their high-risk pools as state-qualified plans. These state- qualified high-risk pools generally offered benefits similar to those offered in the employer-sponsored group market, but almost always required higher deductibles. Compared with the average $275 deductible for employer coverage in 2003, the high-risk pool deductibles available to HCTC recipients in the states we reviewed generally ranged from $500 to $5,000. All of the qualified high-risk pools in these states provided HCTC recipients with a choice of deductibles, with the majority of HCTC recipients selecting the lowest option available in two of the three states. (See table 7.) In addition to a choice of deductibles, state-qualified HCTC plans in three states (Maryland, North Carolina, and Pennsylvania) offered enrollees a choice of benefit packages. HCTC recipients in these three states typically selected the option providing more generous coverage, as in the following examples: The Maryland high-risk pool offered two plan options—a PPO plan with a $1,000 deductible and 20 percent coinsurance for most services, and an exclusive provider organization (EPO) plan with no deductible and $20, $30, and $250 copayments for physician visits, specialist visits, and hospital admissions, respectively. The majority of HCTC recipients (56 percent) selected the EPO plan. North Carolina provided state-qualified coverage through an arrangement with an insurer, which offered a choice between two benefit packages— one with more comprehensive coverage that included lower copayments for physician and hospital care and no separate deductible for prescription drugs, and a second option with higher copayments for physician and hospital care and a separate $200 prescription drug deductible. Most (80 percent) HCTC recipients selected the more comprehensive coverage. In western Pennsylvania, the state-qualified plan provided coverage for hospital and surgical expenses and certain preventive services with no deductible and no coinsurance. HCTC recipients also had the option to purchase a separate plan that added coverage for prescription drugs and physician and specialist visits, with these benefits subject to a $750 deductible and 20 percent coinsurance. Almost 90 percent of HCTC recipients purchased the optional coverage. The cost of qualified coverage for advance HCTC enrollees varied according to the number of individuals covered, whether the advance HCTC enrollee was a TAA recipient or a PBGC beneficiary, and the type of qualified coverage purchased. For example, in April 2004, the average total monthly premium for advance HCTC coverage—representing both the individual and federal share—was $404 for one person and $812 for two people. In the eight states that we reviewed, the cost of coverage for HCTC recipients was partly determined by the premium-setting practices of qualified health plans. The amount paid for qualified coverage by advance HCTC enrollees nationwide varied according to the number of individuals covered as well as whether the enrollees were eligible for the HCTC because they received TAA benefits or because they received PBGC payments. For example, the national average total advance HCTC premium—representing both the enrollee’s 35 percent share and the government’s 65 percent contribution—for a qualified plan covering one individual in April 2004 was $404, versus $812 for a qualified plan that covered two individuals. PBGC beneficiaries, who were on average older than TAA recipients, typically paid more for advance HCTC coverage, both for COBRA as well as state-qualified plans. The average total premium for TAA recipients receiving the advance HCTC in April 2004 was $480, compared to $661 for advance HCTC enrollees receiving PBGC pension payments. Receipt of the advance HCTC reduced the share of the premium paid by enrollees, on average, to $168 for TAA recipients and $231 for PBGC beneficiaries. (App. IV provides average total monthly premiums by state for TAA recipients and PBGC beneficiaries receiving the advance HCTC.) Monthly advance HCTC premium costs ranged widely nationwide, depending on the type of qualified coverage purchased (see fig. 6). State- qualified HCTC coverage was, on average, more expensive than COBRA for plans that covered one individual or an individual and one other family member. However, when more than three individuals were covered on a plan, COBRA coverage was more expensive, on average, than the state- qualified options. These premium comparisons do not reflect differences in benefits among the different types of coverage. Even with the tax credit, most advance HCTC enrollees paid more for their 35 percent share of qualified coverage than individuals purchasing health coverage through an employer. For instance, in July 2004, the average advance HCTC enrollee paid $137 for the 35 percent monthly share of COBRA coverage for one person or contributed $293 toward family coverage. In comparison, according to a 2003 national survey on employer benefits, the average employee paid $42 per month to purchase one-person coverage or $201 per month for family coverage purchased through their employer. However, without the 65 percent subsidy provided by the HCTC, the average advance HCTC enrollee continuing COBRA coverage would likely have had to pay the entire $390 per month for one-person coverage or $837 per month for family coverage. The cost of coverage for HCTC recipients within and across the eight states we reviewed was partly determined by health plans’ premium- setting practices. As they do for non-HCTC applicants, state-qualified health plans in the majority of states we reviewed that had designated such plans adjusted premium rates to take into account enrollees’ demographic characteristics, including their health status. Other premium- setting practices affecting the cost of state-qualified HCTC coverage included raising premiums to compensate for offering coverage on a guaranteed issue basis and, in some cases, automatically charging HCTC recipients higher premiums than what would typically be charged for healthy individuals for whom they are not required to offer coverage on a guaranteed issue basis. Although most state-qualified health plans had not analyzed the extent to which HCTC recipients utilize services, preliminary evidence suggested that insurers have not found the majority of these individuals to be in poor health. Health plans’ premium-setting practices depended on the type of state- qualified coverage offered. In four of the six states we reviewed where state-qualified HCTC coverage was provided through arrangements with insurers offering individual market plans (Maryland, North Carolina, Ohio, and Texas), insurers took each applicant’s health status and medical history into account when determining premiums, a process known as medical underwriting. The other two states (New York and Pennsylvania) charged the same rates for all enrollees. High-risk pools in the states we reviewed generally charged enrollees different rates based on their age (Illinois, Maryland, Texas), gender (Illinois, Texas), or county of residence (Illinois, Texas). One high-risk pool (Texas) also charged tobacco users higher premiums than nontobacco users. Unlike COBRA or other group market coverage, where premiums are based on the history of medical costs and demographic characteristics associated with a group of individuals who are employees of a company or related companies, eligibility and premiums in the individual market in many states are based largely on each individual’s health status and risk characteristics. Typically, the extent to which insurers selling coverage in the individual market can raise premiums for older individuals or those with existing health conditions is determined by each state. While the premiums charged by insurers selling coverage in the individual market may vary substantially, the premiums charged by state high-risk pools are generally set between 125 percent and 200 percent of the standard premium that an individual in good health would typically pay for coverage in the individual market. Regardless of health status, HCTC recipients purchasing COBRA coverage would be charged the same rate as the rest of the employee group, while those purchasing coverage through a high-risk pool would pay from 125 percent to 200 percent of the standard premium charged to healthy individuals. HCTC recipients purchasing coverage through an arrangement with an insurer would likely be charged varying premiums based on their health status and other demographic characteristics, with some unhealthy, high-risk individuals paying more, and in some cases substantially more, than 200 percent of the rates charged to individuals in good health. For example, in one state we reviewed, the insurer offering qualifying coverage to HCTC recipients charged individuals rated in their poorest health category 580 percent of the premium charged to those rated in their healthiest category. For state-qualified HCTC insurers, particularly those in the individual market, having to provide guaranteed issue coverage to certain HCTC recipients presents additional risk. For example, if an individual applicant with 3 months of prior creditable coverage has a costly chronic medical condition, such as juvenile-onset diabetes or heart disease, which would otherwise typically result in that applicant being denied coverage, the cost to the insurer may outweigh the premium paid, resulting in a loss to the insurer. To compensate for this additional risk posed by the guaranteed issue requirement, federal officials have granted permission for state- qualified HCTC health plans to charge higher premiums to individuals rated in the poorest health categories—individuals who would otherwise be turned down for coverage—as long as the additional premiums are actuarially justified and pass state insurance department review. One insurer we interviewed that sold state-qualified coverage in multiple states, including one of the states we reviewed, used differing practices in setting premiums for HCTC recipients in these states. In the state we reviewed, this insurer reported that it had originally planned to offer coverage on a guaranteed issue basis to all HCTC enrollees, regardless of whether they had 3 months of prior creditable coverage, and to automatically charge them 200 percent of the standard premium that it would typically charge a healthy applicant. After the state department of insurance rejected this premium-setting practice, the health plan set up a two-tier pricing system whereby healthier individuals who passed medical underwriting were charged the standard premium, while those who did not pass underwriting were charged 200 percent of this rate. Although this insurer modified its pricing method in the state we reviewed, the insurer said that it continued to automatically charge all HCTC recipients a higher- than-standard premium in two other states where it sold state-qualified coverage. Thus, although the guaranteed issue provision ensures that qualified individuals will have access to HCTC coverage, regardless of age or health status, it also means that the healthiest HCTC recipients may pay more for such coverage than they otherwise would in the individual market without guaranteed issue. Without this consumer protection, however, HCTC recipients with certain preexisting medical conditions would likely be unable to purchase coverage from state-qualified health insurers selling individual market health plans. Two states we reviewed (Maryland and Texas) offered state-qualified HCTC coverage through both the state high-risk pool and through an arrangement with an insurer. Because of the way health plans in these states set premiums, less healthy HCTC recipients were likely to find the high-risk pool coverage to be the less expensive of the two state-qualified options, while healthier HCTC recipients were generally able to purchase less expensive coverage through the arrangement with an insurer. For example: In Maryland, the health plan offered through an arrangement with an insurer charged less healthy HCTC recipients 200 percent of the standard premium typically charged an applicant in good health, whereas the state high-risk pool charged all applicants 150 percent of the standard rate. In Texas, high-risk pool rates were set at 200 percent of the standard premium, while the state-qualified HCTC plan offered through an arrangement with an insurer charged HCTC recipients rated in the poorest health category 4.7 times as much as those rated in the average health category and 5.8 times as much as those rated in the healthiest category. Most of the state-qualified plans in the seven states we reviewed that had such plans reported that they have not analyzed the extent to which HCTC recipients utilize services, which would be one indicator of the health status of the population receiving the HCTC. Officials from some of these plans stated that they are collecting health service utilization data for individuals receiving the HCTC but that they will need at least a full year’s worth of data before drawing any conclusion as to the overall health status of the TAA and PBGC populations. However, on the basis of preliminary medical underwriting data that were provided by HCTC state-qualified plans in two of the states we reviewed, more HCTC recipients have been placed into the healthy or standard risk categories than into the poorest health categories designated for this population. One health plan indicated that fewer than half of its enrollees receiving the HCTC were placed in below-average rating categories, while the other reported that one-fifth of its HCTC enrollees were categorized as worse-than-average risks. IRS’s HCTC program office met the statutory time frames for implementing the HCTC, enabling individuals to claim the end-of-year HCTC for December 2002 on their income taxes and making the advance HCTC available on August 1, 2003. To meet these time frames, the HCTC program office coordinated closely with other federal agencies, state agencies, and private health plans and used private contractors extensively. These stakeholders generally reported that the collaborative effort to implement the HCTC went well and that the HCTC program office was responsive to implementation issues that arose. For example, these implementation issues included instances where individuals who were not eligible for the credit claimed and received the end-of-year HCTC for 2002, while others who were eligible and claimed it did not receive the payment. IRS has been recovering payments made in error and revised its forms and processes to reduce these problems for the end-of-year HCTC for 2003. Implementation issues for the advance HCTC included the unwillingness of certain health plans to accept advance credit payments; delays in health plans’ receiving correct payments when premiums changed; and inaccurate state eligibility lists that jeopardized individuals’ receipt of the advance HCTC. The HCTC program office reported that, from February 2003, when work began to set up the advance HCTC, through April 2004, start-up costs for design, development, and implementation of the HCTC were about $69 million. After restructuring the HCTC program office to transition from implementation activities to operating activities, costs for the HCTC were expected to be about $40 million for the year starting July 1, 2004, and reflected a reduction in contractor staff, although contractors will continue to perform the majority of the administrative and operational work. According to federal officials, in order to implement the HCTC on time, IRS’s HCTC program office coordinated closely with federal agencies, state agencies, and health plans and received extensive support from private contractors. Implementation efforts for the end-of-year and advance HCTC met the statutory deadlines contained in the TAA Reform Act, making each form of the HCTC available for December 2002 and by August 2003, respectively. While IRS’s HCTC program office had primary responsibility for implementing the HCTC, officials from this and other federal agencies involved in its implementation—HHS, Labor, and PBGC— reported that instituting the advance HCTC in particular was a cooperative effort that went well. Officials from workforce agencies and health plans in the states we reviewed largely concurred, stating that the HCTC program office was helpful in implementing the HCTC and addressing issues that have arisen. Meeting the 1-year implementation time frame for the advance HCTC was challenging for state workforce agencies, however. According to our survey of state workforce agencies conducted in March 2004, 71 percent reported that implementing the advance HCTC had been somewhat or very difficult. For example, as figure 7 shows, state workforce agency officials were less satisfied with the timeliness of the information they received from the HCTC program and Labor to implement the advance HCTC than they were with the assistance itself. HCTC program officials stated that, while individuals were able to claim the end-of-year HCTC for premiums paid in December 2002, IRS was unprepared to verify these claims and some credits were paid or denied in error—that is, some individuals received the HCTC who should not have and other individuals who were eligible for it did not. These errors were the result of mistakes individuals made on their tax returns—partly because of limited information in IRS’s tax publications and communications for 2002 about how to claim the HCTC—and errors IRS staff made in processing each claim manually. Claims for the end-of-year HCTC in 2002 were still undergoing review as of June 2004, and the HCTC program reported that of the $2.9 million disbursed, about $465,000 had been improperly paid to ineligible individuals. More than half of this amount (about $243,000) had been recovered, and IRS continues to seek recovery of the rest. HCTC program officials stated that for those who do not pay back the credit, future tax refunds would be offset by the outstanding amount. Additionally, IRS is in the process of auditing 577 claims (about 2 percent of the total) for 2002 that were for greater amounts than were expected. As of June 8, 2004, about half of the audits had been completed, and about 85 percent of the HCTC amounts claimed were disallowed. To reduce the number of ineligible individuals receiving the end-of-year HCTC for 2003, HCTC program officials instituted new procedures and reporting requirements. For example, all tax records were prescreened against state workforce agency and PBGC eligibility lists to identify who was potentially eligible to receive the end-of-year HCTC. As of May 2004, HCTC program officials reported that this screening had prevented about 8,000 ineligible individuals from improperly claiming the end-of-year HCTC on their 2003 tax returns. However, this prescreening only identified whether an individual was potentially eligible for the HCTC at any time during the year, not the specific month or months in which he or she might have been eligible. IRS provided tax professionals with information about the HCTC and mailed each individual who was identified as potentially eligible for the credit in 2003 information about how to claim the end-of- year HCTC. Additionally, the IRS tax form used to claim the end-of-year HCTC was revised to include clearer instructions to help filers determine whether they were eligible for the credit, and individuals were required to attach copies of invoices and payments for each month in 2003 for which they claimed the end-of-year HCTC. This procedure does not, however, ensure that the individual purchased qualified health coverage. Therefore, potentially eligible individuals could have claimed the end-of-year HCTC in 2003 for more months than they should have or for coverage that did not qualify for the credit. Advance HCTC payment and implementation issues prompted the HCTC program to change some of its procedures, but not all issues have been resolved. One such payment issue for which the HCTC program adapted its procedures was the refusal of some automatically qualified health plans to accept the advance HCTC from IRS. HCTC program officials reported that certain health plans refused to accept payments from IRS, primarily because they found the process to register to receive advance payments burdensome or they did not want to receive electronic payments. According to these officials, health plans had to register in the primary vendor database for the federal government—the Central Contractor Registration (CCR)—and accept electronic payments in order to receive advance HCTC payments. The CCR requirement was reported to cause delays, and some plans, especially smaller ones, refused to accept electronic payments or did not have the necessary systems to process them. To encourage health plans to participate, the HCTC program office changed its registration process for health plans—it no longer requires plans to register with the CCR—and now issues paper checks if a health plan will not accept electronic payments. HCTC program officials reported that these changes have prompted some plans to agree to participate. However, as of June 2004, 211 health plans still refused to participate. Most of these were COBRA plans that covered few HCTC-eligible individuals. Because these 211 plans refused to accept payments, about 447 individuals who had tried to enroll for the advance HCTC had to wait until the end of the year to claim the HCTC. Officials from two COBRA plans told us why their plans did not accept advance payments: an official from one plan stated that too few individuals qualify for the HCTC for the plan to consider participating, while an official from another plan was concerned that the advance HCTC would encourage less healthy individuals to retain coverage and that this would result in financial losses for the plan. Nevertheless, a total of more than 600 health plans covering more than 13,000 individuals have agreed to receive the advance HCTC as of June 2004. An unresolved payment issue identified by 3 of the 10 state-qualified plans we contacted in the states we reviewed was the receipt of incorrect advance HCTC payments from IRS when premiums change. While officials from most of the state-qualified plans we interviewed (6 of 10) reported that either they did not experience any problems with advance HCTC payments or that any problems they experienced had been resolved, the most common unresolved issue, reported by officials from three of the plans that identified ongoing issues, dealt with the receipt of incorrect payments when premiums changed. This problem was attributed largely to the time it takes for HCTC enrollees to notify the HCTC program of the new premium and for the HCTC program to adjust the allowable premium amount. For example, one plan reported that payments from IRS are incorrect—usually less than the required amount—for a couple of months after a premium change. To mitigate this problem, two officials from state- qualified plans suggested that the health plan, rather than the HCTC enrollee, notify the HCTC program of premium changes. Officials from two COBRA plan administrators that had a large number of advance HCTC enrollees stated that they did report premium changes directly to the HCTC program. However, HCTC program officials reported that some plans prefer not to report the changes to HCTC because it is outside their normal procedures or they have few members receiving the advance HCTC. An implementation issue affecting enrollees, for which the HCTC program revised its procedures, concerned how the program office responded to enrollees’ payments that were less than the requested amount or late. According to HCTC program officials, between August 2003 and February 2004, more than 1,700 individuals who had enrolled for the advance HCTC were terminated temporarily from the advance HCTC because their payments to IRS were less than their 35 percent share or they were late. Approximately 55 percent of the individuals who were terminated subsequently reenrolled for the advance HCTC. HCTC program officials noted that the initial billing and payment procedures generated numerous calls to the customer service center because individuals received multiple invoices for their 35 percent premium amount, some of which they received late because of mail delivery problems. To mitigate this confusion and the burden of reenrolling individuals who had been dropped, the HCTC program office changed its billing and payment procedures in March 2004. Under the revised procedures, only one invoice would be sent each month and, instead of terminating individuals whose payments were less than the required amount, the HCTC program office would add a 65 percent HCTC proportional to the payment they receive and forward this amount to the health plan. The HCTC enrollee would be responsible for paying any outstanding difference to the health plan directly. HCTC program officials told us that since making these changes, no advance HCTC enrollee has been terminated as a result of payments that were less than the required amount or late. Additionally, officials we interviewed from five of the health plans in the states we reviewed reported that they were lenient in applying their payment rules to ensure that plan members did not lose coverage as a result of problems with the advance HCTC. For example, an official from one health plan reported that the plan had extended from 30 to 90 days the grace period for advance HCTC members to pay their monthly premiums. The HCTC program office has also changed its procedures to address the receipt of incomplete lists of potentially eligible individuals from state workforce agencies. HCTC program officials reported that the lists state workforce agencies provide on which the HCTC program office relies to determine eligibility for the advance HCTC were incomplete for many states and that verifying that individuals remained eligible for the advance HCTC was time consuming. Some states also reported problems with transmitting these data to IRS. Ohio, for example, reported that the HCTC program office does not always receive all of the names of potentially eligible individuals that it sends. HCTC program officials reported that from October 2003 through March 2004, the lists of TAA recipients potentially eligible to receive the HCTC submitted by about one-third to more than one-half of states (16 states to 28 states) failed to include the names of all eligible TAA recipients. Since October 2003, the HCTC program office has audited these states’ lists and asked the workforce agencies to confirm that their transmissions were correct if any of the individuals enrolled to receive the advance HCTC from the previous month failed to reappear as eligible. During the first 6 months in which the HCTC program office performed these audits, it identified 2,984 individuals who were enrolled to receive the advance HCTC in a previous month but whose names dropped from the state lists in the current month. The state workforce agencies determined that approximately 55 percent (or 1,648) of these individuals were still eligible for the advance HCTC and that their names should not have been dropped from the list. Thus, without this audit process these individuals would have erroneously lost eligibility for the advance HCTC. However, HCTC program and Labor officials reported that this verification process is a burden on HCTC program staff and the states. HCTC program officials reported that they did not track advance payment errors that occurred as a result of mistakes made by IRS. While these officials acknowledged that some mistakes did occur, such as late payments or accounting errors, they said that the majority of payments were timely and accurate and that problems were resolved at the time they occurred. Likewise, most officials from health plans we spoke with reported few problems with IRS’s payments; problems identified included payments containing incorrect identification numbers or payments for incorrect amounts. IRS established the HCTC program office with primary responsibility for overseeing and coordinating efforts for the HCTC. The HCTC program office is responsible for resolving operational and legal issues and monitoring the overall progress of the HCTC on a day-to-day basis. An executive steering committee, composed of affected federal agencies and contractors, also was established to provide guidance to the HCTC program office. The majority of officials on the HCTC program’s executive steering committee are IRS or Treasury officials. High-level officials from each of the other federal agencies involved with the HCTC—Labor, HHS, and PBGC—as well as the IRS and Treasury officials are voting members. Officials from IRS’s primary private contractor and a subcontractor— Accenture and The Lewin Group, respectively—are nonvoting members of the committee. This committee meets monthly to provide guidance on policy, legal, and programmatic issues. To meet the implementation date for the advance HCTC, IRS relied on contractors. According to HCTC program officials, IRS staff work closely with contractor staff and oversee their work on an ongoing basis. For example, within the HCTC program office are six project teams, each of which is managed by a senior-level IRS staff person. Paired with each senior-level IRS staff person is a senior contractor staff person, and most of the staff performing specific operational tasks for the HCTC are from the contractor. While the senior IRS and contractor staff share responsibility for their project team’s work, the IRS staff person establishes the direction of the work on the basis of the HCTC program’s strategic plan, sets priorities, and brings knowledge about IRS’s processes to the team. IRS and contractor staff responsibilities are also clarified in the contract documents. For example, IRS contract documents state that the government responsibilities include defining the rules under which the program will function and that the primary contractor’s responsibilities include designing and administering the HCTC program according to these rules. IRS officials in the HCTC program reported that close collaboration between government and contractor staff helped them implement the advance HCTC in a timely manner. Officials from IRS’s contracting office reported that oversight of the primary HCTC contractor responsible for developing and maintaining much of the HCTC program office’s infrastructure is conducted in several ways. IRS contracting officers include direction on how work is to be completed in work requests, as well as reporting requirements and deliverables. For example, one work request required the contractor to report daily on the handling of calls received by the call center for a few months in 2003. IRS staff in the specific area where the work is to be done review and approve each work request under the contract, monitor the contractor’s work, and make recommendations to the contracting official regarding whether the completed work is acceptable. Additionally, IRS contracting officials reported that they review monthly status reports, cost documents, and deliverables submitted by the primary contractor. However, the HCTC program office has not instituted performance measures and is currently working on draft measures and preliminary goals for fiscal year 2005. To implement and administer the advance HCTC, Congress appropriated $70 million to IRS for fiscal year 2003, which will remain available through fiscal year 2004, and $35 million for fiscal year 2004, available through fiscal year 2005. HCTC program officials expected that costs to administer the HCTC program—from the time that work by the primary contractor began in February 2003 through June 2005—would be about $116 million. These costs, broken down by major activities, included about $33 million for design and development work during February 2003 through April 2004. Implementation costs to establish the systems that would be used on an ongoing basis and costs to administer the advance HCTC for the first 9 months it was available were reported to be about $36 million for May 2003 through April 2004. In May and June 2004, the HCTC program office engaged in a planning process during which it restructured its operations and determined how it would transition from implementation activities to operating activities. Costs to reorganize and administer the HCTC during this 2-month transition period were expected to be about $6 million. After transitioning to operating activity levels, officials expected that costs for the HCTC would be about $40 million for the year July 2004 through June 2005, and IRS officials reported that they are identifying ways to further lower operating costs. Included in this $40 million are about $32 million for operating costs and about $8 million for program enhancements such as software updates. In total, the majority (at least $97 million) of the approximately $116 million to administer the HCTC—from its early 2003 start-up through mid-2005 operations—was expected to be paid to IRS’s contractors. (See table 8.) From start-up through June 2004, IRS’s primary contractor was responsible for most of the work for the HCTC. The contractor’s responsibilities during this time included assisting in the development of eligibility and payment processing policies and procedures, maintaining and operating the program office, and establishing a call center. While IRS had an average of 9 full-time-equivalent staff assigned during this time to design, develop, implement, and transition the HCTC program to ongoing operational service levels, the primary contractor had an average of 243 full-time-equivalent staff working on these activities. Starting July 1, 2004, HCTC program officials expected that operating and enhancement costs for the next 12 months would be about $40 million. This figure also reflects a decrease in contractor staff. These costs reflect a reduction in service levels and IRS’s assumption of more of the administrative responsibilities for the HCTC. HCTC program officials stated that reduced service levels means that, for example, the HCTC program will focus on responding to issues raised by health plans rather than providing as much individual-level outreach to health plans as they had in the past. IRS’s primary contractor is expected to continue to perform the majority of work for the HCTC, and officials reported that there would be a decrease in the amount of work done by the contractor, with contractor staffing to decrease to 167 full-time-equivalents. There would be a slight increase in the amount of work done by IRS, with no increase in the number of IRS staff positions designated but with hiring done to fill vacant positions to reach a total of 17 full-time equivalents. As of August 2004, 45 states received national emergency infrastructure grants from Labor to help them set up mechanisms to administer the HCTC, and 11 states received national emergency bridge grants to help pay a portion of the premiums. In total, $45 million, or half of the $90 million in available national emergency grant funds, was awarded. In response to our survey of state workforce agencies, two-thirds of the states that did not apply for the bridge grants said they did not have systems in place to implement the grant. A total of 21 states received high-risk pool grants from CMS as of August 2004. Sixteen states received high-risk pool operating grants to offset losses in state high-risk pools, and 6 states were awarded a seed grant for establishing a new high-risk pool (1 state received both a seed and an operating grant). As of August 2004, less than half of the $80 million in funds available for high-risk pool operating grants had been awarded, as well as less than one-fifth of available high-risk pool seed grants. CMS officials reported that one reason seed grants were not more popular is that states were reluctant to take on the ongoing financial obligation of a high-risk pool. (App. V lists the states awarded national emergency grants and high-risk pool grants and the amounts awarded.) As of August 2004, half ($45 million) of the $90 million available for national emergency grants had been awarded—about $7 million for infrastructure grants and about $38 million for bridge grants. Most states received national emergency grants, with 45 states receiving infrastructure grants and 11 receiving bridge grants. For fiscal year 2002, $60 million was appropriated for national emergency grants, including $50 million for bridge grants and $10 million for infrastructure grants. An additional $30 million was appropriated for fiscal year 2003 for both bridge and infrastructure grants. While bridge grants were originally awarded to provide individuals with a 65 percent subsidy prior to the implementation of the advance HCTC in August 2003, Labor has expanded the use of bridge grants to cover the 1- to 3-month gap period during the HCTC enrollment process when individuals must pay 100 percent of their premiums out of pocket. Five states—Maine, Maryland, North Carolina, Ohio, and Virginia—are using bridge grant funds to cover this gap period, and more states are in the process of seeking funds for this purpose. State officials reported that these grants are important to help individuals cover premiums during the advance HCTC enrollment process and that the availability of these funds during this period could increase eligible individuals’ interest in and receipt of the HCTC. In March and April 2004, the HCTC program piloted an initiative called “HCTC National Emergency Grant Bridge Support Activities” to support states that received bridge grant funds. The pilot was tested in Maryland and Virginia and involved three activities. First, the HCTC program began asking individuals in these states when they applied for the credit to consent to the HCTC program sharing certain private enrollment information with state officials, such as names, addresses, and enrollment status. According to the HCTC program, most individuals (80 percent) in these states consented to this at the time of enrollment. The HCTC program office then sent a report to states weekly showing HCTC enrollment status, contact information, Social Security number, and eligibility type for all TAA recipients and PBGC beneficiaries who had consented to disclosure of this information. Pilot states were encouraged to use this information as a tool for outreach and for determining an individual’s eligibility for bridge grant payments. Second, the HCTC program office offered support to states in promoting their bridge grant program to potentially eligible individuals. Third, the HCTC program office provided ad hoc support to bridge grant states on questions regarding HCTC eligibility and enrollment. Virginia reported that it used the consent reports to conduct outreach such as mailing application forms to potential eligibles, as well as to monitor enrollment status to avoid potential overpayments. Maryland used the consent reports to contact prescreened PBGC beneficiaries and offered them bridge services, including mailing out application packages, and Maryland officials said that the pilot experience helped improve federal and state coordination. The HCTC program and Labor have agreed to expand the bridge grant pilot to other states. In response to our survey of state workforce agencies in March 2004, officials cited a variety of reasons to explain why they did not apply for bridge or infrastructure national emergency grants. For example, officials in two-thirds of the states that did not apply for the bridge grants said that they did not have systems in place to implement the grant. The rest of the states cited a variety of reasons for not applying, including difficulty with the grant application process, insufficient TAA workers or activity, no need for the funding, and prohibitive administrative costs. One state indicated that it was hesitant to assist individuals with obtaining health coverage because it was unable to make decisions about health insurance coverage. Of the five states that Labor reported had not received infrastructure grants, two said that they did not require funding from the grant and another said that it had to complete some system changes before applying for a grant. One state said it would be applying for the grant in the future, and another was not sure whether an application had been submitted. (See table 9.) Almost half of the states (21 states) received high-risk pool grants as of August 2004. Six states were awarded seed grants of between about $53,000 and $1 million for establishing a high-risk pool and 16 states received operating grants to offset losses incurred by their high-risk pools. As of August 2004, $4 million of the $20 million available for seed grants had been awarded to establish new high-risk pools, and less than half (about $30 million) of the $80 million available for high-risk pool operating grants had been awarded. CMS was reviewing an application from the District of Columbia, as of August 2004, and Vermont’s application will be withdrawn because legislation to create a high-risk pool in Vermont was not enacted by its state legislature. (See app. V for a list of high-risk pool awards to states.) According to a CMS official, one reason more states did not apply for high- risk pool seed grants was that states’ fiscal concerns made them reluctant to take on the ongoing financial obligations of a new high-risk pool, which typically enrolls individuals with a history of high medical costs, incurs costs potentially higher than the premiums received from enrollees, and requires subsidization from taxes on local insurers or other revenue sources. CMS officials also said that several states that had high-risk pools were not eligible for the high-risk pool operating grant because they did not meet the eligibility criteria. The operating grant is available only to qualified high-risk pools that meet certain eligibility criteria, and the award amounts are based on the number of uninsured individuals in each state. In addition to meeting the criteria for a qualified high-risk pool contained in the Public Health Services Act, eligibility criteria for receipt of the grant included restrictions on the premiums charged, the number of plan choices available to enrollees, and the availability of mechanisms to fund ongoing losses incurred by the pool. California and Texas, where the numbers of uninsured people are among the highest in the nation and therefore would have been eligible for proportionately larger shares of the grant funds, were among the states that did not meet these criteria. California did not qualify because its high-risk pool did not meet the qualified high-risk pool requirement that eligible individuals have immediate access to the pool, and Texas did not qualify because the premiums for its high-risk pool were set above the allowable limits. Three other states—New Jersey, Idaho, and Oregon—that applied for an operating grant were turned down because their arrangements did not meet the definition of a qualified high-risk pool. The Trade Adjustment Assistance Reform Act of 2002 established the HCTC to help trade-displaced workers and retirees whose pension plans have been assumed by PBGC to purchase health coverage. The establishment of the HCTC within 1 year of enactment, including development of a new mechanism for paying the HCTC directly to hundreds of health plans on behalf of enrollees in advance of the premium due date, resulted from the collaborative efforts of multiple federal and state agencies and private health plans. As implementation issues arose— such as certain health plans’ reluctance to participate, some initial payment problems, and ineligible individuals receiving the end-of-year credit in 2002—the IRS-based HCTC program office worked with other federal, state, and private stakeholders and adapted its policies and processes to address these and other issues. Despite these efforts, the number of individuals receiving the HCTC to date continues to be a smaller portion of those potentially eligible than many stakeholders had expected and some implementation issues remain unresolved. A major factor cited by many state and health plan officials as a reason for lower than expected enrollment was the affordability of coverage, as some eligible individuals may find it difficult to pay the entire premium for 3 to 6 months to maintain coverage until they receive the advance HCTC, and even the 35 percent share of premiums, once the HCTC covers remaining premium costs can represent a high proportion of income, particularly for displaced workers or retirees. Further, while the advance payment option was intended to make the HCTC attractive for eligible individuals by minimizing their out-of-pocket payments, most HCTC recipients in 2003 did not use this option. Instead, the majority of recipients opted to receive the HCTC by claiming the credit on their year- end tax forms. State, health plan, and union officials told us that the complexity of the eligibility determination and enrollment process contributed to the lower than expected usage of the advance payment option. For example, The multitude of tax, labor, and health coverage requirements related to the HCTC are challenging for workers and retirees to navigate. Potentially eligible individuals must often contact multiple federal, state, and private entities to obtain the information they need to enroll. While the HCTC program office offers information to potentially eligible individuals through its call center, this resource begins after individuals have been identified by states or PBGC as potentially eligible and often after individuals have already made decisions about maintaining, changing, or dropping health coverage. Individuals who have more than a 63-day break in continuous health coverage may lose federal consumer protections guaranteed in the TAA Reform Act, such as guaranteed acceptance by a health plan and coverage for their preexisting medical conditions. Given that it takes 3 to 6 months to become eligible for and receive the advance HCTC, during which time the individual is responsible for the full premium amount, some individuals may lose these consumer protections if they do not maintain coverage during this time. To receive the HCTC, the TAA Reform Act requires that an individual must meet certain trade readjustment allowance eligibility requirements, including (1) waiting 60 days or more from the time that a petition to certify that workers were displaced due to trade is submitted to Labor, and (2) complying with the requirement to obtain reemployment training or obtain a waiver from training each month. State workforce agencies contend that granting these waivers to facilitate eligibility for the HCTC is an added administrative burden that further complicates enrollment in the HCTC. Lists from state workforce agencies used to verify individuals’ eligibility were sometimes incomplete, causing individuals to lose access to the advance HCTC if their names were erroneously dropped. Although the HCTC program office began auditing the lists to ensure that they contained all eligible individuals, this time-consuming process had not led to the correction of the underlying problem with the accuracy of the state lists. Enrollees may face delays in having the correct amount of their advance HCTC payment adjusted and paid promptly to their health plans if they fail to notify the HCTC program office when the health plan changes their premiums. PBGC beneficiaries who enroll in Medicare lose eligibility for the HCTC for themselves and their spouse and other dependents, even though their spouse or dependent may not yet be eligible for Medicare and may not have access to other sources of coverage. State and union officials often noted that this was a concern of PBGC beneficiaries when discussing potential eligibility for the HCTC. As the HCTC program begins its second full year and transitions from design and early implementation to more routine operations, it is reducing its contractor staffing and some service levels. As the program evolves, a less complex enrollment process and shorter time period before enrollees begin receiving advance payments could enhance the attractiveness of the HCTC and the advance payment option for eligible individuals. We suggest that Congress consider taking the following three actions: To simplify the advance HCTC eligibility process and enable some trade- displaced workers to qualify for the HCTC sooner after losing employment, Congress may wish to amend existing law to permit TAA recipients to enroll in the HCTC program (1) without waiting 60 days or more to establish eligibility for the trade readjustment allowance and (2) without first meeting trade readjustment allowance requirements pertaining to training. To more promptly reimburse eligible individuals for some of the health coverage premiums they paid during the 3 to 6 months that the advance HCTC eligibility and enrollment process typically takes, Congress may wish to allow the HCTC program to retroactively pay the 65 percent HCTC for the 1 to 3 months between enrollment for and receipt of the advance HCTC, rather than requiring individuals to wait for the end-of-year credit to receive that portion of the benefit. To help eligible individuals maintain their rights to guaranteed coverage and other consumer protections during the time it takes to become eligible and enroll for the HCTC, Congress may wish to specify that for individuals who had health coverage for the 3 months immediately prior to becoming eligible for TAA benefits or PBGC pension payments, the 63-day break in coverage used to determine continuous coverage may begin with the HCTC program office’s notification of potential eligibility. We recommend that the Secretary of Labor, Commissioner of Internal Revenue, Administrator of CMS, and Executive Director of the PBGC take the following five actions. To help individuals understand and comply with the multiple labor, health coverage, and tax eligibility requirements for receipt of the HCTC, the Secretary of Labor, the Commissioner of Internal Revenue, the Administrator of CMS, and the Executive Director of the PBGC should, in coordination with state officials, provide for a centralized resource for individuals to receive information on and assistance with HCTC eligibility criteria, including individualized assistance in completing each step of the eligibility and enrollment process and information about qualified health coverage options available in their local area. This centralized resource should be available at the time individuals must make decisions about purchasing qualifying health coverage and meeting other qualifying criteria, which may occur before the HCTC call center and other existing resources have been notified about an individual’s potential eligibility. To ensure that HCTC-eligible individuals and recipients receive timely and appropriate information, responses to inquiries, enrollment processing, and advance HCTC payments, the Commissioner of Internal Revenue should evaluate the effect that any reduced service levels will have on eligible individuals and health plans’ ability to receive the HCTC on a timely basis and their satisfaction with the information and services provided. To improve the quality of eligibility information provided by the states, the Secretary of Labor and the Commissioner of Internal Revenue should coordinate to improve the accuracy of data received from state workforce agencies. To simplify payment processing for advance HCTC enrollees and avoid disruptions resulting from premium changes, the Commissioner of Internal Revenue should encourage participating health plans to provide notification of changes in premiums directly to the HCTC program office rather than relying primarily on individuals for providing this information. Given that PBGC beneficiaries who enroll in Medicare lose eligibility for the HCTC even though their spouses or other dependents may not yet be eligible for Medicare or have alternative sources for insurance coverage, the Commissioner of Internal Revenue and the Executive Director of the PBGC should coordinate to report to Congress on how many PBGC beneficiaries previously receiving the HCTC have attained the age of 65 and potentially lost eligibility due to enrolling in Medicare, and how many of these former HCTC recipients have spouses or other dependents who are no longer able to receive coverage subsidized by the HCTC. We provided a draft of this report to Labor, IRS, CMS, and PBGC and officials in the eight states we reviewed, including each state’s workforce agency and the department of insurance or high-risk pool in seven states. We received comments from all four federal agencies, five states’ workforce agencies (California, Maryland, New York, Ohio, and Pennsylvania), five states’ departments of insurance (California, New York, Ohio, Pennsylvania, and Texas), and two states’ high-risk pools (Illinois and Maryland). The four federal agencies either concurred with our recommendations or deferred to IRS as the lead agency in implementing the HCTC. The state agencies that commented on our draft generally concurred with our findings. Comments from the federal agencies are reprinted in appendixes VI through IX. Regarding our recommendation that Labor, IRS, CMS, and PBGC work together to develop a centralized resource to help individuals understand the eligibility requirements for the HCTC, IRS agreed with our recommendation and highlighted efforts it has made to date to provide a centralized resource, including developing informational documents for individuals and states, making information available on its Web site, and establishing a call center. Labor agreed on the importance of providing individuals with information about the HCTC and highlighted certain actions it had taken to provide information and training to state workforce agencies and other interested parties such as businesses and unions. Labor also suggested reviewing and evaluating the quality of the existing information before taking further actions. PBGC commented that it would coordinate with the other agencies to address this recommendation, and CMS deferred to IRS as the lead in HCTC outreach and education. While we recognize that agencies have made efforts to provide individuals with information about the HCTC, we noted in the draft report that individualized assistance is not available until after individuals may have already made decisions that affect their eligibility for the HCTC. Thus, while a review of existing resources may be helpful, we have added to our recommendation the need for a centralized resource that provides individualized information and assistance earlier than it is currently available. Regarding our recommendation for IRS to evaluate whether any reduced service levels will affect individuals’ and health plans’ satisfaction, IRS stated that the agency cannot at this time systematically measure customer satisfaction. In response to our recommendation, however, IRS stated that it would include questions in future surveys or other research to elicit an indication of changes in satisfaction. In response to our recommendation that IRS and Labor improve the quality of eligibility information provided by the states, IRS agreed that the information provided by states continues to present a challenge. IRS noted that, although it does not have authority over states to implement solutions to problems with the eligibility lists, it will work with Labor to develop a plan for improving the accuracy of these data. Labor agreed with our recommendation and highlighted the burden the audits placed on states and agreed to continue to work with IRS to improve the quality of the data. In response to our recommendation that IRS encourage health plans to provide notifications of premium changes directly to the HCTC program office, IRS agreed to develop an action plan to make this change. IRS noted that it would likely phase in this change because of the number of plans and individuals affected. IRS and PBGC agreed with our recommendation that PBGC work with IRS to report to Congress the number of PBGC beneficiaries who turn 65 and lose eligibility for the HCTC even though their spouse or dependent may still need HCTC coverage. Additionally, PBGC suggested that IRS, as the lead agency for the HCTC, submit the recommended information to Congress. IRS noted that some estimates may be necessary because not all data elements are readily available to IRS or PBGC. In addition to its comments on our recommendations, IRS stated that the HCTC presented significant new responsibilities for IRS and that challenges remain. IRS reported it is continuing to identify ways to improve the operation of the HCTC program, decrease administrative costs, and obtain data about those who receive the HCTC in order to make outreach activities more effective. IRS stated that it is working to shorten the period of time required before an individual receives the advance HCTC. It noted, however, that the first 3 months of the 3- to 6-month period we identified for this process relates to TAA certification requirements, and that amending these requirements may have broader implications than just for the HCTC program. Additionally, regarding our statement that the benefits offered by qualified health plans across states differ widely, IRS noted that the coverage available for the HCTC is dependent on decisions made by the states and the plans that volunteer to participate. IRS stated that it hopes to obtain data that will enable a better understanding of the health status and other characteristics of HCTC enrollees to help alleviate health plans’ uncertainty about health care costs of HCTC individuals compared to others and to encourage more health plans to participate in the advance HCTC program. IRS and Labor and officials from Maryland, New York, Ohio, Pennsylvania, and Texas also provided technical comments, which we incorporated as appropriate. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its date. We will then send copies to the Secretary of Labor, Secretary of the Treasury, Administrator of CMS, Commissioner of Internal Revenue, Executive Director of PBGC, appropriate congressional committees, and other interested parties. We will also make copies available to others upon request. In addition, this report will be available at no charge on GAO’s Web site at http://www.gao.gov. Please call me at (202) 512-7118 if you have additional questions. Another contact and key contributors are listed in appendix X. Data for Puerto Rico are also included in this table. As of July 2004, 36 states had designated state-qualified coverage options that could be purchased by individuals receiving either the advance or end-of-year health coverage tax credit (HCTC). Another 3 states—Arizona, Idaho, and Washington—had designated state-qualified plans, but these plans were not yet open to enrollment as of July 2004. Most of the 36 states that made state-qualified coverage available chose to provide this coverage through arrangements with insurers or through state high risk-pools, and 3 states designated both their high-risk pool and an arrangement with an insurer as state-qualified coverage. Thirteen states designated mini- COBRA coverage—state-based continuation coverage pertaining to insurers providing coverage to plans maintained by employers with fewer than 20 employees. Mini-COBRA coverage was the sole state-qualified coverage option available to HCTC recipients in 4 states (see table 10). According to federal officials, only a small percentage of Trade Adjustment Assistance (TAA) recipients and Pension Benefit Guaranty Corporation (PBGC) beneficiaries eligible to receive the HCTC likely had access to mini-COBRA coverage, as few of these individuals formerly worked for an employer with fewer than 20 employees. The benefits offered to HCTC recipients varied across coverage types and from plan to plan. COBRA benefits, which were typically identical to the benefits provided to working individuals covered by the employer’s group market health plan, generally included lower deductibles than high-risk pools and more comprehensive benefits and lower deductibles than state- qualified arrangements with insurers in the seven states we reviewed that had state-qualified plans. The majority of state-qualified plans in the states we reviewed were preferred provider organization (PPO) plans, although health maintenance organization (HMO), exclusive provider organizations (EPO), unrestricted fee for service (FFS), and point of service (POS) plans were available in some states. According to a national employer benefits survey, PPO health plans offered by employers in 2003 generally included an average annual deductible for services provided within the health plan’s preferred provider network of $275. Table 11 shows that most of the state-qualified health plans in the states we reviewed offered a choice among deductible amounts, ranging from $0 to $5,000, and that HCTC recipients generally selected the lowest deductibles available, typically $1,000 or less. We reviewed these state-qualified health plans for the extent of the benefits they offered with regard to maternity care, mental health care, and prescription drugs. The extent to which maternity benefits were covered by state-qualified plans in the states we reviewed is shown in table 12. Employer-sponsored plans typically provided coverage for maternity benefits because the federal Pregnancy Discrimination Act required employers with 15 or more employees to cover expenses for maternity services on the same basis as coverage for other medical conditions. Only one state-qualified plan in the states we reviewed did not provide coverage for maternity benefits, and three state-qualified health plans offered maternity coverage that was available as an optional benefit with an additional premium charge. The mental health benefits offered by state-qualified health plans in the states we reviewed are summarized in table 13. A national survey of health benefits offered by employers in 2003 reported that 99 percent of employer PPO plans provided coverage for both inpatient and outpatient mental health services, and the majority of these plans provided coverage for at least 21 days of inpatient care and 21 outpatient visits per year. In comparison, two state-qualified health plans in a state we reviewed did not provide any coverage for mental health benefits, and one health plan in another state we reviewed limited coverage of mental health benefits to 10 inpatient days and 10 outpatient visits per year. State-qualified plans in three states required enrollees to pay 50 percent of the cost of outpatient mental health visits. Two state-qualified health plans in one state limited coverage to certain mental disorders. Prescription drug benefits offered by state-qualified health plans in the states we reviewed are summarized in table 14. According to a national survey of employer-sponsored health benefits, 99 percent of employer PPO plans provided coverage for prescription drugs in 2003, and 92 percent of all employer-sponsored plans did not require a separate prescription drug deductible. The average copayments for prescription drugs reported in this survey were $9 for generic products, $19 for brand-name products that the plan designated as preferred, and $29 for brand-name products that the plan did not designate as preferred. All but one of the state-qualified plans in the states we reviewed included coverage for prescription drugs, and the one plan that did not include such coverage offered it as an optional benefit available for an additional premium charge. State-qualified plans in three states we reviewed required a separate annual deductible for prescription drugs, ranging from $100 to $250. State-qualified health plans in five states we reviewed had annual benefit maximums for prescription drugs, ranging from $500 to $3,000, and one plan did not provide any coverage for brand-name drugs. The cost of qualified health coverage for advance HCTC enrollees varied considerably across states. Total monthly premiums—representing both the individual and federal shares—were affected by the number of people covered on each enrollee’s health plan and whether the advance HCTC enrollee was a TAA recipient or a PBGC beneficiary (see table 15). According to the HCTC program office, most advance HCTC enrollees purchased coverage for a single individual or for an individual and one other family member. On average, PBGC beneficiaries paid more for qualified coverage than TAA recipients. The following staff made important contributions to this report: N. Rotimi Adebonojo, JoAnne R. Bailey, Elizabeth T. Morrison, and Pamela N. Roberto. The Government Accountability Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts newly released reports, testimony, and correspondence on its Web site. To have GAO e-mail you a list of newly posted products every afternoon, go to www.gao.gov and select “Subscribe to Updates.” | Congress enacted the health coverage tax credit (HCTC) in 2002 for certain displaced workers receiving income support through the Trade Adjustment Assistance (TAA) program and for certain retirees receiving pensions from the Pension Benefit Guaranty Corporation (PBGC). The HCTC equals 65 percent of the cost of qualified health coverage, which individuals can receive in advance--the Internal Revenue Service (IRS) pays the credit to the qualifying health plan and the individual pays the remaining 35 percent--or by filing for the credit in their federal tax return. GAO was asked to review the implementation of the HCTC and examined, among other issues, how many individuals received it and factors influencing participation, and the type and cost of coverage they purchased. GAO obtained data from federal and state agencies and private health plans. For 2003, 19,410 individuals received about $37 million in benefits from IRS for the HCTC for themselves and dependents, with 12,594 (65 percent) claiming the credit on their tax returns rather than receiving it in advance. As of July 2004, about 13,200 individuals were enrolled for the advance HCTC, the majority of whom were PBGC beneficiaries. The number receiving the HCTC remains a small portion of the workers and retirees initially identified as potentially eligible. For example, some potentially eligible individuals may have other health coverage that would disqualify them from receiving the HCTC. Several additional factors may have limited participation to date. First, the advance credit only became available beginning in August 2003. Second, the enrollment process is fragmented and complex and requires individuals to meet tax, labor, and health coverage criteria before they can become eligible. Third, eligible individuals must pay the entire premium for about 3 to 6 months while completing eligibility and enrollment requirements and until IRS's first payment is made on behalf of these individuals. Fourth, the health coverage may not be affordable both in terms of an individual's ability to pay the entire premium amount while waiting to receive the advance HCTC and the ability to pay the 35 percent share once payment starts. Individuals can purchase one of several types of qualifying coverage for the HCTC: the coverage they had through their previous employer or insurance coverage options designated by states (primarily high-risk pools or arrangements with insurers). More than half of recipients chose coverage from their previous employer for the advance HCTC and another 40 percent of advance HCTC recipients enrolled in state-designated coverage options, which were available in 35 states and the District of Columbia as of July 2004. The average monthly premiums (representing both the individual and federal shares) for individuals receiving the advance HCTC were $480 for TAA recipients and $661 for PBGC beneficiaries as of April 2004. The tax credit resulted in an average monthly individual share of $168 for TAA recipients and $231 for PBGC beneficiaries. The premiums paid by advance credit recipients varied widely depending on the coverage purchased, including the type of health plan and the number of individuals covered. The cost of HCTC coverage also was affected by the premium-setting practices of qualified health plans. |
One of Secretary-General Ban Ki-Moon’s first major initiatives, upon beginning his tenure in 2007, was to submit to the General Assembly a proposal to restructure the Department of Peacekeeping Operations (DPKO) and establish the Department of Field Support (DFS). The Secretary-General’s proposal, built on previous reform efforts, included requests to reorganize the offices within DPKO, provide additional senior and professional staff for both departments, create new capacities and integrated structures, and transfer resources and authority for field procurement from the Department of Management to DFS. The Secretary- General proposed adding 400 new posts funded under the UN’s support account for peacekeeping operations, including 162 posts in DPKO and 123 posts in DFS. In August 2007, the General Assembly approved many but not all of the elements of the Secretary-General’s proposal, listed below: Creation of new structures, including establishment of DFS from DPKO’s former Office of Mission Support; within DPKO, consolidation of former offices into an Office of Rule of Law and Security Institutions and a Policy, Evaluation and Training Division; and reconfiguration of the Africa Division into two divisions; Creation of new capacities, such as a Public Affairs Unit within DPKO’s Office of the Under-Secretary-General; a security sector reform capacity in the Office of Rule of Law and Security Institutions, and evaluation and partnership capacities in the Policy, Evaluation and Training Division; Increase in number of senior and working-level positions, including the creation of new positions such as Under Secretary-General of DFS, and Chief of Staff of DPKO (responsible for overseeing the implementation of the DPKO/DFS restructuring, among other duties); and upgrading the Military Advisor position to the Assistant Secretary- General level. Elements of the Secretary-General’s restructuring proposal that were not approved by the General Assembly included the following: Establishment of the Field Procurement Service within DFS, which would have increased the delegation of authority for field procurement in DFS; Creation of 17 of the 42 positions requested for Integrated Operational Teams, located within DPKO; and Creation of a risk management capacity within DFS. The Secretariat set a target date of March 2008 to finish recruitment of new staff and a target date of June 2008 to implement the restructuring of DPKO and DFS. UN spending on procurement has grown significantly over the past decade as peacekeeping operations have expanded, as the Procurement Division has reported increases in procurement spending from about $318 million in 1998 to approximately $1.9 billion in 2007. According to DFS, over 85 percent of the UN’s procurement spending is in support of peacekeeping operations, with field missions accounting for almost 50 percent of total UN procurement. Peacekeeping procurement is conducted both by field missions and the headquarters Procurement Division, located within the Department of Management. The Procurement Division develops policies and procedures for headquarters and field procurement based on the UN Financial Regulations and Rules. The Procurement Division also oversees training for procurement staff and provides advice and support for field purchases. In addition, the Procurement Division negotiates, prepares, and administers contracts for goods and services for peacekeeping missions. These involve multi-year systems contracts for goods and services such as air transportation or vehicles. Each field mission has a procurement section led by a chief procurement officer who typically has a personal delegation of procurement authority to award contracts up to $75,000. Contracts or purchase orders above the authority delegated to chief procurement officers must be approved by the mission’s Director or Chief of Mission Support, based on the advice of the mission’s Local Committee on Contracts (LCC), which reviews and recommends contract awards above delegated authorities. Contracts worth more than $500,000 must first be recommended by the Director or Chief of Mission Support based on the advice of the LCC. The cases are then forwarded to the Headquarters Committee on Contracts (HCC), located in New York for review. The HCC reviews proposed awards and provides a recommendation to the Assistant Secretary-General of the Office of Central Support Services (the contracting approval authority), as to whether the contracts are in accordance with the UN Financial Regulations and Rules and procurement policies. UN procurement reform is an important element of strengthening the management of peacekeeping and weaknesses in UN procurement have raised significant concerns. In 2006, we reported that weak internal controls over UN peacekeeping procurement expose UN operations to risk of waste, fraud, and abuse. We further reported that the UN’s control environment for procurement is weakened by the absence of (1) an effective organizational structure, (2) a commitment to a professional workforce, and (3) specific ethics guidance for procurement staff. To address these concerns, we recommended that the Secretary of State and the Permanent Representative of the United States to the UN work with other member states to encourage the Secretary-General to take the following eight actions: Establish clear and effective lines of authority and responsibility between headquarters and the field for UN procurement, Enhance the professionalism of the UN procurement workforce by establishing a comprehensive procurement training program and a formal career path, Provide the Headquarters Committee on Contracts with an adequate structure and manageable workload for contract review needs, Establish an independent bid protest process for UN vendors, Take action to keep the UN procurement manual complete and updated on a timely basis and complete ethics guidance, Develop a consistent process for providing reasonable assurance that the UN is conducting business with only qualified vendors, Develop a strategic risk assessment process that provides reasonable assurance of systematic and comprehensive examination of headquarters and field procurement, and Standardize and strengthen monitoring of procurement activities by procurement managers, including actions to ensure that oversight agencies’ recommendations are implemented and that officials are held accountable for their actions. In November 2007, as part of a broader review of UN management reforms, we reported that the UN Secretariat had improved the UN procurement process, but not in all the areas of vulnerability we had previously identified. Internal UN oversight entities have also reported on UN procurement activities and reforms. In a February 2007 report summarizing its audits and investigations of peacekeeping operations, the Office of Internal Oversight Services (OIOS) identified serious deficiencies in procurement management, systems, and processes. In October 2007, the UN’s Procurement Task Force also raised concerns about internal controls involving contracts that it reported to have a value of approximately $610 million and identified fraud and corruption schemes related to some of them. The Procurement Task Force further reported that these cases involved a misappropriation of approximately $25 million. The UN Logistics Base (UNLB) in Brindisi, Italy, is a permanent logistics base that supports UN peacekeeping operations and has been in operation since 1994. The predecessor to UNLB, located in Pisa, Italy, was used as a storage facility for assets received upon the closure of DPKO missions, but with the increase in peacekeeping missions, the need arose for a more strategically located facility in which to store and maintain reserves for missions. Since 1994, UNLB has evolved to provide additional services including logistics, communications, and other support services to UN peacekeeping missions and has a budget of just over $45 million for fiscal year 2008-2009. UNLB has a natural deepwater harbor as well as air, road, and rail infrastructure, and is within 5,000 kilometers, or a 6-hour flight, of most peacekeeping operations (see fig. 1). Under a memorandum of understanding with the Government of Italy, UNLB occupies the Brindisi premises rent free. The World Food Program manages a UN Humanitarian Response Depot adjacent to the UNLB facility. In 2002, UNLB began managing strategic deployment stocks (SDS), which include equipment used for the start-up of new missions. SDS is designed to help enable the rapid deployment of new missions within 30 to 90 days. To ensure that it is always in a state of readiness to support a newly established mission, UNLB maintains SDS as a revolving inventory that is replenished after equipment is shipped to missions. The United Nations is in the process of restructuring and strengthening its organization for peacekeeping management, but the Secretary-General and General Assembly have not decided whether the Department of Management or the Department of Field Support (DFS) will have full authority for field procurement. According to procurement officers in the field, authority and responsibility for peacekeeping is divided and remains unclear (A full discussion of the implementation of procurement reforms is in the following section). Although the reorganization of the Departments of Peacekeeping and Field Support is largely in place, some member states are concerned that the Under Secretary-General of DFS reports to and takes direction from the Under Secretary-General of DPKO for matters related to DPKO-managed field operations, in an arrangement that is both new and unique within the UN. Both departments are proceeding to recruit the additional staff authorized, but the recruitment is behind schedule and several key senior-level positions have not been permanently filled, according to the UN. The authority for field procurement remains divided between the Department of Management and DFS. In his 2007 peacekeeping restructuring proposal, the Secretary-General considered the delegation of authority and resources for field procurement to DFS fundamental to the rationale for realigning peacekeeping and establishing the new department. The Secretary-General’s plan further stated that this transfer of authority would simplify the line of authority and accountability for procurement and would result in more timely delivery of goods and services to the field. In 2007, however, the General Assembly deferred its decision on whether to approve the transfer of authority for field procurement and approximately 50 staff from the Department of Management to DFS, pending the submission of a report by the Secretary- General. This report is to explain in detail the proposed management structure for procurement, including procurement procedures for peacekeeping operations. The General Assembly originally requested that this report be issued in time for its fall 2007 session, but the Secretary- General has not yet issued it. In 2006, we reported that the division of authority over field procurement between the Department of Management and DPKO had led to diffused accountability over procurement functions. We reported that because the UN had not established a single organizational entity or mechanism capable of comprehensively managing procurement, it was unclear which department was accountable for addressing problems in the UN’s field procurement process. To address these concerns, we recommended that the Secretary of State and the Permanent Representative of the United States to the UN work with other member states to encourage the Secretary-General to establish clear and effective lines of authority between headquarters and the field for UN procurement, among other steps. The U.S. government’s position is that the UN must fix systemic problems in the UN procurement system including the lack of accountability and an ineffective and inefficient organizational structure. Officials of both the Department of Management and DFS acknowledge that the current divided authority for procurement is an area of vulnerability. For example, Department of Management officials told us that the dual control over procurement prevents the strategic management of procurement. These officials stated that the Department of Management’s procurement division has overall responsibility for UN procurement, but lacks authority or jurisdiction over peacekeeping missions. DFS officials agreed that the continued divided management structure for field procurement is problematic. These officials said that each field procurement crosses between the Departments of Management and Field Support multiple times, which is inefficient and leaves open the question of which department is ultimately accountable and responsible for the procurement. Figure 2 illustrates the divided lines of authority in the procurement of goods and services that exceed field mission authority, with approval and clarifications moving back and forth between DFS and the Department of Management before the procurement is completed. In our structured interviews, chief procurement officers at peacekeeping missions commented that the lack of clear authority and accountability continues to adversely impact them. Eighteen of the 20 chief procurement officers we interviewed outlined challenges or difficulties stemming from the division of responsibilities for field procurement. For example, DFS does not have full operational control and authority for field procurement because it does not approve individual cases, according to one chief procurement officer. The Department of Management’s Procurement Division does review cases before they are submitted to the Headquarters Committee on Contracts, but is not operationally accountable for late procurements in the field, according to another chief procurement officer. As a result, one field procurement officer told us that, even when a procurement delay impacts a mission’s operation, it is possible that no one can be held accountable because procurement staff followed the rules and procedures of their departments. Eighteen of the 20 chief procurement officers we interviewed also expressed confusion or uncertainties over the division of responsibilities between the two departments as well as which department they should seek guidance from. For example, several chief procurement officers told us that the Procurement Division indicated that they should not communicate with the division on procurement questions, but should instead ask DFS. However, DFS has only a two-person office to assist field missions with their procurement concerns, and several of the chief procurement officers said that DFS lacks the resources needed to sufficiently support field procurement. Several chief procurement officers also said they feel like “orphans” and are often left on their own to make procurement decisions in isolation. Department of Management and DFS officials expressed opposing views on how to resolve the issue of divided authority for field procurement. Department of Management officials stated that transferring authority and resources for procurement to DFS would weaken internal controls by including the field requisitioning and procurement functions within the same department. These officials also said that the procurement division within the Department of Management should be given overall responsibility for all UN procurement, including in the field. DFS officials, however, stated that they should be provided the authority and staff to conduct field procurement. These officials said that procurement procedures need to be improved to reflect the realities of conducting procurement in the field. They pointed out that expediting field procurement was central to the Secretary-General’s peacekeeping reform, and the continuation of the status quo on field procurement raises the question of why DFS was created. Some chief procurement officers said a decision should be made as soon as possible but did not express an opinion about which department should be given overall responsibility for field procurement. As of August 2008, the reorganization of peacekeeping management is largely in place, including the co-location of staff from the Departments of Peacekeeping Operations and Field Support and new offices for both departments. Co-location included moving offices and staff of both departments to adjacent locations within the UN so that they could work together on common issues. DPKO also established new offices such as the Office of Rule of Law and Security Institutions, which consolidated the existing police, justice, corrections, mine action, and disarmament and demobilization units. This new office is intended to be more comprehensive in helping reform a country’s police and military and developing its courts and judiciary. One element of the reorganization that is still in process is the development of the Integrated Operational Teams within DPKO. These teams, which are intended to improve coordination between UN departments in planning, deploying, and supporting peacekeeping operations, were approved by the General Assembly in 2007, but are not fully established. DPKO planned to have seven teams—made up of political, military, police and support specialists—operational by March 2008. As of June 2008, the team for the joint United Nations/African Union Mission in Darfur is the only one that is fully operational. Figure 3 highlights the reorganization’s major changes to the organizational structures of DPKO and DFS. Although UN officials have told us the restructuring of the Departments of Peacekeeping and Field Support is mostly in place, some member states are concerned that the newly established Under Secretary-General of DFS reports to and takes direction from the Under Secretary-General of DPKO for matters related to DPKO-managed field operations. The Secretary- General intended this organizational structure to ensure cooperation and integration between the two departments. However, the General Assembly specified that this arrangement, with one Under Secretary-General subordinate to another, was not to set a precedent. The UN Advisory Committee on Administrative and Budgetary Questions (ACABQ), as well as several of the representatives from individual member states that we spoke to, expressed concern over the feasibility of this arrangement, given that it is both new and unique within the UN. The ACABQ has raised concerns about the Secretary-General’s proposal to strengthen DPKO’s Office of Military Affairs. The Secretary-General reported that the office lacked the rank, capacity, and specialist capabilities to successfully fulfill the functions of a strategic military headquarters for peacekeeping operations in routine and crisis situations. In March 2008, the Secretary-General proposed to expand the Office of Military Affairs by 92 positions, upgrade it with higher-ranking military officers, and expand its functions. The ACABQ reviewed the Secretary- General’s proposal, and although it did support additional strengthening of the office, it did not recommend approval. The ACABQ reported that the Secretary-General had not substantiated the challenges faced by the Office of Military Affairs with relevant data and did not submit the proposal as part of a comprehensive budget for peacekeeping support. The General Assembly subsequently approved 45 new posts and requested the Secretariat to further report on the strengthening and restructuring of the Office of Military Affairs. As of August 2008, a UN official informed us that 134 of the 152 new staff positions authorized by the General Assembly for DPKO and DFS had been selected. However, the departments had established a goal to fill all of the newly-created positions by March 2008. A DPKO official informed us that the hiring of staff has taken longer than expected because of the UN’s lengthy hiring process. Filling positions at the senior level is a particular concern because the restructuring is being completed while the UN is expanding peacekeeping missions. In addition, new Under Secretaries General for both DPKO and DFS were just appointed in June 2008 and March 2008, respectively. According to the UN, DPKO has 26 senior staff positions with 7 of them not filled by permanent appointees, and DFS has 15 senior staff positions with 5 not filled by permanent appointees. Key positions that are vacant or are temporarily filled include DPKO’s Chief of Staff (who ensures coordination between DPKO and DFS and oversees the implementation of the restructuring, among other activities), the principal officers of both Africa divisions, and DFS’s Director of Logistics Support, according to a UN official. In addition to these positions, DFS reported that the Assistant Secretary-General for Field Support and the Chief of Transport and Movement vacated their posts in late August 2008. The UN Advisory Committee on Administrative and Budgetary Questions (ACABQ) has raised concerns that the vacancies and the many new appointees are likely to have a major impact on the performance of the two departments. According to the ACABQ, it is unclear how these vacant positions, as well as the limited amount of time the newest senior appointees have been in their positions, will affect the restructuring implementation. DFS officials disagreed with the ACABQ’s assessment because, in their view, the mid-level staff are experienced and will provide continuity despite senior management changes. Moreover, the duties of many of the vacant senior level positions are being carried out by experienced staff, who temporarily fill these positions, according to UN officials. The United Nations has made some progress in implementing procurement reforms, but has not resolved continuing concerns in areas such as developing career paths for procurement officers in the field. Reforms have included policies to strengthen internal controls—including the expansion of financial disclosure requirements to cover all procurement staff—and efforts to improve the procurement function, such as an expansion of training for procurement staff. However, these reforms and initiatives have not addressed some previously identified concerns, such as difficulties in attracting and retaining field procurement staff. Chief procurement officers at peacekeeping missions raised these and other concerns as continuing challenges to conducting procurement activities in the field. See table 1 for a summary of UN procurement reform accomplishments and continuing concerns. The UN has made progress in implementing procurement reforms, in particular through the issuance of several organizationwide policies to improve internal controls. The UN also has taken steps to improve the functioning of procurement in headquarters and the field through expanded training and updates to its vendor management database and procurement manual, among other initiatives. Following a World Summit held in 2005, the UN outlined a series of procurement reform actions in 2006, and the Procurement Division established a Procurement Reform Implementation Team to implement these reform initiatives focused on internal controls, the procurement process, and strategic management. In a November 2007 status update on these reforms, the Secretariat reported that it had implemented 35 of 74 total reform actions, including 10 of the 27 main reform deliverables. As part of the UN’s procurement reform process, the Secretariat has initiated or revised several procurement policies intended to improve internal controls covering the overall UN procurement process. Initiatives that the Department of Management’s Procurement Division has implemented include the following: Financial disclosure requirement for procurement staff. In 2007, the UN expanded its financial disclosure requirements, previously only required for senior-level staff, to also cover all staff involved in procurement activities regardless of their function or grade level. These staff are required to file a disclosure or declaration of interest on an annual basis. Post-employment restrictions. In 2007, the Secretary-General issued a bulletin establishing a post-employment restriction for all UN staff members participating in the procurement process. The policy prohibits former UN staff members from accepting employment or compensation from any UN contractor for 1 year following their UN employment. Supplier code of conduct. In 2006, the UN issued a supplier code of conduct on its Web site to raise awareness of the ethical responsibility of the vendor community. It included discussions of issues such as the avoidance of conflict of interest. In 2007, the UN revised the supplier code of conduct to reflect the latest provisions on post-employment restrictions. Ban on gifts for Procurement Division staff. The Procurement Division also has issued a guideline for its staff establishing zero tolerance for gifts and hospitality from UN vendors. This guideline is more stringent than the relevant provisions of the existing UN Staff Rules, which are applicable to the staff at large and allow staff to receive gifts of a nominal value, under certain conditions. In 2006, we reported that the UN had not established training requirements for its procurement staff, resulting in inconsistent training levels across the procurement workforce. Other studies had also found that UN procurement staff lacked sufficient knowledge of procurement policies and procedures. The Procurement Division, in coordination with the Office of Human Resources Management and the Inter-Agency Procurement Services Office (IAPSO), has since developed a series of training courses for headquarters and field staff that were delivered in 2007 and 2008. These training modules covered topics including the fundamentals of UN procurement, contract and supplier relations, and ethics in procurement. According to the Department of Management, a joint procurement training program provided training to over 850 staff responsible for procurement activities at various locations. Chief procurement officers at 18 of the 20 field missions told us that their mission had received procurement training recently. However, while expressing appreciation for the training delivered in the field, 13 of the 20 chief procurement officers we interviewed stated that the UN had not established a comprehensive procurement training program for procurement staff. For example, one chief procurement officer observed that there are no benchmarks or minimum requirements for training and that it is largely driven by the availability of funds. Some chief procurement officers also emphasized to us that because of the high turnover of field procurement staff, training must continue to be offered to the field and must not be a one-time event. Several procurement chiefs also discussed a need to expand training for other mission staff involved in the procurement process—particularly requisitioners. In May 2008, the UN approved a Procurement Division training framework document that covers the division’s longer-term plans and objectives for procurement training. The document outlines an objective of establishing a comprehensive procurement training program that covers not only procurement staff, but also requisitioning and contract management staff. However, the document does not make clear how this training will be funded. The Procurement Division also has implemented reforms in other areas, including updating its vendor management database and its procurement manual. In 2006, we reported that the UN has had persistent difficulties in maintaining effective rosters of qualified vendors and that it had not updated its procurement manual since 2004 to reflect current UN procurement policy. The Procurement Division has taken action on the following reform areas: Vendor Database Management. In August 2007, the Procurement Division established a Vendor Registration and Management Team that has, among its responsibilities, to manage and develop the UN’s database of vendors determined to be qualified to do business with the organization. Procurement division officials stated that the team has removed 5,000 companies with incomplete or out-of-date information from the database. In addition, these officials stated that a pilot project is under way at headquarters to streamline vendor registration requirements. Procurement Manual. The Department of Field Support established a working group composed of headquarters and field official that is focused on reviewing and updating the procurement manual. A DFS official stated that the working group’s recommendations are forwarded to the Procurement Division for consideration and revision of the manual. The UN updated the manual in November 2007 and again in June 2008. According to the UN, the manual will continue to be regularly amended to reflect best practices in public sector procurement. UN officials reported that recent changes to the manual included a more detailed discussion of the best value for money principle, among other issues. Increase in HCC Threshold. In August 2008, the UN increased the minimum threshold for procurement contracts required to be reviewed by the Headquarters Committee on Contracts from $200,000 to $500,000. The UN Office of Internal Oversight Services had recommended in 2003 that this threshold be increased to $500,000 or $1 million in order to reduce the committee’s workload and improve efficiency. Fourteen of the 20 chief procurement officers we interviewed had told us that the financial threshold for HCC’s review of procurement cases should be raised. Some of these officials referred to rising prices since the $200,000 limit was established or the decline in the value of the U.S. dollar vis-à-vis the Euro as reasons for increasing the limit. Procurement from Developing Countries. UN officials stated that the organization has taken steps to increase procurement opportunities for vendors from developing countries. In November 2007, the Secretariat reported that procurement from developing country vendors increased from 41 percent of total procurement in 2004 to 55 percent in 2006. To increase procurement opportunities, the UN has conducted business education seminars in various countries to increase awareness of potential vendors about the UN procurement process. Expanded Delegation of Authority for Local Procurement. To address challenges to field procurement at mission start-up, the Procurement Division has expanded a list of items for which missions have increased procurement authority. These items are core requirements such as food, water, and cleaning services, which could more easily be procured locally. For these items, missions have a delegated procurement authority of $1 million, rather than their typical $200,000 limit for other goods and services. Although the UN has made progress in implementing procurement reforms from its 2006 agenda, it has not fully addressed several concerns previously raised by GAO and others. These include the need to improve career development options and conditions of service in the field in order to attract and retain qualified procurement staff, and adapt headquarters- based procurement processes to the field environment. In addition, the UN has not implemented other reforms, such as establishing an independent bid protest mechanism. The United Nations has not made progress in addressing previously raised concerns over career development opportunities in order to attract and retain staff needed for field procurement. In 2006 we reported that the UN had not established a career path for professional advancement for headquarters and peacekeeping procurement staff and that the peacekeeping procurement workforce is adversely affected by considerable staff turnover, especially in peacekeeping missions where UN staff must operate in demanding, unpredictable, and dangerous conditions. GAO’s Framework for Assessing the Acquisition Function at Federal Agencies also states that critical success factors for acquiring, developing and retaining talent are targeted investments in people and utilizing human capital approaches targeted to meet organizational needs. As discussed earlier, the Procurement Division has recently issued a training framework document that includes an objective to support the professional development of staff members in areas including staff mobility and career advancement. However, 14 of the 20 chief procurement officers we interviewed stated that the UN has not established a formal career path for procurement staff. One chief procurement officer, for example, told us that there is no clarity in this area and little prospect for promotion and development, which has an impact on staff performance. Another field official said that opportunities for career development for field staff are “totally forgotten” by the UN and that when a mission closes, the staff are left wondering what will happen to them. The UN commented that several proposals to reform human resources management are currently before the General Assembly, including proposals on harmonizing conditions of service, streamlining contractual arrangements, and establishing career peacekeepers. Overall, the UN continues to have difficulties in retaining high-quality procurement staff for sustained periods in peacekeeping missions. We previously reported that about 23 percent of procurement staff positions in peacekeeping missions were vacant in 2005, and DFS reported that the vacancy rate for field procurement missions has remained at over 20 percent from 2006 to 2008. UN officials also told us that turnover among field procurement staff has continued to hurt the continuity of their operations and that peacekeeping missions continue to faces challenges in deploying qualified, experienced procurement staff, especially during the critical start-up phase. In addition, 19 of 20 chief procurement officers expressed concerns to us about vacancies or understaffing among field procurement staff. One chief procurement officer at a large mission told us that when his mission started up there were only two temporary duty staff assigned to the procurement function and that it took 2 years for the section to reach 75 percent of its allocated staffing level. In discussing the significance of field procurement vacancies, another chief procurement officer told us that staff are pushed harder and burn out faster, and there is a heightened risk that errors will be made. In our 2006 report, we noted that field procurement staff operate under regulations that do not always reflect differences inherent to operating in field locations and that UN procurement rules and processes are difficult to apply in peacekeeping missions, according to UN officials, in particular during start-up. Despite the UN’s efforts to improve field procurement, chief procurement officers continue to note challenges in implementing UN procurement policies and processes in the field environment. For example, 17 of the 20 chief procurement officers we interviewed identified difficulties in applying the UN’s vendor registration requirements in the countries where the missions are operating. One official told us that the requirement for potential vendors to provide bank statements is impossible to meet in areas where there are no functioning banks. Another procurement official stated that the UN vendor registration system does not take into account these circumstances on the ground, and if the missions strictly followed the rules and the paperwork requirements, they would not be able to do business. As an example, this official told us that to purchase water the mission has to find an individual with a borehole. The UN official stated that this person may have a gun and a donkey, but the only paper he handles for his business is cash. Officials in the Department of Management’s Procurement Division stated that they are working to streamline vendor registration requirements, including reducing paperwork requirements for low-value contracts. The Department of Management commented that the Procurement Division is piloting a revised vendor registration process at UN headquarters that requires less formal documentation and is intended to expedite vendor registration. Although the Procurement Division has revised and updated the procurement manual in both of the last 2 years, 15 of the 20 chief procurement officers we interviewed told us that the procurement manual should be further revised to better reflect the field procurement environment. Several chief procurement officers, for example, stated that the manual should be shortened and simplified to more clearly distinguish between policy and guidelines and that separate guidance for field procurement should be established. Another official stated that when the manual was written the operational requirements in field were not taken into account. This official added that during a war, it is not always possible to go through a long bidding process for fuel or food and that sometimes time frames need to be condensed to meet local conditions. Procurement division officials told us that a future revision and update of the manual will include a more extensive revision to reflect field concerns. In addition to the concerns raised above, several other elements of the UN’s procurement reform agenda continue to be discussed within the organization but have not yet been implemented. These include: Independent Bid Protest. We previously reported that the UN had not established an independent bid protest process, a widely endorsed control mechanism that permits vendors to file complaints with an office or official who is independent of the procurement process. Procurement division officials stated that a procedure for bid protests has been agreed to in principle but still needs to be formalized. In addition, these officials stated that a pilot project for a bid protest system in UN headquarters is planned to begin in September 2008. Ethics Guidance. A 2006 UN report on procurement reform discussed plans to issue specific guidance on ethics responsibilities for procurement staff in 2006. However, according to Procurement Division officials, these guidelines have not yet been finalized and issued. In March 2008, the ACABQ expressed its concern over the delay in issuing the ethics guidelines for procurement staff and reiterated that every effort should be made to resolve outstanding issues and issue the guidance without further delay. UN officials told us that an issue still to be resolved is whether the formal adoption of the Procurement Division’s guidance on zero tolerance for gifts for procurement staff will require a change to the UN staff regulations. Lead Agency Concept. The UN also has made little progress in establishing a lead agency concept, which is intended to achieve savings and reduce duplication of work for commonly procured products, such as office supplies, information technology, and communications equipment. Under the concept a UN organization with an established contract with favorable terms and conditions would make purchases under the contract on behalf of other organizations in the UN system. In its 2006 procurement reform plan, the UN projected that implementation of the lead agency concept would take 6 to 12 months. However, UN officials stated the General Assembly has yet to approve a proposal to implement the concept. According to the Department of Management, the lead agency concept may be of limited application, given that a significant proportion of the UN Secretariat’s procurement activities are in support of peacekeeping activities and which may not be required by other UN agencies. Risk Assessments of Field Procurement. In 2006, we reported that the UN lacks a comprehensive risk assessment framework for procurement activities. A UN official acknowledged that there has been little progress to report on the establishment of a risk management system. Fifteen of the 20 chief procurement officers we interviewed also told us that they had not received guidance or requirements from UN headquarters for conducting risk assessments of procurement activities. One official, for example, stated that although there has been discussion within UN headquarters about risk management, no formal guidance has been issued. At the organizational level, the UN continues to develop and plan for the roll-out of an overall risk assessment framework, known as the Enterprise Risk Management (ERM) concept. The UN is planning to implement the ERM by 2010. UNLB provides several important services to peacekeeping missions, including the management of the UN’s worldwide communications and information network and the rapid deployment of Strategic Deployment Stocks (SDS). In response to peacekeeping mandates, UNLB’s responsibilities have increased to incorporate other services, such as training and aviation support. However, its growth over the past 5 to 6 years has raised concerns among UN member states about its expansion and future roles in peacekeeping support. UNLB supports peacekeeping missions through the provision of several important services including the management of the UN’s global communications network and the management and rapid deployment of strategic equipment to the missions when they start. In addition to these core functions, UNLB provides administrative support to six “tenant units” hosted at the base that provide services such as training and aviation support. Services that UNLB provides to peacekeeping operations include the following: UNLB manages the UN worldwide communications hub that links operations between UN headquarters, UN agencies, peacekeeping missions, and a number of other field offices through e-mail, telephone, and videoconferencing. UNLB’s Communications and Information Technology Service serves more than 90,000 UN staff at headquarters and at field operations. On a yearly basis, UNLB establishes 4,000 videoconferences, processes 24 million inter-mission telephone calls, and routes 120 million e- mail messages involving headquarters and UN field missions. UNLB also maintains the UN satellite communication network and the mobile communication vehicles used in the field (as shown in fig. 4). UNLB provides logistical support to peacekeeping missions that are starting up by receiving, inspecting, maintaining, and issuing equipment and supplies from SDS. SDS is composed of equipment considered vital to missions at start-up, such as computers, generators, portable offices, and vehicles. (See app. III for a list of the various components of SDS managed by UNLB.) UNLB also receives goods and equipment that have been procured directly from a manufacturer on behalf of peacekeeping missions, inspects the goods, and refits the equipment for the missions’ needs, then ships them to missions. Finally, UNLB refurbishes used equipment, such as vehicles and generators, for inclusion in the UN Reserve stock for re-issuance to peacekeeping missions. UNLB provides administrative support services to six “tenant units” hosted at the base that provide various services and support. For example, UNLB administers training courses, seminars, and pre-deployment briefings at its on-site training facility. As part of the training function, UNLB provides the civilian pre-deployment training that new or returning UN staff enroll in before deploying to a mission. According to UN officials, UNLB provided training to 2,000 staff in 2007, of which 400 were preparing to deploy to peacekeeping missions. UNLB also provides oversight of aviation safety for UNMIK, UNOMIG, and itself and develops geospacial information for missions. UNLB’s Air Operations Centre provides ground support to aircraft movements and also coordinates with the UN’s World Food Program to provide aviation support for humanitarian flights from Brindisi. The Geographic Information Services (GIS) Center provides mapping and support services to peacekeeping operations, in Darfur and Lebanon, for example. UNLB has grown since 2002 in response to the growing number of peacekeeping mandates and the Secretary-General’s decisions to place additional services at UNLB. Since 2002, the UN Security Council has mandated the deployment or expansion of eight peacekeeping operations and authorized a four-fold increase in the number of UN peacekeepers. From fiscal year 2002/2003 to fiscal year 200/2009, UNLB’s budget increased from $14 million to over $45 million, and its staff levels increased from 130 to 264 (see table 2). As shown in table 2, UNLB has also been actively shipping SDS stocks to missions. Since 2002, when the General Assembly approved the SDS, UNLB has supported 40 operations with SDS shipments amounting to over $300 million. This includes shipments to all new missions since 2004, the supply of operational and security materials to existing missions, and ad hoc support to operations, including the rotation of SDS. UNLB’s expansion since 2002 includes the administration and management of offices that support peacekeeping. In fiscal year 2006/2007, UNLB initiated its training center and Regional Aviation Safety Office, and the base’s fiscal year 2007/2008 budget initiated administrative support for the Strategic Air Operations Center, GIS Center, and the Engineering Design Unit. In 2008, UNLB will manage facilities for DPKO’s Standing Police Unit. In July 2008, the General Assembly approved UNLB’s 2008/2009 budget, which includes an increase in staff. UNLB’s annual budget documents include performance measures and indicators of achievement relating to the management of SDS and other equipment. UNLB is meeting most of its performance indicators, which include a near 100 percent availability of its IT communications services to UN staff and a reduction in equipment receipt and inspection times, but faces some challenges in shipping this equipment to the missions. For example, UNLB has not met its goal of processing shipments of equipment within a 17-day target period, due in part to the time it takes to procure shipping contracts. While noting these challenges, the ACABQ also has recognized UNLB’s achievements in several areas, particularly its recent certifications in the International Organization for Standardization (ISO) process for excellence in supply inventory and information security management (ISO 27001). While the General Assembly approved UNLB’s 2008-2009 budget, it endorsed the ACABQ’s previous recommendation that the Secretary- General report on the role and future development of the base. In 2007 and 2008, the General Assembly and the ACABQ reported that a longer-term perspective was needed to clarify the concept and functions of UNLB, and the basis for placing certain functions at the base. The General Assembly endorsed the recommendation that the Secretary-General report in the 2009-2010 budget proposal on UNLB’s roles and future development. The ACABQ also raised several specific issues about UNLB’s new services. In 2007, and subsequently in 2008, the ACABQ requested analyses of the function of the GIS Center and the Engineering Standardization and Design Center, stressing the need for the GIS Center to clarify its goals, resources and roles. For the Engineering Center, the ACABQ saw a need for determining what efficiency and productivity gains would be achieved by establishing the unit at UNLB. In 2008, the ACABQ also emphasized that a forthcoming report on training strategy should provide an analysis of the optimum venues and conditions for training, including training that may be more effective if provided regionally. The ACABQ also recommended that the Secretary-General clarify reporting lines between the “tenant units,” UNLB, and UN headquarters. In response to the ACABQ’s concerns, endorsed by the General Assembly, the Secretary-General stated that support for establishing logistics functions at UNLB would be based on analysis of projected costs and overhead weighed against potential benefits, including savings and productivity gains. To clarify UNLB’s future strategy, the Department of Field Support and UNLB are developing a 5-year plan that is to be incorporated into UNLB’s 2009-2010 budget. According to UNLB officials, the plan is expected to show UNLB expansion possibilities as well as refurbishment of infrastructure requirements for the next 5 years. They said one factor that could change UNLB’s role is a decision by the General Assembly to shift field procurement authority and responsibility to DFS. According to the head of DFS’s Logistics Division, if DFS were given more responsibility for field procurement, UNLB could play a greater role in procuring for, managing, and monitoring the UN’s worldwide contracts for goods and services. Management reforms needed to cope with the dramatic growth of peacekeeping are incomplete. Reforms to restructure peacekeeping management and strengthen procurement are still being discussed by the Secretariat and member states, but have not been resolved. In addition, the UN is in the process of clarifying long-term plans for the UN logistics base. Central to resolving these issues is a decision about which UN department—the Department of Management or the Department of Field Support—has authority and responsibility for peacekeeping procurement. The UN Secretariat has been unable to reach agreement on the management authority over field procurement, and as this decision continues to be delayed, the divided authority between two departments remains. UN officials and member states agree that this dual control over procurement is inefficient and ineffective and continues to expose the organization to risks. In a 2006 report, we identified the UN’s divided organizational structure for managing procurement as a vulnerability that leaves unclear which department is accountable for problems in the UN’s field procurement process. In that report, we recommended that the United States work with other member states to encourage the Secretary-General to take steps such as establishing clear and effective lines of authority between headquarters and the field for UN procurement. In 2007, we further reported that due to the time and attention given to the Secretary- General’s peacekeeping restructuring proposal, the General Assembly had not considered several procurement reform issues, including establishing lines of accountability, delegation of authority, and the responsibilities of the Department of Management and the Department of Peacekeeping Operations. A decision on this issue will provide direction to complete the restructuring and resourcing of the Department of Field Support, clarify lines of authority and responsibility for peacekeeping procurement, and help clarify a longer-term strategy for the logistics base. However, the UN has yet to resolve this issue. Further progress in other procurement reform areas also is needed. While the UN has taken steps to expand procurement training and update its procurement manual, it has not made progress in establishing an independent bid protest process and continues to face difficulties in attracting and retaining field procurement staff. Continued pressure by the United States and other member states to move these and other procurement reforms forward is needed to fully address concerns that we raised in our 2006 and 2007 reports covering UN procurement. The Department of State and the UN provided written comments on a draft of the report, which we have reprinted in appendixes IV and V. State agreed with the main findings of the report and agreed that much work remains in the UN’s ongoing process to restructure and strengthen its organization for peacekeeping management. State commented that it would draw upon our findings in its continuing discussions with the UN. The UN commented that the report was a generally accurate reflection of the current situation. State and the UN also provided technical comments, which we addressed in the report as appropriate. We are sending copies of this report to interested congressional committees; the Secretaries of State and Defense; and the United Nations. We will also provide copies to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs 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 app. VI. Our review focused on three objectives related to the management of peacekeeping operations: (1) the status of restructuring and strengthening peacekeeping management, including the authority for field procurement; (2) the status of reforms to address previously identified problems with peacekeeping procurement; and (3) UN Logistics Base’s (UNLB) support of peacekeeping operations and its recent expansion. To assess the status of restructuring and strengthening peacekeeping management, we reviewed UN documents, including the Secretary- General’s peacekeeping restructuring proposal, restructuring status reports, Department of Peacekeeping Operations (DPKO) and Department of Field Support (DFS) documents, General Assembly (GA) resolutions, Advisory Committee on Administrative and Budgetary Questions (ACABQ) reports, Office of Internal Oversight Services (OIOS) reports, and other UN documents. We also reviewed previous GAO reports. We also used a framework that is widely accepted in the international audit community and has been adopted by leading accountability organizations, including the International Organization of Supreme Audit Institutions, the U.S. Office of Management and Budget, and GAO. This framework includes the following elements of internal control: (1) the control environment, (2) risk assessment, (3) control activities, (4) information and communications, and (5) monitoring. In addition, we conducted interviews at UN headquarters in New York, with officials from the Office of the Secretary-General, DPKO, DFS, OIOS, and the Procurement Division (PD). We also met with officials at the U.S. Mission to the United Nations and with representatives of the ACABQ and with individual UN member states, including leading contributors to the UN and developing countries. In addition, we conducted structured interviews with chief procurement officers at 20 field missions to discuss management authority for field procurement and other issues related to the DPKO/DFS restructuring. For more information on these structured interviews, see the detailed description below. In Washington, D.C., we also met with State and Department of Defense (DOD) officials. To assess the status of peacekeeping procurement reforms, we reviewed UN documents, including UN Secretariat reports on the status of procurement reforms, PD and DFS documents, ACABQ reports, OIOS reports, and other documents. We also collected data on UN field procurement and on procurement staff vacancies. In addition, we reviewed previous reports and the internationally accepted internal control framework referred to above. In addition, we conducted structured telephone interviews with chief procurement officers at 20 current peacekeeping and special political missions. For these structured interviews, we selected the population of 17 current peacekeeping missions, as well as the 3 special political missions that are led by DPKO. Besides being led by DPKO, these special political missions are also similar to the peacekeeping missions in that they have their own delegated procurement authority from UN headquarters. We did not include within our scope other special political missions that are not led by DPKO or that do not have delegated procurement authority. We selected the following 17 peacekeeping missions and 3 special political missions for our interviews: UNTSO – United Nations Truce Supervision Organization UNMOGIP – United Nations Military Observer Group in India and Pakistan UNFICYP – United Nations Peacekeeping Force in Cyprus UNDOF – United Nations Disengagement Observer Force UNIFIL – United Nations Interim Force in Lebanon MINURSO - United Nations Mission for the Referendum in Western Sahara UNOMIG - United Nations Observer Mission in Georgia UNMIK - United Nations Interim Administration Mission in Kosovo MONUC - United Nations Organization Mission in the Democratic Republic of the Congo UNMEE - United Nations Mission in Ethiopia and Eritrea UNMIL - United Nations Mission in Liberia UNOCI - United Nations Operation in Côte d’Ivoire MINUSTAH - United Nations Stabilization Mission in Haiti UNMIS - United Nations Mission in the Sudan UNMIT - United Nations Integrated Mission in Timor-Leste UNAMID - African Union-United Nations Hybrid operation in Darfur MINURCAT - United Nations Mission in the Central African Republic and Chad Special Political Missions led by DPKO UNAMA – United Nations Mission in Afghanistan UNIOSIL – United Nations Integrated Office in Sierra Leone BINUB – United Nations Integrated Office in Burundi Our structured interview included questions on procurement reforms and processes, previous GAO findings, and issues relating to peacekeeping management and UNLB. Structured interview development involved multiple iterations in which questions were assessed methodologically for coherence, completeness, and balance. Two methodologists provided detailed input on the questions during the entire period of development. In the final phase of interview development, we pre-tested our questions with three of our initial respondents and refined our questions based on their input. To analyze the open-ended responses to our structured interview questions, we first developed a set of summary statements to be used for reporting purposes. These summary statements were based on an inductive exercise involving an in-depth reading and comparison of responses to questions under each of the eight recommendation categories and on other issues. Second, we tested these statements on an initial set of three interviews. This test involved two analysts separately coding all of the summary statements for each of the three interviews. Most statements were coded in one of three ways: (1) positive response – the interview data corresponded to the statement; (2) negative response – the interview data contradicted the statement; (3) non-response – no reference to the statement was contained in the interview data. The two analysts met and reconciled their responses; this effort also resulted in modifications to the summary statements. Third, the two analysts used the revised statements to separately code each of the remaining 17 interviews and then met to reconcile any differences in coding. The level of correspondence between the two analysts’ coding of the summary statements was very high, 89 percent. The final tallies of the analysis were obtained by counting, for each statement, the number of positive, negative, and non-responses. Summary results of this analysis across all eight recommendation areas are provided in Appendix II. To assess the status of procurement reforms, we also met with UN officials in New York, including officials with the Office of the Secretary- General, the Procurement Division, DFS, DPKO, and OIOS. In addition, we met with representatives of the U.S. mission to the United Nations and with representatives from the ACABQ and individual member states. In Washington, we also met with State and DOD officials. To identify and examine the support UNLB provides to peacekeeping missions, we reviewed UN documents and reports, including budget documents, UNLB data and documents, DPKO Material Resource Plans (MRP), ACABQ reports, OIOS reports, and General Assembly resolutions. We determined that data from the UN's inventory management system are sufficiently reliable for the purposes of our report, which is to support findings concerning UNLB's support for peacekeeping operations and its expansion. We traveled to Rome and Brindisi, Italy, to meet with officials from UNLB, the UN Humanitarian Response Depot (UNHRD), and representatives of the U.S. Mission to the Rome-based UN organizations. We met with UNLB officials to gain information on UNLB’s operations, responsibilities related to the management of strategic deployment stocks (SDS), and challenges with supporting peacekeeping operations. We met with UNHRD and U.S. Mission officials to discuss other UN organizations’ logistics operations to support humanitarian missions. We also met with officials with the U.S. Permanent Mission to the UN in New York, as well as State officials and DOD officials in Washington, D.C. It was beyond the scope of this review to conduct an analysis of the cost-effectiveness of UNLB’s location in comparison to other locations. We conducted this performance audit from August 2007 to September 2008 in accordance with generally accepted government auditing standards. These standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The following table provides of statements derived from our structured telephone interviews with chief procurement officers (CPO) at 20 UN field missions. The statements are organized by categories that correspond to recommendations from our 2006 report on UN procurement. For each statement, we list the number of respondents that provided answers corresponding to the statement (Yes), the number of respondents providing answers indicating the opposite view (No), and the number of respondents who did not provide an answer or provided an answer that was unclear. For a detailed description of our scope and methodology for these structured interviews, see appendix I. CPOs at peacekeeping missions identified challenges to conducting procurement activities in the field Lines of authority and responsibility between headquarters and the field for UN procurement CPOs expressed confusion or uncertainties over the division of responsibilities between DFS and PD. CPOs told us that lines of authority and responsibility for procurement between headquarters and the field are clear. CPOs expressed challenges or difficulties stemming from the division of responsibilities between DFS and PD. CPOs stated that overall responsibility for field procurement should be clarified between DFS and PD. CPOs stated that DFS lacks the resources needed to sufficiently support field procurement. CPOs stated that they feel like “orphans” or that they are often left on their own to make procurement decisions in isolation. Procurement training program and establishment of a formal career path for procurement officers CPOs told us that their mission had received procurement training recently. CPOs stated that the UN has not established a comprehensive procurement training program for procurement staff. CPOs told us that the UN has not established a formal career path for procurement staff. CPOs told us that their missions were not in a position to implement the Best Value for Money principle. Functions and workload of the Headquarters Committee on Contracts (HCC) CPOs discussed one or more challenges associated with the HCC’s review of procurement cases. CPOs told us that the financial threshold for the HCC’s review of procurement cases should be raised. Establishment of an independent bid protest process for UN vendors CPOs discussed concerns to take into account if a formal independent bid protest were to be established for field missions. CPOs told us that their missions have received few, if any, complaints from companies about the outcomes of the bidding process. UN procurement manual and ethics guidance CPOs stated that their staff refer to the UN Procurement Manual as a reference tool. CPOs stated that the Procurement Manual should be revised to better reflect the field procurement environment. CPOs stated that UN headquarters sought their input on revisions to the Procurement Manual. Process for assuring that the UN is conducting business with only qualified vendors CPOs identified difficulties in applying the UN’s vendor registration requirements in the countries where the missions are operating. CPOs told us that the UN’s vendor registration process was unclear or that it needed to be revised. CPOs told us that UNHQ provides them with information on suspended or suspect vendors. Risk assessment process providing reasonable assurance of systematic and comprehensive of headquarters and field procurement CPOs stated that they have not received guidance or requirements from UN headquarters for conducting risk assessments of procurement activities. Monitoring of procurement activities by procurement managers CPOs described monitoring and oversight of field procurement (by UN headquarters) as limited. CPOs expressed concerns to us about vacancies or understaffing among field procurement staff. Appendix III: Components of Strategic Deployment Stocks (SDS) SDS includes vehicles, communications equipment, and accommodation, among other items. This equipment is stored and maintained at UNLB as a reserve to be used for rapid deployment to newly starting missions. The following table lists the categories of SDS managed and stored by UNLB. The equipment is grouped into six sections: Engineering, Geographic Information Systems (GIS), Medical, Supply, Communication and Information Technology Services (CITS), and Transport. Communication and InformationTechnology Services (CITS) Source; United Nations. In addition to the contact named above, Tet Miyabara, Assistant Director, Jeremy Latimer, Sona Kalapura, Michelle Richman Su, Debbie Chung, and David Dornisch made key contributions to this report. In addition, Ashley Alley, Avrum Ashery, Jenny Chanley, Beth Hoffman Leon, Colleen Miller, and Justin Monroe provided technical assistance. | The United States is the largest financial contributor to United Nations (UN) peacekeeping operations--providing about $1.4 billion in 2008 (about 26 percent of the total UN peacekeeping assessed budget)--and has a strong interest in the efficient and effective management of these operations. The size and scope of UN peacekeeping has significantly increased over the past several years and the UN has pursued management reforms to strengthen its capacity to support operations. GAO was asked to examine (1) the status of the current restructuring and strengthening of peacekeeping management including procurement for the field, (2) the status of reforms to address previously identified problems with peacekeeping procurement, and (3) the UN Logistics Base's support of peacekeeping operations. GAO reviewed relevant UN documents; conducted structured interviews with chief procurement officers at 20 peacekeeping missions; and interviewed UN and U.S. officials. State agreed with the report and commented that it would draw upon some of the report findings in its discussion with the United Nations. The UN agreed with GAO's assessment of the status of reforms and provided technical comments, which are addressed in the report as appropriate. The United Nations (UN) is in the process of restructuring and strengthening its organization for peacekeeping management, but has not resolved the issue of authority for field procurement, which is fundamental to the restructuring. Instead, the authority for field procurement remains divided between two departments, leaving the lines of accountability and responsibility for field procurement unclear. Member states are also concerned that the head of the new Department of Field Support reports to and takes direction from the head of the Department of Peacekeeping Operations on matters related to peacekeeping missions. The UN has not yet appointed several key senior-level staff for both departments, at a critical time in the restructuring. The UN has made some progress in implementing procurement reforms to improve internal controls and processes. For example, the UN Secretariat has established financial disclosure requirements for all staff involved in the procurement process, expanded training for peacekeeping staff and updated its procurement manual. However, these efforts have not addressed some previously identified concerns, including difficulties in attracting and retaining field procurement staff and in applying procurement processes in the field. The UN Logistics Base (UNLB) in Brindisi, Italy, provides important communications and logistical support to peacekeeping operations and has expanded considerably since 2002. UNLB maintains the UN's worldwide information and technology network and provides peacekeeping missions with stocks that are essential during start-up. In response to peacekeeping mandates, UNLB has further expanded to take on tasks such as training and aviation support. However, its growth over the past 5 to 6 years has raised concerns of the General Assembly, which requested that it clarify its role and future development plans. |
NICS is used by federally licensed firearm dealers to initiate a background check on individuals seeking to possess or receive a firearm. The permanent provisions of the Brady Handgun Violence Prevention Act (Brady Act) took effect on November 30, 1998. Under the Brady Act, before a firearm dealer can transfer a firearm to an unlicensed individual, the dealer must initiate a background check through NICS to determine whether the prospective firearm transfer would violate federal or state law. Under federal law, generally there are 10 categories of individuals who are prohibited from receiving or possessing a firearm, including individuals convicted of a MCDV and those subject to a qualifying domestic violence protection order. States can also establish their own prohibitions in addition to the federal prohibitions. During a NICS check, descriptive data provided by an individual, such as name and date of birth, are used to search three national databases—managed by the FBI—containing criminal history and other relevant records to determine whether or not the person is disqualified by law from receiving or possessing firearms. The majority of the records found in these three databases come from states and territories, though federal and international criminal justice agencies also contribute some records. Interstate Identification Index (III): The III is a system for the interstate exchange of criminal history records. III records include information on persons who are indicted for, or have been convicted of, a crime punishable by imprisonment for a term exceeding 1 year or have been convicted of a misdemeanor crime of domestic violence. National Crime Information Center (NCIC): NCIC is an automated database of criminal justice-related records consisting of 21 files (7 property files and 14 person files), accessible to law enforcement and criminal justice agencies. The files pertain to, among other things, information on wanted persons (fugitives), persons subject to protection orders, and stolen property. NICS Index: The NICS Index is a database that was created for use in connection with NICS background checks and contains information on persons determined to be prohibited from possessing or receiving a firearm. In general, states make MCDV records available to the III and protection orders to the NCIC Protection Order file. To facilitate determining if a MCDV record or protection order would prohibit an individual from receiving or possessing a firearm, state and local criminal justice agencies can identify (“flag”) prohibiting records from among all the other records that they provide to the III and NCIC. The flagged criminal history records and protection orders, as well as records submitted to the NICS Index, have been pre-validated by the submitting agency as prohibiting an individual from receiving or possessing a firearm, thereby expediting the NICS check process. For criminal records in the III, agencies can use the Identification for Firearms Sales (IFFS) flag to indicate a prohibiting record for both persons who have been convicted in any court of a crime punishable by imprisonment for a term exceeding 1 year or a misdemeanor crime of domestic violence. For records in the NCIC, agencies can flag a prohibiting protection order with the “Brady Indicator,” which flags orders related to domestic violence that prohibit the individual from receiving or possessing firearms under federal law. According to the FBI, approximately 23.1 million background checks were run through NICS during 2015, of which the FBI’s NICS Section processed about 9 million transactions and designated state and local criminal justice agencies processed about 14.1 million. The FBI has a goal of completing 90 percent of all NICS checks immediately, and completes the vast majority of checks before firearms are transferred. FBI officials noted that the NICS Section has achieved this goal every year since 2003, and had a 90.4 percent immediate determination rate in 2015. States may choose among three options for performing NICS checks: (1) the state can conduct all of its own background checks, referred to as point of contact (POC) states; (2) the state and FBI’s NICS Section can share responsibility for background checks, referred to as partial-POC states; or (3) the NICS Section can conduct all background checks for a state. Figure 1 shows the general NICS check process for gun purchases through a firearm dealer. The Gun Control Act of 1968, as amended, and ATF regulations establish the types of MCDV convictions and domestic violence protection orders that prohibit a person from possessing a firearm under federal law. Specifically, federal law prohibits individuals who are subject to qualifying MCDV convictions or active domestic violence protection orders from possessing or receiving a firearm. As defined by ATF regulations, a qualifying MCDV is generally an offense that is a misdemeanor offense under federal, state, or local law, includes the use or attempted use of physical force or the threatened use of a deadly weapon, and involves an intimate partner relationship between the defendant and the victim, among other things. As defined in ATF regulations, a qualifying protection order generally must include issuance after a hearing where the defendant was given actual notice and the opportunity to participate; the restraint of future conduct by the defendant, such as harassing or stalking of an intimate partner or child of the intimate partner or defendant; and a finding that the defendant represents a credible threat to the physical safety of an intimate partner or child, or by its terms explicitly prohibits the use, attempted use, or threatened use of physical force against the intimate partner or child that would reasonably be expected to cause bodily injury, among other things. ATF is responsible for, among other things, retrieval of firearms that have been transferred to prohibited individuals. Specifically, when the FBI determines, after 3 business days, that an individual to whom a firearm was transferred is prohibited from receiving or possessing a firearm, the FBI refers this delayed denial case to ATF. ATF reviews delayed denial cases it receives from the FBI to confirm the prohibition, and then refers the case to an ATF field office for potential retrieval actions. ATF field offices conduct additional research by coordinating with local law enforcement agencies. If ATF determines that a person should not have been denied, ATF notifies the FBI that the firearm transaction was not prohibited and that the transfer was permissible. If ATF confirms that the person who received the firearm was prohibited, an ATF official contacts the firearm purchaser to coordinate transferring the firearm to a licensed dealer or a third party who is not a prohibited person, or seizes the firearm. The goal of the National Criminal History Improvement Program (NCHIP) is, among other things, to improve the nation’s safety and security by enhancing the quality, completeness, and accessibility of criminal history record information by providing direct financial and technical assistance to states and tribes to improve their criminal record systems and other related systems. For example, according to the 2016 grant solicitation, the funds can be used to, among other things, assist states and tribes in finding ways to make more records available to NICS through the III, NCIC, and NICS Index and to address gaps in the federal and state records currently available in NICS. All states and five territories have received NCHIP grant funds at least once since the inception of the NCHIP grants in 1995. The NICS Act Record Improvement Program (NARIP) implements the grant provisions of the NICS Improvement Amendments Act of 2007 (NIAA) to improve records available to NICS and help eligible states and tribes improve completeness, automation, and transmittal of records to state and federal systems. The Consolidated Appropriations Act, 2016, appropriated $73 million for grants to states to upgrade criminal and mental health records for NICS, of which no less than $25 million shall be for grants made under the authorities of the NICS Improvement Amendments Act of 2007. These grants were to, among other things, assist states and tribes in supplying accurate and timely court orders and records of misdemeanor crimes of domestic violence for inclusion in federal and state law enforcement databases used to conduct NICS background checks. Since 2011, DOJ has placed a funding priority on NARIP grant projects that increase the number of mental health records accessible to NICS. According to the grant solicitations, states must use a portion of awarded funds to make such records accessible to NICS unless the state can provide information showing that another prohibiting category represents a greater information gap. Twenty-two states voluntarily participate in the Identification for Firearms Sales (IFFS) program and flag criminal records in the III that prohibit an individual from receiving or possessing a firearm. States can use the IFFS flag to identify disqualifying convictions in any court of a crime punishable by imprisonment for a term exceeding 1 year. States can also use the IFFS flag to identify disqualifying MCDV records, but the total number of MCDV records that states make available to the III for use during NICS checks is generally unknown. FBI officials noted that it is not possible to identify all of the domestic violence records in the III because there is no automatic process that can disaggregate these records from the 88 million other criminal records. As of October 2015, states used the IFFS flag to indicate that approximately 5 million (6 percent) of 88 million total III records were firearm disqualifying for the range of criteria, including domestic violence records. According to NICS Section and BJS officials, states predominantly make MCDV records available for NICS checks through the III versus the NICS Index. NICS officials said that they encourage states to enter criminal records into III because the records are then available for all criminal justice purposes, not just NICS checks. BJS was responsible, under the NIAA, for collecting initial state estimates of the number of MCDV records, among the other prohibiting categories, that exist at the local or originating agencies and the number of records that are or could be made available to NICS. However, in 2012, BJS decided to stop collecting state record estimates because feedback from focus groups comprised of FBI and state officials and analysis of the collected record estimates demonstrated that certain estimates were not sufficiently reliable for their intended use due to factors such as states using widely different methods to estimate the number of records. According to FBI guidance, NICS examiners and POC states can deny a firearm transfer based on a disqualifying IFFS flag after verifying that the person seeking to obtain the firearm matches with the record and reviewing the criminal record information that is returned from the NICS check without verifying that the other elements of the firearm prohibition for MCDVs were met. Officials from three of five POC states we spoke with said they will deny a firearm transfer if the IFFS flag indicates there is a firearm-disqualifying record. Officials from the other two POC states said they will conduct additional research prior to denying the firearm transfer, such as obtaining and reviewing a police report or court record, to verify that all of the prohibiting criteria are met. Based on our discussions with officials from eight states, DOJ, SEARCH, and NCSC, we identified two general challenges (versus challenges related to flags) that state officials most frequently cited as negatively affecting their ability to make criminal records—both felony and misdemeanor records—available to the III: (1) lack of fingerprinted arrest records, such as when law enforcement cites and then releases an individual and (2) incomplete criminal records where the arrest record does not have a final disposition. These are consistent with challenges we have previously reported. Fingerprints not collected and cite-and-release practices: As we previously reported, incomplete or missing criminal history records can result from law enforcement officials citing and releasing individuals without formally arresting and fingerprinting them. Criminal records without fingerprints are not available in the III, and hence, these records would not be available for a NICS check. Officials from four of the eight states we contacted said their state has laws that allow law enforcement officials to issue a citation to individuals for misdemeanor crimes, including crimes that are domestic-violence related, instead of a formal, fingerprinted arrest. Officials from the remaining four states said their state has laws that require a fingerprinted arrest for misdemeanor crimes that could be related to domestic violence. Officials from two states said they are using federal grant funds, such as NCHIP or NARIP, to enter non-fingerprinted MCDV records into the NICS Index. For example, Nebraska officials are using NARIP funds to develop a court process that will automatically identify MCDV records that qualify for the federal firearm prohibition and enter these records into the NICS Index. DOJ also provides grant funds to states to purchase mobile live scan devices that digitally record and electronically transmit fingerprint images or to place live scan devices in courtrooms to help ensure that all arrests have a fingerprinted arrest record in the III. From fiscal years 2009 through 2015, DOJ provided approximately $6 million of the $95 million in NARIP grants to 13 states specifically for MCDV and protection order projects. Criminal history records not complete: States may face challenges in providing complete criminal records (records that have the arrest charge and the disposition of the arrest, such as conviction or acquittal), which can make it challenging to determine if an individual should be prohibited under federal law from receiving or possessing a firearm. Officials from seven of the eight states we contacted said providing complete criminal records to the III, which include felony and misdemeanor records, was a challenge. As we previously reported, DOJ has engaged in various efforts to address state challenges in providing complete criminal history records. For example, states have used NCHIP grant funds to improve the completeness of domestic violence records available to NICS by updating records that only contain arrests to include disposition information and upgrading and automating criminal history record systems to capture data on dispositions from courts and prosecutors. According to senior BJS officials, from fiscal years 2006 through 2015, DOJ provided approximately $11 million of the $137 million in NCHIP grants to states and territories specifically for protection order and MCDV projects. DOJ also helps states by sharing best practices through informational websites and reports and on-site technical assistance. For example, under a DOJ grant through the Office of Justice Programs, Bureau of Justice Assistance, the NCSC created a web-based toolkit that identifies, among other things, best practices on how to overcome disposition reporting and coordination challenges among state and local criminal justice agencies. According to DOJ officials, the toolkit was completed in April 2016. According to FBI data, all states; Washington, D.C.; and two territories enter protection orders to the NCIC protection order file, and 47 states; Washington, D.C.; and two territories also submit orders with the “Brady Indicator,” which flags orders related to domestic violence that prohibit the individual from receiving or possessing firearms under federal law. In 2015, approximately 334,000 (37 percent) of the 907,000 protection orders in NCIC had the Brady Indicator (see fig. 2). State participation in the NCIC protection order file is voluntary, and the extent to which states enter protection orders into the NCIC varies (see appendix III for state and territory protection order data). FBI officials said that they encourage states to enter protection orders into the NCIC protection order file rather than the NICS Index because these protection orders are then available for all criminal justice purposes, not just NICS background checks. According to FBI officials, the total number of domestic violence-related protection orders in NCIC is unknown because the only way to identify these protection orders is through the use of the Brady Indicator. States are not required to use the Brady Indicator when entering protection orders into NCIC and vary in the degree to which they voluntarily flag disqualifying protection orders. Some states have developed practices for using the Brady Indicator on protection orders. For example, Washington state officials said that the state courts and law enforcement agencies consistently use the Brady Indicator to identify firearm prohibiting protection orders. State officials developed a standardized protection order form that captures all the information needed to determine if the order qualifies for the federal firearm prohibition. Additionally, state officials offered training to court staff on how to use the form to determine the Brady Indicator setting for the protection order. Officials from one of the states we spoke with said that they do not encourage law enforcement officials to use the Brady Indicator on protection orders because of the complexity of the flag setting. The officials added that high staff turnover in the local law enforcement agencies responsible for entering the protection order information could also result in staff incorrectly flagging protection orders with the Brady Indicator. According to FBI guidance, NICS examiners and POC states can deny a firearm transfer based on a disqualifying Brady Indicator after verifying that the protection order is active without verifying that the other elements of the firearm prohibition for protection orders were met. Officials from three of five POC states we spoke with said they follow this guidance and rely on the Brady Indicator to deny firearm transfers after verifying the protection order is active without further research on whether the protection order disqualifies firearm transfers. Officials from two other states said they prefer to conduct additional research to ensure the protection order meets the criteria to prohibit a firearm transfer prior to denying a firearm transaction, such as reviewing a copy of the petition for the protection order. Officials from five of the eight states we spoke with said that they generally do not face challenges entering protection orders into the NCIC protection order file. Officials from the other three states said they face challenges entering protection orders to NCIC due to the NCIC entry requirements or the lack of resources and staff. For example, to enter a protection order into NCIC, the protection order must contain certain information, such as name, sex, and race, and it must include at least one numeric identifier, such as date of birth or social security number. Officials from one state said that it is not always possible to collect all the required information, and, as a result, each year the state will average approximately 1,200 to 1,400 protection orders that they cannot enter into NCIC. Officials from another state said that they lacked sufficient staff and resources to enter all protection orders that do not involve a familial relationship into NCIC. Officials from the third state said that the state and local criminal justice agencies did not have the staff and resources to respond to “hit” inquiries 24 hours a day on protection orders. As a result, only one district court in the state enters protection orders into NCIC. DOJ has grant programs available to states to, among other things, facilitate submitting protection orders to NCIC and also to provide judicial education on administering protection orders in domestic violence situations and handling firearm prohibitions. For example, Nebraska state officials said they used NARIP and NCHIP grant funds to develop a mechanism for law enforcement agencies to enter protection orders directly into NCIC. The officials said the portal has significantly increased the number of protection orders entered into the NCIC. States have also used NCHIP grants to validate and enter protection orders into the NICS Index. For example, Pennsylvania officials said they received a 2015 NCHIP grant award to develop a process to enter protection orders into the NICS Index that did not have all the information the FBI requires for entry into NCIC. The officials said that these protection orders currently are only available for in-state law enforcement purposes or firearm checks and entering these protection orders into the NICS Index would make them available for firearm checks outside of the state. Lastly, DOJ’s Office on Violence Against Women (OVW) offers multiple grants to state and local criminal justice agencies, victim services organizations, and other entities that address domestic violence. For example, OVW grants fund programs and staff that assist domestic violence victims in obtaining a protection order, train judges on when it is appropriate to include a firearm prohibition in a protection order, and enforce protection order conditions, such as removing firearms from the subject of the protection order. DOJ has engaged in other efforts to help states enter protection orders into the NCIC, such as in person and distance trainings, sharing best practices, conferences, and audits. For example, the NCSC worked with DOJ to develop an online training course for judges on how to develop protection orders under domestic violence situations. Additionally, under the direction of BJS, the NCSC and SEARCH plan to publish a series of reports describing, among other things, the challenges states face in providing NICS-related records and best practices that states have used to make these records available. BJS made available the first of these reports on mental health records in March 2016, and a BJS official said the next report on protection orders will be available by late summer 2016. FBI also conducts audits of states with access to certain FBI systems, such as NCIC, every 3 years. These audits can help improve, among other things, the accuracy and completeness of protection orders in NCIC by reviewing a sample of protection orders and comparing these protection orders against supporting documentation. For example, DOJ auditors identified a state where the NCIC protection orders did not contain all available information, and the state redesigned its existing protection order system to capture the additional information into NCIC. States can submit pre-validated, firearm disqualifying MCDV records and protection orders to the NICS Index for use solely during NICS checks. Pre-validated records are those that can be used to immediately deny a firearm transfer, and are notated by the use of the Brady Indicator, IFFS flag, or made available in the NICS Index. Pre-validated records expedite NICS checks because NICS examiners and POC states can automatically deny firearm transfers based on a NICS Index entry. However, the FBI encourages states to first submit MCDV records and protection orders to the III and NCIC, respectively, because these databases are used for general criminal justice purposes in addition to firearm sales. States may also enter records into the NICS Index if the respective records in the III or NCIC do not contain all the information needed to determine whether the record would prohibit a firearm transfer. The total number of MCDV records that states entered into the NICS Index increased from approximately 19,000 in fiscal year 2008 to approximately 97,000 in fiscal year 2015. This increase largely reflects the efforts of five states whose MCDV records made up approximately 91 percent of these records in the NICS Index in fiscal year 2015 (see fig. 3). Thirty-seven states had MCDV records in the NICS Index as of September 30, 2015, and 18 states had made available more than 100 MCDV records to the NICS Index. Some states have developed processes to submit pre-validated prohibiting MCDV records to the NICS Index in order to expedite NICS checks or make records available to NICS that are not available in other FBI databases, such as the III. For example, Connecticut state officials said they developed a process where court personnel identify potentially prohibiting MCDV records and then a centralized clerk validates the records as firearm-prohibiting and enters them into the NICS Index. The officials noted that the motivation to enter MCDV records into the NICS Index was to ensure that all prohibiting MCDV records were made available for NICS checks because (1) Connecticut state law allows for cite and release arrests for misdemeanor crimes and (2) the information needed to determine if the record prohibits a firearm transfer may not be available in the state primary court records or the criminal history repository. Officials from two POC states we spoke with said they entered disqualifying MCDV records into the NICS Index as they identified these records during a NICS checks in order to expedite potential future NICS checks of the same individual. The total number of protection orders that states entered into the NICS Index increased from approximately 700 in fiscal year 2008 to approximately 55,000 in fiscal year 2015. This increase in protection orders predominantly reflects the effort of one state. Specifically, approximately 47,000 (85 percent) of the approximately 55,000 records were due to New York’s efforts to enter protection orders into the NICS Index starting in fiscal year 2014 (see fig. 4). New York state officials said they used federal grant funding to develop an automatic process that uses protection order information collected by court clerks to identify disqualifying protection orders and then enter these records into the NICS Index and the NCIC. Officials said the motivation for this process is to ensure that all disqualifying protection orders are available for NICS checks and to facilitate and expedite the NICS check process. In total, 23 states had protection orders in the NICS Index as of September 30, 2015. FBI data show that about 70 percent of NICS checks involving prohibiting MCDV records were denied within 3 business days. Specifically, about 41,000 of the approximately 59,000 MCDV denials from fiscal years 2006 through 2015 were denied within 3 business days, with the remaining 18,000 transactions (30 percent) denied after 3 business days. No other category had more than 20 percent of its denials delayed beyond 3 business days. FBI data also show that about 28,000 (94 percent) of the approximately 30,000 domestic violence protection order denials from fiscal years 2006 through 2015 were denied within 3 business days, with the remaining 2,000 transactions (6 percent) denied after 3 business days (see fig. 5). According to our analysis of FBI data, denial determinations for checks involving MCDV records also took longer than checks for other prohibited categories. For example, while the FBI denied 70 percent of MCDV- related checks within 3 business days, it took the Bureau 9 business days to determine 90 percent of all MCDV denials from fiscal years 2006 through 2015. As a comparison, it took the FBI 3 business days to determine 90 percent of criminal conviction denials during the same time period (see fig. 6). Our analysis of FBI data also found that the number of business days needed to complete 90 percent of MCDV denials has improved over time—decreasing from 12 days in fiscal year 2006 to 7 days in fiscal year 2015 (see fig. 7). Other prohibiting categories also required fewer business days to complete 90 percent of denials over time. For example, criminal convictions decreased from 5 business days in fiscal year 2006 to 2 business days in fiscal year 2015. FBI officials were not aware of what actions have contributed to the reduced number of days to reach denial determinations. In addition, NICS examiners were not able to complete many checks initiated by the NICS Section before the FBI was required to stop investigating and purge information related to the transactions from NICS. The FBI is required to purge information related to unresolved NICS checks within 90 days after the check was initiated. According to FBI officials, the FBI purges unresolved NICS checks after 88 days to ensure that they comply with the regulation. Our analysis of FBI data show that 171,994 (2.1 percent) of the 8,256,688 checks that the FBI initiated in 2014 had no proceed or denial determination made by the FBI within 88 days. According to FBI officials, these cases were categorized as unresolved and the FBI does not track the outcomes of these cases. Our analysis indicates that if the 2014 denial rates of NICS checks involving domestic violence records applied to these unresolved checks, approximately 1,930 would have been denied during 2014 for all categories, of which about 130 because of a MCDV record and about 56 because of a protection order. FBI officials said they do not identify or track information on unresolved checks—such as the possible prohibiting offense that led to the check needing additional review or the reason a determination was not made—due to system limitations and multiple prohibiting categories being researched. The officials told us that because they use all available resources to make a final determination, it is unclear to them if tracking additional information could help reduce the number of unresolved checks. For example, they noted that, in accordance with some states’ records management practices, some records they would need to complete the checks are no longer available and have been destroyed. According to FBI data, more than 500 firearms were transferred to individuals with prohibiting MCDV records or prohibiting protection orders each year from fiscal years 2006 through 2015—about 6,700 total transfers—because the FBI denial determination was made after 3 business days, which resulted in the FBI referring these cases to ATF for firearm retrieval. Under federal law, firearm dealers may transfer a firearm to an individual if the dealer has not received a response from the NICS Section after 3 business days. In cases where a proceed or denial determination cannot be made within 3 business days, NICS examiners continue to conduct research to determine whether an individual is eligible for a firearm. The officials added that the NICS Section is to refer any firearm transactions that they deny after 3 business days—known as a delayed denial—to ATF for firearm retrieval if the NICS examiner determines that the dealer has already transferred the firearm to the individual. FBI data show that the FBI referred a total of 6,221 MCDV delayed denials and 559 protection order delayed denials to ATF for potential firearm retrieval from fiscal years 2006 through 2015 because individuals with prohibiting domestic violence records acquired a firearm. During the same period, according to FBI data, the number of NICS checks the FBI processed increased from about 5.2 million checks in fiscal year 2006 to about 9 million checks in fiscal year 2015. Also, from fiscal years 2006 through 2008, the number of FBI referrals to ATF related to domestic violence declined from more than 1,200 to about 550 and remained between 520 and 670 through fiscal year 2015 (see fig. 8). FBI officials were not able to explain how the number of referrals to ATF has remained relatively constant since fiscal year 2008 while the number of NICS checks increased. The FBI was not able to specifically identify the cause of the decline in firearm transfer referrals to ATF from 2006 to 2008, but noted that a change in the NICS process could account for the initial decline. Officials from the NICS Section said that it can be difficult to determine the outcome of a NICS check—proceed or denied—when a prohibiting category has multiple criteria that must be met in order to prohibit a firearm transfer. As previously discussed, in order to deny a firearm transfer for the MCDV and protection order prohibiting categories, multiple criteria must be met, including the element of force, the relationship between the offender and victim, and due process. Another challenge is that states differ on the criminal offenses that can be considered an MCDV. For example, some states have assault, battery, or disturbing the peace offenses while other states have specific domestic violence offenses. Officials from the NICS Section and POC states we contacted said that it may take more than 3 business days to complete checks that involve multiple criteria in part because of the required coordination with local agencies to obtain information related to the criteria. Officials from one POC state noted that communication and document retrieval can sometimes take a week or longer to obtain the necessary information to make a determination. State officials said it often takes time to identify which office or agency to contact in order to gain access to the necessary information. Examiners from three POC states we contacted said it can be difficult to get the necessary information in a timely manner. Also, according to officials from two states, some local agencies charge a fee for copies of documents which they said can inhibit accessing necessary information to make a determination. Officials from three states we spoke with also said they face particular challenges retrieving older criminal records because they are not electronic or have been purged from state criminal record repositories. Officials from the eight states we contacted identified some actions they have taken to address challenges to completing checks before firearm transfers occur. Pre-validating prohibiting domestic violence records: Officials from six of the eight states we spoke with have established processes to proactively identify or pre-validate prohibiting domestic violence records to help get checks completed faster. Pre-validated records are those that can be used to immediately deny a firearm transfer, and are notated by the use of the Brady Indicator, IFFS flag, or made available in the NICS Index. For example, Connecticut officials said they have developed a process in which potentially prohibiting MCDV records are identified, independently validated, and then entered into the NICS Index. The officials told us this effort was to help ensure that all prohibiting MCDV records were made available for NICS checks. New York officials said they identify federal and state prohibiting MCDVs using a text banner that explicitly states that an individual is prohibited from purchasing a firearm on their criminal history records. The officials said they have also utilized federal grant funds to develop a calculation process to identify firearm prohibiting protection orders to make them available in the NICS Index. Pennsylvania officials said they use the IFFS flag to indicate when an arresting charge is a firearm disqualifier. Pennsylvania also uses an automated process that includes identifying the relationship between the victim and offender to apply the Brady Indicator to prohibiting protection orders. Nebraska officials said they use a system for NCIC protection order entries to assist in identifying firearm-prohibiting criteria, which is verified and supplemented by law enforcement officials. The system then applies the Brady Indicator based on criteria provided to the system. New Mexico officials said they report relevant court records to the NICS Index and use a computer query program to identify MCDV records and protection orders that should be included. Washington state officials said they use the Brady Indicator to flag prohibiting domestic violence protection orders entered into the NCIC protection order file. Allowing additional time to complete checks before firearm transfers: Three of our eight sample states have passed laws that allow additional time to complete checks (for all prohibiting categories) before a firearm is transferred. Specifically, Washington law provides for 10 business days to complete a NICS check. Washington examiners said that the additional time is necessary to identify prohibiting criteria and to make a determination if an individual is prohibited. Pennsylvania law requires a 48 hour mandatory wait period before a firearm can be transferred even when a background check is completed within 3 business days and provides for a temporary delay of a firearm transfer if there is a potential prohibiting MCDV record to allow for obtaining all information necessary to make an accurate determination. Pennsylvania officials noted that the temporary delay can be extended indefinitely to prevent a firearm transfer to an individual prohibited due to a domestic violence record. Connecticut law allows up to 60 days to conduct a NICS check for an eligibility certificate, which is required to purchase a firearm in the state and an eligibility certificate is not issued if a final determination of eligibility cannot be made. Other actions taken to help complete checks before firearm transfers occur: According to Texas officials, Texas references state statutes on all criminal records that are submitted to the FBI. The officials said this allows examiners to more quickly identify prohibiting crimes and make accurate determinations. Some POC states, such as Washington and Nevada, enter records into the NICS Index after state officials have researched and identified a prohibiting record in order to expedite future checks involving the same individual. In addition to state actions, the NICS Section adds records to the NICS Index when prohibiting criteria are identified and the information is unable to be updated in III or NCIC. DOJ has also taken actions to help make timely determinations of NICS checks, including providing grants to states to improve records. To help ensure accurate determinations, DOJ conducts a secondary review of denial determinations, and established an appeal process for individuals who believe they were wrongfully denied the ability to purchase a firearm. Grants: As previously mentioned, DOJ provides NCHIP and NARIP grant funds to states to improve general record availability and to better ensure that arrest records and corresponding court dispositions are available for NICS checks. According to DOJ guidance for grant applications, gaps in records significantly hinder the ability of NICS to quickly and accurately confirm whether a prospective purchaser is prohibited from acquiring a firearm. Officials from BJS, the agency responsible for soliciting grant proposals and issuing funds, said that, to the extent possible, they work closely with the FBI to ensure projects are addressing challenges related to prohibited categories. For example, states can use grant funds to help make more records available for use in NICS checks. Officials from one state we spoke with, New York, said they utilized federal grant funds to help make more records available in the NICS Index, thereby addressing gaps in records from the state. Secondary review of denial determinations: ATF, within DOJ, is responsible for reviewing denied firearm transactions. Specifically, ATF reviews all delayed denial referrals it receives from the FBI, after the FBI has reviewed the case and made the determination that a firearm was transferred to a prohibited individual. According to ATF officials, when the FBI makes a delayed denial determination and refers a case to ATF for retrieval, ATF reviews the referrals to determine whether the denial is valid and a retrieval action is necessary. ATF’s process helps ensure that prohibited individuals do not retain possession of a firearm. ATF officials said they sometimes find that the firearm was not transferred, or that the denied individual should have been allowed to purchase the firearm. According to our analysis of ATF data, ATF referred about 76 percent of domestic violence-related delayed denials to its field offices for retrieval actions from October 1, 2006, through July 13, 2015. ATF determined through its review process that the remaining 24 percent of referrals did not need to be sent to the field for retrieval because the firearm was not transferred, the firearm was returned to the dealer without ATF intervention, or the denial was overturned. Appeals: DOJ has a process for individuals to appeal a decision when they are denied a firearm. According to FBI data, from fiscal years 2006 through 2015, the FBI received about 188,000 total appeals. The data also show that about 35,000 of those denial determinations were overturned on appeal. DOJ and the FBI have taken steps to help improve the timely completion of NICS checks but have not established procedures to assess or monitor how long it takes to complete checks for each prohibiting category, which could help inform FBI and other DOJ entities on which areas they should prioritize resources, such as grant funding and training. Specifically, the FBI and other DOJ entities have identified some state practices that could help improve the timely completion of NICS checks. In addition, DOJ issues grants to states in order to help make more records readily available during NICS checks and reduce the time needed to conduct research and make final determinations. BJS officials responsible for administering grants noted that they work with the NICS Section to the extent possible to coordinate and prioritize grant funding. FBI officials also said that they are in the process of changing how they manage the receipt of information from states, such as dispositions and incident reports, in an effort to reduce the amount of time necessary to complete NICS checks. However, the FBI does not assess or monitor how long it takes to complete checks for each prohibiting category. According to NICS Section officials, an analysis of denial data would not affect how the FBI conducts checks because the time required to make determinations (i.e., proceed or denial) is dependent on the availability of information supplied by states. BJS officials noted that an analysis of the time required to complete checks for each prohibiting category could help them identify areas in which they could conduct state outreach and assist states in providing more complete records, such as through the use of grant funding. Our analysis of FBI denial data shows that completing NICS checks involving certain prohibiting categories, including those we focused on for this report—MCDV and protection orders—present challenges. Specifically, more than 500 firearms were transferred to individuals with prohibiting domestic violence records each year from 2006 through 2015. Our analysis also found that the time needed to complete checks involving domestic violence records declined between fiscal years 2006 and 2015, but DOJ and FBI officials were not able to identify what actions they may have taken that contributed to the improvement. The mission of the NICS Section is to enhance national security and public safety by providing the timely and accurate determination of a person’s eligibility to possess firearms in accordance with federal law. However, as discussed previously, some NICS checks are delayed and denied after the firearm has already been transferred to the prohibited individual because information necessary to complete a background check prior to a firearm transfer is not immediately available and additional research must be conducted. Standards for Internal Control in the Federal Government states that internal control monitoring should assess the quality of performance over time and ensure that the findings of audits and other reviews are promptly resolved. Monitoring is to be performed continually and ingrained in the agency’s operations, and managers are to evaluate findings to determine if any corrective actions are needed. Ongoing monitoring or analysis similar to the analysis we conducted could help the FBI determine if specific prohibiting categories present greater challenges in completing determinations than other categories and, in turn, the FBI could use the results and provide them to other DOJ entities to help establish priorities. For example, BJS could use the results of the FBI’s analysis to help prioritize grants to states or focus state training and outreach to address challenges with specific prohibiting categories, among other actions. Sustained federal and state efforts to support NICS background checks are critical in helping to ensure public safety. The national system of criminal background checks relies first and foremost on the efforts of state and local governments to provide complete and accurate records to the FBI. State and local governments often rely on DOJ’s guidance, grants, and identification of practices that can help mitigate challenges in conducting background checks. DOJ has steps in place to reduce the risk of erroneously denying individuals from possessing firearms and an appeals process for individuals who believe they were wrongfully denied the ability to possess a firearm. However, because it has not assessed its data to identify which prohibiting categories result in more delayed denials and firearm transfers to prohibited individuals, the agency cannot reasonably ensure it has effectively prioritized resources and tools to assist states in providing more complete and accurate records for those categories. To help the NICS Section achieve its mission to enhance national security and public safety by providing the timely and accurate determination of a person’s eligibility to possess firearms, we recommend that the Director of the FBI monitor NICS check outcomes for specific categories of prohibited individuals to assess timeliness and provide this information to other DOJ entities for use in establishing priorities and tools to assist states in submitting more complete records for use during NICS checks. We provided a draft of this report for review and comment to DOJ. DOJ provided written comments, which are reproduced in appendix IV. DOJ agreed with our recommendation. We are sending copies of this report to the Attorney General, 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 questions about 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. Key contributors to this report are listed in appendix V. To describe the extent to which states identify domestic violence records for use during National Instant Criminal Background Check System (NICS) checks, we analyzed Federal Bureau of Investigation (FBI) data on the number of domestic violence records that states identified and made available to NICS, including those protection orders flagged with the Brady Indicator, provided by states and territories from 2006 through 2015. We selected this time frame in order to have a sufficient length of time to identify trends in the number of records available to NICS. To assess the reliability of these data, we questioned knowledgeable officials about the data and the systems that produced the data, reviewed relevant documentation, and examined the data for obvious errors. We determined that some of the data were not sufficiently reliable for the purposes of our report. Specifically, we did not report the Identification for Firearms Sales (IFFS) flag data from 2006 through 2014 due to inaccurate flag settings and the lack of controls on who could modify the flag settings. These issues were corrected for 2015, so we determined that the 2015 IFFS flag data were sufficiently reliable for our purposes. We were not able to identify all of the domestic violence records that states have made available to the FBI because of challenges in disaggregating some of these records from other criminal history records, but to the extent possible we took steps to identify trends in the data. We analyzed, on a more limited basis, the number of records that each state had made available regarding other prohibiting categories, such as mental health records, to provide context for trends we identified related to domestic violence records. We also analyzed the last 3 years of FBI state audit findings to report on general challenges states face with respect to the accuracy, validity, and completeness of domestic violence records. Additionally, we analyzed U.S. Department of Justice’s (DOJ) National Criminal History Improvement Program and NICS Act Record Improvement Program grant solicitations and award amounts to identify prioritization and trends in the grant award decisions. In addition, we interviewed officials from eight selected states (Connecticut, Nebraska, Nevada, New Mexico, New York, Pennsylvania, Texas, and Washington) to gain an understanding of their processes for submitting domestic violence records to the FBI and the extent to which they have encountered challenges, if any, in submitting records. We selected this non-generalizable sample of states to reflect a range of factors, including five point of contact (POC) states and three non-POC states, the number of domestic violence records they currently make available to the FBI and whether they have received grant funding to improve their record submissions. Additionally, we interviewed groups with an interest in, among other things, individuals with a history of domestic violence and firearm background checks, including Everytown for Gun Safety, the National Rifle Association, and the Law Center to Prevent Gun Violence, SEARCH—the National Consortium for Justice Information and Statistics—and the National Center for State Courts. Finally, we interviewed officials from various DOJ components with responsibility for maintaining NICS records or supporting related activities, including the FBI’s Criminal Justice Information Services (CJIS) Division and NICS Section, the Bureau of Justice Statistics (BJS), and the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) to obtain additional perspectives on the records states provide for use during NICS checks. To determine the extent to which NICS checks involving domestic violence records are completed before firearm transfers take place, we analyzed DOJ documentation and data to identify trends in total number of NICS checks, denials, delayed denials, firearm retrievals, and days required to determine the outcome of a check. Specifically, we obtained record level FBI data on NICS check denials and delayed denials— 798,401 records from fiscal years 2006 through 2015—and analyzed NICS transaction dates, denial codes, prohibiting categories, and other information to identify the length of time it took examiners to make a denial determination, by year and by prohibiting category. We did not analyze record level data on proceeded NICS checks because FBI is required to purge all identifying information related to the NICS transaction. To illustrate variation in the amount of time denials in different prohibiting categories took, we compared the number of business days taken to complete 90 percent of denials by category. For most prohibiting categories, once 90 percent of denials were completed, the percentage completed each subsequent day was diminishingly small. Specifically, after most prohibiting categories reached a 90 percent denial rate, the rate increased by less than 2 percent each day. We also obtained data from ATF and the FBI on retrieval referrals and appeals by individuals denied a firearm for fiscal years 2006 through 2015 and analyzed these data to identify trends in NICS checks appeals. To assess the reliability of these data, we questioned knowledgeable officials about their information collection procedures and systems, reviewed relevant documentation, and examined data for obvious errors. We determined that the data were sufficiently reliable for the purposes of our report. To determine whether challenges exist that may increase the time it takes to complete a NICS check, we analyzed testimony from DOJ and the selected states regarding characteristics of domestic violence records that can present challenges and lead to checks exceeding the federally allowed 3 business days before a firearm can be transferred. We also obtained documentation and testimony from DOJ and selected states regarding federal and state efforts to increase the number of checks completed before firearms are transferred, including grant awards and training to states. We also interviewed DOJ management and program officials to determine DOJ’s efforts to help NICS and states overcome challenges that could contribute to delayed denials, including guidance, training, and actions to share best practices. We analyzed documentation and interviewed officials from ATF about its efforts to review delayed denial cases prior to initiating a firearm retrieval, challenges it faced, and actions that could minimize the number of retrieval efforts. Finally, we compared DOJ’s actions to monitor the outcomes of the checks and use the results to establish and manage program priorities against criteria outlined in federal internal control standards. We conducted this performance audit from June 2015 to July 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Appendix II: State Options for Conducting Background Checks Using the National Instant Criminal Background Check System (NICS) States have three options for conducting NICS checks, referred to as non-point of contact (non-POC), full point of contact (full-POC), and partial-POC states. In non-POC states, Federal Firearm Licensees initiate a NICS check by contacting the Federal Bureau of Investigation’s (FBI) NICS directly by telephone or via the Internet and any required follow-up research is performed by NICS Section staff. In full-POC states, Federal Firearms Licensees initiate a NICS check by contacting one or more state organizations, such as a state or local law enforcement agency, to query NICS databases and related state files and then, if necessary, the state organization carries out any required follow-up research. In partial POC states, Federal Firearm Licensees initiate a NICS check for handgun purchases or permits by contacting the state who then queries NICS and state files but contacts the NICS to initiate checks for long gun purchases, such as shot guns or rifles. According to the DOJ-funded report, states elect POC or non-POC status for various reasons, such as a state’s attitude toward gun ownership, since many POC states have prohibiting legislation that is stricter than federal regulations. For example, Oregon has five statutorily prohibiting categories of misdemeanor convictions in addition to domestic violence. Additionally, there may be an economic incentive for states to elect non- POC status, since implementing and operating a POC may cost a state more money than it can collect in fees charged to Federal Firearm Licensees for conducting background checks. For example, DOJ reported that Idaho elected not to become a full-POC state because of the added expense of performing background checks for long gun purchases. Legend: Total = Total protection orders active during the year Brady = Total protection orders with a disqualifying Brady Indicator. The Brady Indicator flags protection orders related to domestic violence that prohibit the individual from receiving or possessing firearms under federal law. In addition to the contact named above Eric Erdman, Assistant Director, and Andrew Curry, Analyst-in-Charge, managed this assignment. Winchee Lin, John Hocker, Billy Commons, Dominick M. Dale, Michele C. Fejfar, Eric D. Hauswirth, and John Yee made significant contributions to the work. | The FBI and designated state and local criminal justice agencies use the FBI's NICS to conduct background checks on individuals seeking to obtain firearms. Persons prohibited by federal law from possessing firearms include individuals who have domestic violence records that meet federal disqualifying criteria. Under federal law, firearm dealers may transfer a firearm to an individual if the FBI has not made a proceed or denial determination within 3 business days. GAO was asked to review NICS checks involving domestic violence records. This report (1) describes the extent to which states identify domestic violence records that prohibit an individual from obtaining a firearm and (2) evaluates the extent to which NICS checks involving domestic violence records are completed before firearm transfers take place and any related challenges in completing these checks. GAO reviewed laws and regulations; analyzed FBI data from 2006 through 2015 on domestic violence records that states submitted to the FBI, FBI total checks and denial determinations, and DOJ firearm retrieval actions; and interviewed officials from DOJ and eight states (chosen based on number of domestic violence records submitted to NICS and other factors). State interview results are not generalizable but provide insights on state practices. Most of the 50 states submit domestic violence records—misdemeanor crime of domestic violence (MCDV) convictions and domestic violence protection orders—to the Department of Justice's (DOJ) Federal Bureau of Investigation (FBI) for use during National Instant Criminal Background Check System (NICS) checks, but states vary in their efforts to identify (“flag”) such records that prohibit an individual from obtaining a firearm under federal law. For example, in 2015, 22 states voluntarily participated in a program to identify criminal history records that prohibit individuals from obtaining firearms, which can include domestic violence records. FBI data also show that 47 states identified domestic violence protection orders that prohibit firearm purchases. Since not all domestic violence records that states submit to the FBI meet federal prohibiting criteria, flagging prohibiting records can help expedite NICS checks. The total number of prohibiting domestic violence records that states submit to the FBI is generally unknown because states are not required to flag prohibiting records and there is no automated process to disaggregate such records from other records checked by NICS. For fiscal years 2006 to 2015, FBI data show that most NICS checks involving domestic violence records that resulted in denials were completed before firearm transfers took place (see table). However, about 6,700 firearms were transferred to individuals with prohibiting domestic violence records, which resulted in the FBI referring these cases to DOJ's Bureau of Alcohol, Tobacco, Firearms and Explosives for firearm retrieval. Under federal law, firearm dealers may (but are not required to) transfer a firearm to an individual if the dealer has not received a response (proceed or denial) from the FBI after 3 business days. FBI data also show that during fiscal year 2015, the FBI completed 90 percent of denials that involved MCDV convictions within 7 business days, which was longer than for any other prohibiting category (e.g., felony convictions). The FBI completed 90 percent of denials that involved domestic violence protection orders in fewer than 3 business days. According to federal and selected state officials GAO contacted, the information needed to determine whether domestic violence records—and in particular MCDV convictions—meet the criteria to prohibit a firearm transfer is not always readily available in NICS databases and can require additional outreach to state agencies to obtain information. DOJ has taken steps to help states make prohibiting information more readily available to NICS—such as through training and grant programs—but does not monitor the timeliness of checks that result in denials by prohibiting category. Ongoing monitoring could help the FBI determine if specific prohibiting categories present greater challenges in making determinations than other categories and, in turn, the FBI could provide the results to other DOJ entities to help them establish priorities, such as for grants, state outreach, or training. GAO recommends that FBI monitor the timeliness of NICS checks to assist DOJ entities in establishing priorities for improving the timeliness of checks. FBI agreed with the recommendation. |
Federal responsibilities for assisting states in preparing for emergencies include developing national strategies, policies, and guidelines and providing funding to assist states in developing their emergency preparedness plans and programs. A critical element of emergency preparedness is preparing health care systems for medical surge in a mass casualty event, and consideration of hospital capacity, alternate care sites, electronic medical volunteer registries, and altered standards of care is key to this task. DHS is responsible for developing national strategies, policies, and guidelines related to emergency preparedness. Additionally, DHS administers the Homeland Security Grant Program, which currently consists of four programs—the State Homeland Security Program, Urban Areas Security Initiative, Metropolitan Medical Response System, and Citizens Corps Program. While these programs generally award funds to states and municipalities for the prevention and detection of terrorist acts, some funds can be spent on medical response, including medical surge activities. HHS has the principal responsibility for helping states to prepare for medical surge. In December 2006, PAHPA established ASPR within HHS in order to enhance coordination of public health and medical surge. The act reauthorized and gave ASPR authority over the Hospital Preparedness Program, which provides funds annually to 62 entities—the 50 states, 4 municipalities, 5 U.S. territories, and 3 Freely Associated States of the Pacific—through cooperative agreements in order to strengthen their emergency readiness capabilities. Also, beginning in fiscal year 2009, HHS will require that states provide a 5 percent match to the amount of the federal cooperative agreement funding, through either state funds or in- kind contributions, such as office space or computer support for the program. In 2010 and subsequent years, the matching requirement will increase to 10 percent. As part of the 2006 Hospital Preparedness Program, ASPR required all cooperative agreement recipients to submit midyear progress reports that include data on 15 sentinel indicators, 13 of which are related to medical surge. For example, one of the sentinel indicators is the number of hospitals that have the capacity to maintain at least one patient with a suspected highly infectious disease in a negative pressure isolation room. PAHPA also gave ASPR authority for the Emergency System for Advance Registration of Volunteer Health Professionals (ESAR-VHP). ESAR-VHP supports state-based electronic databases designed to register health care personnel who volunteer to provide medical care in an emergency for the purpose of verifying their credentials. In order to continue to receive Hospital Preparedness Program funds, states must participate in ESAR- VHP by fiscal year 2009. Under PAHPA, HHS is required to link state electronic medical volunteer registries into a national registry. DOD and VA do not have a federal responsibility in assisting states in planning and preparing for medical surge in a mass casualty event. However, since their hospitals are accredited by the Joint Commission, they are required to participate in at least one annual emergency preparedness exercise with their local community. In addition, because they are part of the local community, they would play a role in planning for and responding to local mass casualty events. According to Homeland Security Presidential Directive 21 (HSPD-21) Public Health and Medical Preparedness, issued in October 2007, mass casualty health care is a critical element of public health and medical preparedness. HSPD-21 is one of a series of executive orders released since September 11, 2001, establishing a national strategy to help protect the nation in the event of terrorist attacks or other catastrophic health events. It states that mass casualty health care capability needs to be different from “day-to-day” public health and medical operations, which “cannot meet the needs created by a catastrophic health event.” It also states that the nation must develop a disaster medical capability that, among other things, is rapid, flexible, sustainable, integrated, and coordinated, and delivers appropriate treatment in the most ethical manner with available capabilities. The four key components we identified follow: Hospital capacity: Following a mass casualty event, hospitals may need the ability to adequately care for a large number of additional patients. Strategies to increase hospital capacity include deferring elective procedures, applying more stringent triage for admitting patients, discharging patients early with follow-up by home health care personnel, and adding additional beds and equipment in areas of the hospital that are not normally used for inpatient care, such as outpatient examining rooms. Alternate care sites: A mass casualty event could overwhelm hospitals’ capacity and require the establishment of alternate sites to provide health care services. Alternate care sites deliver medical care outside hospital settings for patients who would normally be treated as inpatients, and triage patients in order to sort those who need critical attention and immediate transport to the hospital from those with less serious injuries. In addition, alternate care sites manage unique considerations that might arise in the context of mass casualty events, including the delivery of chronic care; the distribution of vaccines; or the quarantine, grouping, or sequestration of patients potentially infected with an easily transmissible infectious disease. The development of alternate care sites involves several issues, including the level and scope of medical care to be delivered, the physical infrastructure required, staffing requirements for the delivery of such care, the medical equipment and supplies needed, and the management systems required to integrate such facilities with the overall delivery of health care. Additionally, there are two types of alternate care sites—fixed and mobile. Fixed facilities are nonmedical buildings that, because of their size or proximity to a hospital, can be adapted to provide medical care. Mobile medical facilities are either specialized units with surgical and intensive care capabilities that are based on tractor-trailer platforms or fully equipped hospitals stored in container systems that can be set up quickly. Electronic medical volunteer registries: In a time of emergency, it can be difficult for state and hospital officials who are organizing a response to use medical volunteers unless they have been preregistered to determine who is qualified to provide medical assistance. For example, immediately after the attacks on September 11, 2001, thousands of people spontaneously arrived in New York City to volunteer their assistance— many of whom volunteered to provide medical assistance to the victims of the attacks. However, authorities were unable to distinguish medically qualified from unqualified volunteers. Generally, an electronic medical volunteer registry would (1) preregister health care volunteers, (2) apply emergency credentialing standards to these registered volunteers, and (3) allow for the verification of the identity, credentials, and qualifications of registered volunteers in an emergency. Altered standards of care: In a mass casualty event, routine resource shortages would be significantly magnified and hospitals would have limited access to many needed resources, such as health care providers, equipment and supplies, and pharmaceuticals. As a result, it could be necessary to alter standards of medical care in a manner that is different from normal day-to-day circumstances and appropriate to the situation. For example, because of an influx of a large number of patients in a mass casualty event, adequate staffing of health care providers would be hindered by the current shortages of health care providers. Workforce shortages could result in hospitals changing their established standards of care, such as nurse-to-patient care ratios. The federal government has provided funding, guidance, and other assistance to help states prepare their regional and local health care systems for medical surge in a mass casualty event. From fiscal years 2002 through 2007, the federal government awarded the states about $2.2 billion through ASPR’s Hospital Preparedness Program to support activities to meet their preparedness priorities and goals, including medical surge. Further, the federal government developed, or contracted with experts to develop, guidance that was provided for states to use when preparing for medical surge. In addition, the federal government provided other assistance, such as conferences for states. From fiscal years 2002 through 2007, HHS awarded states about $2.2 billion through ASPR’s Hospital Preparedness Program to support activities to strengthen their hospital emergency preparedness capabilities, including medical surge goals and priorities. (See app. III for Hospital Preparedness Program cooperative agreement funding by state.) ASPR’s 2007 Hospital Preparedness Program guidance specifically authorized states to use funds on activities such as the development of a fully operational electronic medical volunteer registry in accordance with ESAR-VHP guidance and the establishment of alternate care sites. We cannot report state-specific funding for four key components—hospital capacity, alternate care sites, electronic medical volunteer registries, and altered standards of care—because state expenditure reports did not disaggregate the dollar amount spent on specific activities related to these components. During fiscal years 2003 through 2007, DHS’s Homeland Security Grant Program also awarded the states funds that were used for a broad variety of emergency preparedness activities and may have included medical surge activities. However, most of these DHS grant funds were not targeted to medical surge activities, and states do not report the dollar amounts spent on these activities. The federal government developed, or contracted with experts to develop, guidance for states to use in preparing for medical surge. DHS developed overarching guidance, including the National Preparedness Guidelines and the Target Capabilities List. The National Preparedness Guidelines describes the tasks needed to prepare for a medical surge response to a mass casualty event, such as a bioterrorist event or natural disaster, and establishes readiness priorities, targets, and metrics to align the efforts of federal, state, local, tribal, private-sector, and nongovernmental entities. The Target Capabilities List provides guidance on building and maintaining capabilities, such as medical surge, that support the National Preparedness Guidelines. The medical surge capability includes activities and critical tasks needed to rapidly and appropriately care for the injured and ill from mass casualty events and to ensure that continuity of care is maintained for non-incident-related injuries or illnesses. In addition, ASPR provided states with specific guidance related to preparing for medical surge in a mass casualty event, including annual guidance for its Hospital Preparedness Program cooperative agreements, guidance for developing ESAR-VHP-compliant electronic medical volunteer registries, and guidance to develop a hospital bed tracking system. The Hospital Preparedness Program cooperative agreement guidance included activities to assist states in following DHS’s guidelines and meeting its targets. ASPR’s ESAR-VHP guidelines provide states with common definitions, standards, and protocols, which can aid in forming a national network to facilitate the deployment of medical volunteers for any emergency among states. For example, ESAR-VHP registration guidelines categorize medical volunteers by profession, ranging from physicians to mental health counselors. ESAR-VHP guidelines also include four different levels of credentialing based on verification of each volunteer’s qualifications. ASPR provided guidance to states for the Hospital Available Beds for Emergencies and Disasters (HAvBED) system, which is an inpatient bed tracking system designed to allow emergency response entities to know where and what type of additional hospital beds are available, in order to know which hospitals still have capacity to receive patients. HAvBED reports the number of beds vacant/available at the aggregate state level to HHS. To enhance consistency among state- reported data, HAvBED provides standard definitions of beds and data elements each system must incorporate when reporting bed availability during a mass casualty event. Additionally, HHS worked through AHRQ and contracted with nonfederal entities to develop publications for states to use when preparing for medical surge. For example, AHRQ published the document Mass Medical Care with Scarce Resources: A Community Planning Guide to provide states with information that would help them in their efforts to prepare for medical surge, such as specific circumstances they may face in a mass casualty event. This publication notes that the state may be faced with allocating medical resources during a mass casualty event, such as determining which patients will have access to mechanical ventilation. The publication recommends that the states develop decision-making guidelines on how to allocate these medical resources. The RAND Corporation developed the publication Learning from Experience: The Public Health Response to West Nile Virus, SARS, Monkeypox, and Hepatitis A Outbreaks in the United States, which provides states with information on challenges that they may face in a disease outbreak or bioterrorist attack. AHRQ also published Reopening Shuttered Hospitals to Expand Surge Capacity, which contains an action checklist that can be used by states and local entities to identify organizations that have an interest or responsibility in preparing for medical surge, and to determine what resources each could provide. (See app. III for a list of federal guidance.) To support states’ efforts to prepare for medical surge, the federal government also provided other assistance such as conferences and electronic bulletin boards for states to use in preparing for medical surge. States were required to attend annual conferences for Hospital Preparedness Program cooperative agreement recipients, where ASPR provided forums for discussion of medical surge issues. (See app. III for a list of federal conferences.) Additionally, ASPR’s Web site contained links to related published documents, and states were given access to an ASPR- operated electronic bulletin board to communicate with other states on medical surge issues related to the Hospital Preparedness Program. Furthermore, ASPR project officers and CDC subject matter experts were available to provide assistance to states on issues related to medical surge. For example, CDC’s Division of Healthcare Quality Promotion developed cross-sector workshops for local communities to bring their emergency management, medical, and public health officials together to focus on emergency planning issues, such as developing alternate care sites. Many states have made efforts related to three of the key components for preparing for medical surge, that is, increasing hospital capacity, planning for alternate care sites, and developing electronic medical volunteer registries, but fewer have implemented the fourth, planning for altered standards of care. More than half of the 50 states were meeting or close to meeting the criteria for the five medical-surge-related sentinel indicators for hospital capacity. In our 20-state review, we found that all were developing bed reporting systems and almost all of the states with DOD and VA hospitals were engaging in various levels of coordination with those hospitals in an effort to expand their hospital capacity. Of the 20 states, 18 reported that they were in the process of selecting alternate care sites that used either fixed or mobile medical facilities. Additionally, 15 of the 20 states had begun registering volunteers in electronic medical volunteer registries. However, only 7 of the 20 states had adopted or were drafting altered standards of care for specific medical interventions to be used in response to a mass casualty event. More than half of the states met or were close to meeting the criteria for the five surge-related sentinel indicators for hospital capacity that we reviewed from the Hospital Preparedness Program 2006 midyear progress reports, the most recent available data at the time of our analysis. (See table 1 for the five sentinel indicators and the associated criteria.) Twenty- four of the states reported that all of their hospitals were participating in the state’s program funded by the ASPR Hospital Preparedness Program, with another 14 states reporting that 90 percent or more of their hospitals were participating. Forty-three of the 50 states have increased their hospital capacity by ensuring that at least one health care facility in each defined region could support initial evaluation and treatment of at least 10 patients at a time (adult and pediatric) in negative pressure isolation within 3 hours of an event. Regarding individual hospitals’ isolation capabilities, 32 of the 50 states met the requirement that all hospitals in the state that participate in the Hospital Preparedness Program be able to maintain at least one suspected highly infectious disease case in negative pressure isolation; another 10 states had that capability in 90 to 99 percent of their participating hospitals. Thirty-seven of the 50 states reported meeting the criteria that within 24 hours of a mass casualty event, their hospitals would be able to add enough beds to provide triage treatment and stabilization for another 500 patients per million population; another 4 states reported that their hospitals could add enough beds for from 400 to 499 patients per million population. Finally, 20 states reported that all their participating hospitals had access to pharmaceutical caches that were sufficient to cover hospital personnel (medical and ancillary), hospital- based emergency first responders, and family members associated with their facilities for a 72-hour period; another 6 states reported that from 90 to 99 percent of their participating hospitals had sufficient pharmaceutical caches. (See app. IV for further information.) In our further review of 20 states, all 20 states reported that they had developed or were developing bed reporting systems to track their hospital capacity—the first of four key components related to preparing for medical surge. Eighteen of the 20 states reported that they had systems in place that could report the number of available hospital beds within the state. All 18 of these states reported that their systems met ASPR HAvBED standards. For example, in early 2005 one state completed development of a statewide Web-based bed tracking system designed to track the emergency status of all health care facilities. The system has the capacity to present information by individual facility as well as by county. The 2 states that reported that they did not have a system that could meet HAvBED requirements said that they would meet the requirements by August 8, 2008. Our review also found that of the 10 states with DOD hospitals, 9 reported coordinating with DOD hospitals to plan for emergency preparedness and increase hospital capacity. For example, in one state DOD hospital officials served on state-level emergency preparedness committees and participated in training and exercises. The remaining state said it could not report whether the DOD hospitals participated in such activities because these activities were coordinated at the local level. Eight of the 10 states also reported that DOD hospitals in their state would accept civilian patients in the event of a mass casualty event if resources were available. The 2 remaining states did not know whether their DOD hospitals would accept civilian patients, although one of these states said that there had been discussions about this possibility between the state and DOD. Of the 19 states that have VA hospitals, all reported that at least some of the VA hospitals took part in the states’ hospital preparedness programs or were included in planning and exercises for medical surge. For example, VA hospitals in one state were participating in state, regional, and local planning for emergency preparedness along with other hospitals in an effort to increase surge capacity and come closer to the state’s goal of 500 beds for every 1 million population, a VA official said. In another state, a VA hospital was planning with state emergency preparedness officials and DOD hospitals to prepare for any mass casualty event that could occur during a major public event taking place in the state later that year. VA officials stated that individual hospitals cannot precommit resources— specific numbers of beds and assets—for planning purposes, but can accept nonveteran patients and provide personnel, equipment, and supplies on a case-by-case basis during a mass casualty event. Twelve of the 19 states reported that VA hospitals would accept or were likely to accept nonveteran patients in the event of a medical surge if space were available and veterans’ needs had been met. Four of the 19 states reported that their VA hospitals would not accept nonveteran patients in the event of a medical surge, 2 states reported that they did not know if the VA hospitals would accept nonveteran patients, and 1 state reported that some of its VA hospitals would take nonveteran patients and others would not. In planning to increase hospital capacity, most of the 20 states we surveyed reported that they used federal guidance and technical assistance. Eleven states reported that they used ASPR’s Hospital Preparedness Program cooperative agreement guidance, and 9 states used ASPR’s Medical Surge Capacity and Capabilities Handbook. Three states also reported that they used CDC’s Public Health Emergency Preparedness Program cooperative agreement guidance. In addition, 2 states reported that they consulted with ASPR project officers when planning for hospital capacity. Eighteen of the 20 states reported that they were in the process of selecting alternate care sites, and the 2 remaining states reported that they were in the early planning stages in determining how to select sites. Of the 18 states, 10 reported that they had also developed plans for equipping and staffing some of the sites. For example, one state had developed standards and guidance for counties to use when implementing fixed alternate care sites and had stockpiled supplies and equipment for these sites. The counties were responsible for identifying and operating these sites. According to state officials, while most counties were still identifying fixed sites, some counties had established memorandums of understanding with various facilities, including churches, schools, military facilities, and shopping malls. In addition, the state purchased three state-run mobile medical facilities, each with 200 beds, which were stored in the northern, central, and southern parts of the state. Another state, which expects significant transportation difficulties during a natural disaster, had acquired six mobile medical tent facilities of either 20 or 50 beds that were stored at hospital facilities across the state. This state also planned to identify fixed facility alternate care sites, which would provide medical services to people who could not take care of themselves at home but did not need to be in a hospital. Each of these fixed sites was expected to serve 1,000 casualties. One of the 2 states that were in the early planning stages was helping local communities formalize site selection agreements, and the second state had drafted guidance for alternate care sites that was expected to be released early in 2008. Most states reported using AHRQ guidance when planning for alternate care sites. For example, 18 states reported that they used AHRQ’s guidance, such as Rocky Mountain Regional Care Model for Bioterrorist Events, Alternate Care Site Selection Tool, and Reopening Shuttered Hospitals to Expand Surge Capacity. A few states used other federal guidance, such as DHS’s National Incident Management System and National Disaster Management System guidance, when planning alternate care sites. Five states also reported that they used DOD guidance when planning alternate care sites, including DOD’s Modular Emergency Medical System. Fifteen of the 20 states reported that they had begun registering medical volunteers and identifying their medical professions in an electronic registry, and the remaining 5 states were developing their electronic registries and had not registered any volunteers. For 2006, ESAR-VHP guidance identified seven categories of health care professionals ranging from physicians to mental health counselors that should be included in the states’ registries. Of the 15 states that reported that they had begun registering volunteers, 3 states had registered volunteers in more than eight categories, 3 states had registered volunteers in five to seven categories, and the remaining 9 states had registered volunteers in four or fewer categories, often concentrating on nurses. Officials from 4 of the 5 remaining states that had not begun registering volunteers reported that they anticipated registering volunteers by the spring or summer of 2008. An official from the other state reported that state officials did not know when they would begin to register volunteers. Of the 15 states that reported they were registering volunteers, 12 reported they had begun to verify the volunteers’ medical qualifications, though few had conducted the verification to assign volunteers to the highest level, Level 1. If a volunteer is assigned to Level 4, it means that the state has not verified any medical qualifications, such as licenses or certifications in medical subspecialties. Three of the 15 states had registered volunteers solely at Level 4. Seven of the 12 states had credentialed some volunteers no higher than Level 3, meaning they had verified the licenses of some of the volunteers. For example, one state had verified the credentials and assigned all of its 1,498 registered volunteers at Level 3. Another 3 of the 12 states had assigned volunteers to no higher than Level 2, meaning these states had conducted additional verification of medical qualifications, such as degrees. For example, one state had assigned its registered volunteer nurses at Level 2. The remaining 2 states had assigned a small number of volunteers at Level 1. For example, one state had assigned 2 of 955 volunteers at Level 1. At Level 1, all of a volunteer’s medical qualifications, which identify their skills and capabilities, have been verified and the volunteer is ready to provide care in any setting, including a hospital. Nineteen of the 20 states reported that they used ASPR’s ESAR-VHP Interim Technical and Policy Guidelines, Standards, and Definitions when developing registries. Eight of the 20 states also reported that they used information obtained from the annual ESAR-VHP conferences to help develop their volunteer medical registry systems. In our 20-state review of efforts related to the fourth key component, we found that 7 states had adopted or were drafting altered standards of care for specific medical issues. Three of the 7 states had adopted some altered standards of care guidelines. For example, one state had prepared a standard of care for the allocation of ventilators in an avian influenza pandemic, which one state official reported would also be applicable during other types of emergencies. Another state issued guidelines in February 2008 for allocating scarce medical resources in a mass casualty event that call for suspending or relaxing state laws covering medical care and for explicit rationing of health care to save the most lives, and require that the same allocation guidelines be used across the state. For example, during a mass casualty event in this state, hospitals could ignore their nurse-patient ratios and nurses could be assigned to jobs outside their specific area of expertise. In addition, nonlicensed individuals, or retired health care providers whose licenses had lapsed, could be recruited to provide emergency care. For example, a nonmedical hospital employee who had experience as a military medic could get an emergency credential to stitch up wounds or start intravenous lines. According to an official, the state had not completed all of the guidelines for allocation of scarce resources that it planned to develop. The state recently convened a panel of ethicists and providers to address which specific categories of patients would receive scarce resources, such as vaccines and ventilators, when shortages existed. Of the 13 states that had not adopted or drafted altered standards of care, 11 states were beginning discussions with state stakeholders, such as medical professionals and lawyers, related to altered standards of care, and 2 states had not addressed the issue. One state reported that its state health department planned to establish an ethics advisory board to begin discussion on altered standards of care guidelines. Another state had developed a “white paper” discussing the need for an altered standards of care initiative and planned to fund a symposium to discuss this initiative. Six of the seven states that had adopted or were drafting altered standards of care guidelines reported using AHRQ documents, such as Altered Standards of Care in Mass Casualty Events and Mass Medical Care with Scarce Resources: A Community Planning Guide. Officials from one state reported that they had also used CDC documents and the federal government’s pandemic influenza Web site when planning for altered standards of care. While the Hospital Preparedness Program has been operating since 2002, state officials in the 20 states we surveyed reported that they faced continuing challenges in preparing for medical surge in a mass casualty event. Even though many states have made efforts to increase hospital capacity, provide care at alternate care sites, identify and use medical volunteers, and develop appropriate altered standards of care, they expressed concerns related to all four of these key components of medical surge. State officials also noted concerns related to programmatic and regulatory issues involved in preparing for medical surge in a mass casualty event. State officials raised several concerns related to their ability to increase hospital capacity, including maintaining adequate staffing levels during mass casualty events, a problem that was more acute in rural communities. While 19 of 20 states we surveyed reported that they could increase numbers of hospital beds in a mass casualty event, some state officials were concerned about staffing these beds because of current shortages in medical professionals, including nurses and physicians. Some state officials reported that their states faced problems in increasing hospital capacity because many of their rural areas had no hospital or small numbers of medical providers. For example, officials from a largely rural state reported that in many of the state’s medically underserved areas hospitals currently have vacant beds because they cannot hire medical professionals to staff them. In addition, these officials reported that because their hospitals did not provide pediatric intensive care or burn care services and instead transferred these patients to neighboring states, the state might not be able to provide these services during a mass casualty event. State officials also reported that as time passed and no mass casualty events occurred, increasing hospital capacity for a mass casualty event seemed to be a waning priority for hospital chief executive officers. State officials reported that it was difficult to continue to engage private-sector hospital chief executive officers in emergency preparedness activities at a time when these hospitals were facing day-to-day financial problems. For example, officials from one state reported that hospitals in the state were consolidating and closing, and officials from another state reported that fewer hospitals were applying for ASPR Hospital Preparedness Program funds. Officials from two other states reported that progress in preparing emergency plans had slowed, especially for the smaller rural facilities, because the Hospital Preparedness Program allows states to use these funds to hire staff to assist with emergency planning but prohibits hospitals from doing so. According to officials from one of these states, hospital staff have had limited time to spend on emergency planning activities because they must first attend to the operational needs of the hospital. Some state officials reported that it was difficult to identify appropriate fixed facilities for alternate care sites. Officials from two states reported that some small, rural communities had few facilities that would be large enough to house an alternate care site. Officials from some states also reported that some of the facilities that could be used as alternate care sites had already been allocated for other emergency uses, such as emergency shelters. State officials also reported concerns about reimbursement for medical services provided at alternate care sites, which are not accredited health care facilities. During the response to Hurricane Katrina, the Secretary of HHS waived a number of statutory and regulatory requirements related to medical care, and this waiver allowed for reimbursement of medical care provided in alternate care sites. However, officials from several states said that hospitals would prefer to know ahead of time under what circumstances they would receive reimbursement from the Centers for Medicare & Medicaid Services (CMS) for medical care provided in alternate care sites during a mass casualty event. State officials said that having such information would make planning and exercising easier and more realistic. CMS officials told us it would be very difficult to provide specific guidance that would apply to all medical surge events and that the agency preferred to issue guidance on a case-by-case basis following visits to alternate care sites by CMS or Joint Commission officials during the emergency. For example, after Hurricane Katrina, CMS officials visited alternate care sites and the Secretary of HHS relaxed reimbursement requirements for medical care provided in a hospital parking lot, the convention center, and a department store. State officials also told us they were unclear how certain federal laws and regulations that relate to medical care—specifically, the privacy rule issued by HHS under the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and the Emergency Medical Treatment and Labor Act (EMTALA)—would apply in a mass casualty event, especially if the care were provided in an alternate care site and not a hospital. EMTALA requires hospital emergency rooms at Medicare-participating hospitals to screen and treat for emergency medical conditions all individuals who seek treatment. The HIPAA privacy rule prohibits the unauthorized disclosure of individually identifiable health information by health care providers and certain other entities. The Social Security Act authorizes the Secretary of HHS to waive EMTALA and certain requirements under the HIPAA privacy rule during national emergencies, such as a mass casualty event. Federal guidance published in 2006 describes circumstances where provisions related to emergency treatment and privacy protections were temporarily suspended. AHRQ’s publication Providing Mass Medical Care with Scarce Resources: A Community Planning Guide states that requiring hospitals to adhere to EMTALA requirements during a mass casualty event could be unworkable because of the large number of casualties. It notes that during Hurricane Katrina, HHS temporarily suspended the application of EMTALA in affected regions. This allowed hospitals to provide individuals’ medical screening examination at, or transfer them to, alternate care sites, such as a convention center and department store. During Hurricane Katrina, HHS also temporarily relaxed the sanctions and penalties arising from noncompliance with certain provisions of the HIPAA privacy rule, including the requirements to obtain a patient’s agreement to speak with family members or friends. HHS provided details of these waivers on its Hurricane Katrina Web site. Some states reported that medical volunteers might be reluctant to join a state electronic medical volunteer registry if it is used to create a national medical volunteer registry. PAHPA requires ASPR to use the state-based registries to create a national database. According to state officials, some volunteers do not want to be part of a national database because they are concerned that they might be required to provide services outside their own state. Officials from one state reported that since PAHPA was enacted, recruiting of medical volunteers was more difficult and that the federal government should clarify whether national deployment is a possibility. ASPR officials said that they would not deploy medical volunteers nationally without working through the states. Finally, some states expressed concerns about coordination among programs that recruit medical volunteers for emergency response. Officials from one state reported that federal volunteer registration requirements for the Medical Reserve Corps (MRC) and the ESAR-VHP programs had not been coordinated, resulting in duplication of effort for volunteers. For example, the volunteers registered in the MRC units in that state also were expected by the state to register in the state electronic medical volunteer registry. Officials from a second state reported that a volunteer for one program that recruits medical volunteers is often a potential volunteer for another such program, which could result in volunteers being double-counted. For example, an emergency medical technician registered in the electronic medical volunteer registry may also volunteer for an MRC unit, a Disaster Medical Assistance Team (DMAT), and the American Red Cross. This may cause staffing problems in the event of an emergency when more than one volunteer program is activated. Some state officials reported that they had not begun work on altered standards of care guidelines, or had not completed drafting guidelines, because of the difficulty of addressing the medical, ethical, and legal issues involved. For example, HHS estimates that in a severe influenza pandemic almost 10 million people would require hospitalization, which would exceed the current capacity of U.S. hospitals and necessitate difficult choices regarding rationing of resources. HHS also estimates that almost 1.5 million of these people would require care in an intensive care unit and about 740,000 people would require mechanical ventilation. Even with additional stockpiles of ventilators, there would likely not be a sufficient supply to meet the need. Since some patients could not be put on a ventilator, and others would be removed from the ventilator, standards of care would have to be altered and providers would need to determine which patients would receive them. In addition, some state officials reported that medical volunteers are concerned about liability issues in a mass casualty event. Specifically, state officials reported that hospitals and medical providers might be reluctant to provide care during a mass casualty event, when resources would be scarce and not all patients would be able to receive care consistent with established standards. According to these officials, these providers could be subject to liability if decisions they made about altering standards of care resulted in negative outcomes. For example, allowing staff to work outside the scope of their practice, such as allowing nurses to diagnose and write medical orders, could place these individuals at risk of liability. While some states reported using AHRQ’s Mass Medical Care with Scarce Resources: A Community Planning Guide to assist them as they developed altered standards of care guidelines, some states also reported that they needed additional assistance. States said that to develop altered standards of care guidelines they must conduct activities such as collecting and reviewing published guidance and convening experts to discuss how to address the medical, ethical, and legal issues that could arise during a mass casualty event. Four states reported that, when developing their own guidelines on the allocation of ventilators, they were using guidance from another state. This state estimated that a severe influenza pandemic would require nearly nine times the state’s current capacity for intensive care beds and almost three times its current ventilator capacity, which would require the state to address the rationing of ventilators. In March 2006 the state convened a workgroup to consider clinical and ethical issues in the allocation of mechanical ventilators in an influenza pandemic. The state issued guidelines on the rationing of ventilators that include both a process and an evaluation tool to determine which patients should receive mechanical ventilation. The guidelines note that the application of this process and evaluation tool could result in withdrawing a ventilator from one patient to give it to another who is more likely to survive—a scenario that does not explicitly exist under established standards of care. Additionally, some states suggested that the federal government could help their efforts in several ways, such as by convening medical, public health, and legal experts to address the complex issues associated with allocating scarce resources during a mass casualty event, or by developing demonstration projects to reveal best practices employed by the various states. Recently, the Task Force for Mass Critical Care, consisting of medical experts from both the public and the private sectors, provided guidelines for allocating scarce critical care resources in a mass casualty event that have the potential to assist states in drafting their own guidelines. The task force’s guidelines, which were published in a medical journal in May 2008, provide a process for triaging patients that includes three components—inclusion criteria, exclusion criteria, and prioritization of care. The exclusion criteria include patients with a high risk of death, little likelihood of long-term survival, and a corresponding low likelihood of benefit from critical care resources. When patients meet the exclusion criteria, critical care resources may be reallocated to patients more likely to survive. Many state officials raised concerns about other federal programmatic and regulatory challenges, such as program funding cycles, decreased federal funding for hospital emergency preparedness, and new requirements for state matching funds. State officials reported that ASPR’s Hospital Preparedness Program’s single-year funding cycles had made planning and operating state emergency preparedness programs challenging, in part because it is difficult to plan and implement program activities in a single year. One state official suggested that using a 3-year funding cycle for the Hospital Preparedness Program would allow for long-term planning with more realistic work plans. It would also allow for more time for program development and less time spent on program administration. ASPR officials said that they were aware of the concern and were considering a transition to a multiyear funding cycle beginning in 2009. Another concern expressed by some state officials was that federal funding for ASPR’s Hospital Preparedness Program had decreased while program requirements had increased, making it difficult for states to plan for maintenance of emergency preparedness systems, meet new requirements, and replace expired supplies. Hospital Preparedness Program funds decreased about 18 percent from fiscal year 2004 to fiscal year 2007. Finally, many state officials were concerned about the new requirement for matching funds. Beginning in fiscal year 2009, states that want to receive ASPR’s Hospital Preparedness Program funds will have to match 5 percent of the federal funds with either state funds or in-kind contributions. Though states have begun planning for medical surge in a mass casualty event, only 3 of the 20 states in our review have developed and adopted guidelines for using altered standards of care. HHS has provided broad guidance that establishes a framework and principles for states to use when developing their specific guidelines for altered standards of care. However, because of the difficulty in addressing the related medical, ethical, and legal issues, many states are only beginning to develop such guidelines for use when there are not enough resources, such as ventilators, to care for all affected patients. In a mass casualty event, such guidelines would be a critical resource for medical providers who may have to make repeated life-or-death decisions about which patients get or lose access to these resources—decisions that are not typically made in routine circumstances. Additionally, these guidelines could help address medical providers’ concerns about ethics and liability that may ensue when negative outcomes are associated with their decisions. In its role of assisting states’ efforts to plan for medical surge, HHS has not collected altered standards of care guidelines that some states and medical experts have developed and made them available to other states. Once a mass casualty event occurs, difficult choices will have to be made, and the more fully the issues raised by such choices are discussed prior to making them, the greater the potential for the choices to be ethically sound and generally accepted. To further assist states in determining how they will allocate scarce medical resources in a mass casualty event, we recommend that the Secretary of HHS ensure that the department serve as a clearinghouse for sharing among the states altered standards of care guidelines that have been developed by individual states or medical experts. We requested comments on a draft of this report from HHS, DHS, DOD, and VA. These agencies’ comments are reprinted in appendixes V, VI, VII, and VIII, respectively. In commenting on this draft, HHS said our report was a fair representation of the progress that has been made to improve medical surge capacity. HHS was silent regarding our recommendation that the department serve as a clearinghouse for sharing among the states altered standards of care guidelines developed by individual states or medical experts. HHS provided technical comments, which we incorporated where appropriate. In commenting on this draft, DHS concurred with our findings and raised two issues. With regard to the phrase “altered standards of care,” DHS said that the definition of standard of care implies that the standard does not change but “rather it is the type, or level, of care that is altered,” and that this distinction highlights the need to prepare the public “for a different look to health care” in a mass casualty incident. We agree that efforts to inform the public would be beneficial because of the need for enhanced public awareness about how medical care might be delivered in an emergency, but our report focused on addressing states’ concerns about the medical, ethical, and legal issues involved in drafting altered standards of care guidelines. DHS also characterized our recommendation as calling for “passive guidance” and suggested that HHS may need to explore the possibility of producing guidance to direct states’ discussion on rationing of scarce resources. However, we believe a clearinghouse role is more appropriate for HHS than a directive role because the delivery of medical care is a state, local, and private function. DOD concurred with our findings and conclusions. VA concurred with our findings and said that inconsistencies from state to state regarding VA medical centers’ stance toward treating nonveterans in an emergency stem from the centers’ varying capabilities to provide emergency medical treatment. VA said, for example, that not all medical centers provide emergency services or have the same level of emergency supplies. Nevertheless, VA confirmed its authority to provide care in emergency situations and specifically acknowledged that it is authorized to provide emergency care to nonveterans on a humanitarian basis. Finally, VA also highlighted its federal role in responding to disasters under Emergency Support Function #8, the Robert T. Stafford Disaster Relief and Emergency Assistance Act, and the National Response Framework, which was beyond the scope of our report. As arranged with your offices, unless you release its contents earlier, we plan no further distribution of this report until 30 days after its issuance date. At that time, we will send copies of this report to the Secretary of HHS and other interested parties. We will also make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report or need additional information, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report were Karen Doran, Assistant Director; Jeffrey Mayhew; Roseanne Price; Lois Shoemaker; and Cherie’ Starck. 4. Number of beds statewide, above the current daily staffed bed capacity, that awardee is capable of surging beyond within 5. Number of participating hospitals statewide that have access to pharmaceutical caches sufficient to cover hospital personnel (medical and ancillary), hospital-based emergency first responders and family members associated with their facilities for a 72-hour period. 6. Number of participating hospitals statewide that have the capacity to maintain at least one suspected highly infectious disease 7. Number of awardees’ defined regions that have regional facilities to support the initial evaluation and treatment of at least 10 adult and pediatric patients at a time in negative pressure isolation within 3 hours post-event. 8. Number of ambulatory and nonambulatory persons that can be decontaminated within a 3-hour period, statewide. 9. Number of health care personnel, statewide, trained through competency-based programs. 10. Number of hospital lab personnel, statewide, trained in the protocols for referral of clinical samples and associated information. 11. Functional state-based ESAR-VHP system in place that allows qualified, competent volunteer health care professionals to register for work in hospitals or other facilities during an emergency situation. 12. Number of volunteer health professionals by discipline and credentialing level currently registered in the state-based ESAR-VHP system. 13. Number of drills conducted during the fiscal year 2006 budget period that included hospital personnel, equipment, or facilities. 14. Number of tabletop exercises conducted during the fiscal year 2006 budget period that included hospital personnel, equipment, or facilities. 15. Number of functional exercises conducted during the fiscal year 2006 budget period that included hospital personnel, equipment, or facilities. The five sentinel indicators that were analyzed in this report for hospital capacity are 2, 4, 5, 6, and 7. To determine what assistance the federal government has provided to help states prepare their regional and local health care systems for medical surge in a mass casualty event, particularly related to four key components—hospital capacity, alternate care sites, electronic medical volunteer registries, and altered standards of care—we reviewed and analyzed national strategic planning documents and identified links among federal policy documents on emergency preparedness. We also reviewed and analyzed studies and reports related to medical surge capacity issued by the Congressional Research Service, the Department of Health and Human Services’ (HHS) Office of Inspector General, the Agency for Healthcare Research and Quality (AHRQ), the Centers for Disease Control and Prevention (CDC), the Office of the Assistant Secretary for Preparedness and Response (ASPR), the Joint Commission, and other experts. In addition, we obtained and reviewed documents from ASPR to determine the amount of funds awarded to states through its Hospital Preparedness Program’s cooperative agreements. We did not review funding documents from the Department of Homeland Security’s (DHS) Homeland Security Grant Program because the agency does not track the dollar amount spent on medical surge activities. We interviewed officials from ASPR, CDC, and DHS to identify and document criteria and guidance given to state and local entities to plan for medical surge and to learn how federal funds were awarded and utilized. To determine what states have done to prepare for medical surge in a mass casualty event, particularly related to four key components, we obtained and analyzed the 2006 and 2007 ASPR Hospital Preparedness Program cooperative agreement applications and 2006 midyear progress reports (the most current available information—generally effective through March 2007—at the time of our data collection) for the 50 states. We also reviewed the 15 sentinel indicators for the Hospital Preparedness Program. We analyzed the 5 medical-surge-related sentinel indicators for which criteria to evaluate performance were identified and which were reported by the states in their 2006 midyear progress reports. Although ASPR’s 2006 guidance for these reports does not provide specific criteria with which to evaluate performance on these indicators, we identified criteria to analyze the data provided for 5 of them from either ASPR’s previous program guidance or DHS’s Target Capabilities List, which includes requirements related to preparing for medical surge. All 5 of the medical-surge-related sentinel indicators we analyzed were related to one of the four key components—hospital capacity. See appendix I for a list of the 15 sentinel indicators. In addition, we obtained and reviewed 20 states’ emergency preparedness planning documents relating to medical surge and interviewed state officials from these states regarding their activities related to hospital capacity, alternate care sites, electronic medical volunteer registries, and altered standards of care. We also interviewed these state officials to determine what federal guidance or tools they used and to identify the Department of Defense (DOD) and the Department of Veterans Affairs (VA) hospitals’ participation in state planning. Finally, we obtained and reviewed DOD and VA policies and interviewed officials to further understand their policies regarding participation with state and local entities in emergency preparedness planning and responding to mass casualty events. To determine what concerns states identified as they prepared for medical surge in a mass casualty event, we interviewed emergency preparedness officials from the 20 states and focused our questions on their efforts related to four key components of medical surge we identified. We also asked what further assistance states might need from the federal government to help prepare their health care systems for medical surge. We did not validate the sentinel indicator data the 50 states reported to ASPR; however, if data for specific indicators were missing or obviously incorrect (e.g., a percentage was greater than 100 percent), we contacted state officials for clarification. We did not examine the accuracy of other self-reported information contained in the midyear progress reports or Hospital Preparedness Program applications from the 20 states we reviewed. During interviews with officials from the 20 states, we discussed the completeness of information provided in their progress reports and applications about four key components related to preparing for medical surge. For each interview, we used a question set that contained open- ended questions. The state emergency preparedness officials we interviewed provided varying levels of detail to answer our questions. Thus our information from these interviews is illustrative and is intended to provide a general description of what the 20 states have done to prepare for medical surge in a mass casualty event and is not generalizable to all 50 states. We conducted our work from May 2007 through May 2008 in accordance with generally accepted government auditing standards. Tables 2, 3, and 4 provide information on ASPR’s Hospital Preparedness Program funding and on guidance and other assistance for states to use in preparing for medical surge. Figures 1 through 5 provide data for the five surge-related sentinel indicators for hospital capacity from ASPR’s Hospital Preparedness Program 2006 midyear progress reports. | Potential terrorist attacks and the possibility of naturally occurring disease outbreaks have raised concerns about the "surge capacity" of the nation's health care systems to respond to mass casualty events. GAO identified four key components of preparing for medical surge: (1) increasing hospital capacity, (2) identifying alternate care sites, (3) registering medical volunteers, and (4) planning for altering established standards of care. The Department of Health and Human Services (HHS) is the primary agency for hospital preparedness, including medical surge. GAO was asked to examine (1) what assistance the federal government has provided to help states prepare for medical surge, (2) what states have done to prepare for medical surge, and (3) concerns states have identified related to medical surge. GAO reviewed documents from the 50 states and federal agencies. GAO also interviewed officials from a judgmental sample of 20 states and from federal agencies, as well as emergency preparedness experts. Following a mass casualty event that could involve thousands, or even tens of thousands, of injured or ill victims, health care systems would need the ability to "surge," that is, to adequately care for a large number of patients or patients with unusual medical needs. The federal government has provided funding, guidance, and other assistance to help states prepare for medical surge in a mass casualty event. From fiscal years 2002 to 2007, the federal government awarded the states about $2.2 billion through the Office of the Assistant Secretary for Preparedness and Response's Hospital Preparedness Program to support activities to meet their preparedness priorities and goals, including medical surge. Further, the federal government provided guidance for states to use when preparing for medical surge, including Reopening Shuttered Hospitals to Expand Surge Capacity, which contains a checklist that states can use to identify entities that could provide more resources during a medical surge. Based on a review of state emergency preparedness documents and interviews with 20 state emergency preparedness officials, GAO found that many states had made efforts related to three of the key components of medical surge, but fewer have implemented the fourth. More than half of the 50 states had met or were close to meeting the criteria for the five medical-surge-related sentinel indicators for hospital capacity reported in the Hospital Preparedness Program's 2006 midyear progress reports. For example, 37 states reported that they could add 500 beds per million population within 24 hours of a mass casualty event. In a 20-state review, GAO found that all 20 were developing bed reporting systems and most were coordinating with military and veterans hospitals to expand hospital capacity, 18 were selecting various facilities for alternate care sites, 15 had begun electronic registering of medical volunteers, and fewer of the states--7 of the 20--were planning for altered standards of medical care to be used in response to a mass casualty event. State officials in GAO's 20-state review reported that they faced challenges relating to all four key components in preparing for medical surge. For example, some states reported concerns related to maintaining adequate staffing levels to increase hospital capacity, and some reported concerns about reimbursement for medical services provided at alternate care sites. According to some state officials, volunteers were concerned that if state registries became part of a national database they might be required to provide services outside their own state. Some states reported that they had not begun work on or completed altered standards of care guidelines due to the difficulty of addressing the medical, ethical, and legal issues involved in making life-or-death decisions about which patients would get access to scarce resources. While most of the states that had adopted or were drafting altered standards of care guidelines reported using federal guidance as they developed these guidelines, some states also reported that they needed additional assistance. |
High-level waste contains radioactive components that emit dangerously intense radiation. Radiation is generated through a decay process in which the atoms of a radioactive component (also known as a radionuclide) lose their radioactivity by spontaneously releasing energy in the form of subatomic particles or rays similar to X-rays. Even short but extremely intense exposure to radiation can cause almost immediate health problems such as radiation sickness, burns, and, in severe cases, death. Excessive exposure to these particles or rays damages cells in living tissue and is believed to cause long-term health problems such as genetic mutations and an increased risk of cancer. Because of the intense radiation emitted from high-level waste, the waste must be isolated and handled remotely behind heavy shielding such as a layer of concrete in order to protect humans and the environment. In addition to the intense radioactivity, some of the radioactive components can be very mobile in the environment and may migrate quickly to contaminate the soil and groundwater if not immobilized. Besides radioactive components, DOE high-level waste also generally contains hazardous components added during the process of dissolving used nuclear fuel to remove plutonium and other nuclear materials. These hazardous components include solvents, acids, caustic sodas, and toxic heavy metals such as chromium and lead. Radioactive waste components, when combined with hazardous components, are referred to as “mixed wastes.” DOE has a vast complex of sites across the nation dedicated to the nuclear weapons program, but the high-level waste stemming from reprocessing spent fuel to produce weapons material such as plutonium and uranium has been limited mainly to three sites—Hanford, Washington; the Idaho National Engineering and Environmental Laboratory (“Idaho National Laboratory”) near Idaho Falls, Idaho; and Savannah River, South Carolina. DOE largely ceased production of plutonium and enriched uranium by 1992, but the waste remains. Most of the tanks in which it is stored have already exceeded their design life. For example, many of Hanford’s and Savannah River’s tanks were built in the 1940s to 1960s and were designed to last 10-40 years. (Figure 1 shows waste storage tanks being constructed at the Hanford Site.) These tanks, most of which are underground, are used to store high-level waste. Leaks from some of these tanks were first detected at Hanford in 1956 and at Savannah River in 1959. Given the age and deteriorating condition of some of the tanks, there is concern that some of them will leak additional waste into the soil, where it may migrate to the water table. Treatment and disposal of high-level waste produced at DOE facilities are governed by a number of federal laws, including laws that define the roles of DOE and the Nuclear Regulatory Commission (NRC) in waste management. The Atomic Energy Act of 1954 (AEA) and the Energy Reorganization Act of 1974 established responsibility for the regulatory control of radioactive materials including DOE’s high-level wastes. The Energy Reorganization Act of 1974 assigned the NRC the function of licensing facilities that are expressly authorized for long-term storage of high-level radioactive waste generated by DOE and others. The Nuclear Waste Policy Act of 1982, as amended, defines high-level radioactive waste as “the highly radioactive material resulting from the reprocessing of spent nuclear fuel, including liquid waste produced directly in reprocessing and any solid material derived from such liquid waste that contains fission products in sufficient concentrations, and…other highly radioactive material that the …determines…requires permanent isolation.” The act also established a process for developing and siting a geologic repository (a permanent deep disposal system) for the disposal of high-level waste and spent fuel. Regarding DOE’s high-level waste, the act provided that unless the President determined that a separate repository was required for such waste, DOE should arrange for the use of commercial repositories developed under the act for disposal of its defense waste. In 1985, President Reagan decided that a separate repository for defense waste was not needed. Under amendments the Federal Facility Compliance Act of 1992 made to the Resource Conservation and Recovery Act of 1976 (RCRA), DOE generally must develop waste treatment plans for its sites that contain mixed wastes. These plans are approved by states that the Environmental Protection Agency (EPA) has authorized to administer RCRA or by EPA in states that have not been so authorized. DOE carries out its high-level waste cleanup program under the leadership of the Assistant Secretary for Environmental Management and in consultation with a variety of stakeholders. In addition to the EPA and state environmental agencies that have regulatory authority in states where the sites are located, stakeholders include county and local governmental agencies, citizen groups, advisory groups, and Native American tribes. These stakeholders advocate their views through various public involvement processes including site-specific advisory boards. Over the years, much of the cleanup activity has been implemented under compliance agreements between DOE and the regulatory agencies. These compliance agreements provide for establishing legally enforceable schedule milestones that govern the work to be done. The waste in the tanks at Hanford, Savannah River, and the Idaho National Laboratory is a complex mixture of radioactive and hazardous components, and DOE’s process for preparing it for disposal is designed to separate much of the radioactive material from other waste components. In the tanks, this mixture has transformed into a variety of liquid and semisolid forms. The radioactive components are of many different types; some remain dangerous for millions of years, while others lose much of their radioactivity in relatively short periods of time. Because most of the radioactive components decay relatively rapidly, over 90 percent of the current radioactivity will dissipate within 100 years. DOE plans to isolate the radioactive components and prepare the waste for disposal through the use of an extensive and sequential multi-step treatment process. To fulfill its current commitment to federal and state regulators, DOE expects this process to concentrate at least 90 percent of the radioactivity into a much smaller volume that can be permanently isolated for at least 10,000 years in a geologic repository. DOE plans to dispose of the remaining waste of relatively low radioactivity on-site near the surface of the ground, such as in vaults or canisters, or at other designated disposal facilities. High-level waste generally exists in a variety of physical forms and layers inside the underground tanks, depending on the physical and chemical properties of the waste components. The waste in the tanks takes three main forms: Sludge: The denser, water insoluble components generally settle to the bottom of the tank to form a thick layer known as sludge, which has the consistency of peanut butter. Saltcake: Above the sludge may be water-soluble components such as sodium salts that crystallize or solidify out of the waste solution to form a moist sand-like material called saltcake. Liquid: Above or between the denser layers may be liquids comprised of water and dissolved salts called supernate. As figure 2 shows, 44 percent of the total volume of high-level waste is in saltcake form, followed by liquid and sludges. In addition, a small portion of the waste volume is also in solid form and is stored in facilities other than tanks. At the Idaho National Laboratory, some waste is stored in stainless steel bins, enclosed in concrete vaults, after having undergone a thermal process that converted the liquid into a solid granular substance called calcine. At Hanford, some high-level waste was retrieved from the tanks, dried, and stored as solid material in stainless steel capsules. The various layers of waste in the tanks are not uniformly distributed and often differ from tank to tank and even from place to place within a tank. Depending on how the waste was generated and whether it was mixed or transferred from one tank to another, the layers of waste within any given tank may be unevenly distributed and liquid is interspersed between layers of saltcake. Some tanks contain all three main waste forms—sludge, saltcake, and liquid—while others contain only one or two forms. Tank contents also vary among sites. For example, at the Idaho National Laboratory most tanks contain primarily liquid waste because the waste was kept in an acidic form, while at Hanford and Savannah River, most tanks contain waste in two or three physical forms. The radioactive components of the high-level waste vary greatly in terms of how long they remain radioactive, with the vast majority losing their radioactivity within years or decades. Each radioactive component, or radionuclide, in high-level waste loses its radioactivity at a rate that differs for each component. This rate of decay, which cannot be changed, is measured in “half-lives”—that is, the time required for half of the unstable atoms to decay and release their radiation. The half-lives of major radionuclides in the high-level waste range from 2.6 minutes for barium-137m to 24,131 years for plutonium-239. To illustrate, for any given number of radioactive barium-137m atoms, half will lose their radioactivity within 2.6 minutes. After another 2.6 minutes, half of the remaining unstable atoms will lose their radioactivity, leaving only one- fourth of the original number of unstable atoms still radioactive. The process is the same, but the half-life intervals much longer, for long-lived radionuclides, such as plutonium-239 atoms. For radioactive plutonium- 239 atoms, half will lose their radioactivity within 24,131 years, and half of the remainder will lose their radioactivity after another 24,131 years. Currently, nearly all of the radioactivity in DOE’s high-level waste originates from radionuclides with half-lives of about 30 years or less. As table 1 shows, about 98 percent of the radioactivity of the high-level waste comes from four radionuclides: barium-137m, cesium-137, strontium-90, and yttrium-90. Of these, cesium-137 is the longest lived, with a half-life of 30.17 years. The relatively short half-lives of most of the radionuclides in the waste means that much of the total current radioactivity will decay within 100 years. For example, within 30 years, about 50 percent of the current radioactivity in DOE’s wastes will have decayed away, and within 100 years, this figure will rise to more than 90 percent. Figure 3 shows the pattern of decay, using 2002 to 2102 as the 100-year period. Extending the analysis beyond the 100-year period shown in the figure, in 300 years, 99.8 percent of the radioactivity will have decayed, leaving 0.2 percent of the current radioactivity remaining. Despite the relatively rapid decay of the current radioactivity in high-level waste, a variety of long-lived radionuclides will remain radioactive for a very long time and must be isolated from the environment. Radionuclides with half-lives greater than cesium-137 (30.17 years), such as plutonium-239 and americium-241, which have half-lives of 24,131 years and 432.2 years respectively, will continue to pose a threat to human health and the environment for thousands of years. Once the radionuclides with relatively short half-lives have decayed away, the longer-lived radionuclides will be the primary source of radioactivity in the waste. Some of these long-lived radionuclides, such as technetium-99, are potentially very mobile in the environment and therefore must remain permanently isolated. If these highly mobile radionuclides leak out or are released into the environment, they can contaminate the soil and water. DOE’s process for dealing with its high-level waste centers on separating the various components of the waste so that the portion that is most radioactive can be concentrated into a much smaller volume. While currently all high-level waste is radioactive and dangerous, significant portions of the waste, such as contaminated water, will have low levels of radioactivity if separated from most of the radionuclides that are highly radioactive. Contaminated water currently represents 54 percent of the total waste by volume across the DOE complex. In overview, DOE’s process generally involves separating the waste into two main streams. One, the high-level portion, will contain at least 90 percent of the radioactivity and a small portion of the waste volume. The other stream, the low-activity portion, will contain 10 percent or less of the total radioactivity but most of the waste volume. DOE’s plans for treating the waste currently call for a set of steps to be applied to the waste at each site. The primary steps are shown in table 2. DOE plans to permanently dispose of the high-level portion of the separated waste in a geologic repository developed pursuant to the Nuclear Waste Policy Act. This repository is intended to isolate highly radioactive waste materials from the public and the environment for at least 10,000 years. The remaining low-activity portion would be immobilized in accordance with federal and state environmental laws and the agreements made with state regulators and disposed of permanently on-site or at other designated locations. Although radionuclides with long half-lives are present in both the high-level and low-activity portions of the waste after the separations processes are concluded, the portion of the waste not sent to the geologic repository will have relatively low levels of radioactivity and long-lived radionuclides. Based on current disposal standards used by the NRC, if the radioactivity of this remaining waste is sufficiently low, it can be disposed of on-site near the surface of the ground, using less complex and expensive techniques than those required for the highly radioactive portion. DOE has successfully applied this process in a demonstration project at the West Valley site in New York state. At West Valley, separation of the low-activity portion from the high-level portion of the waste reduced by 90 percent the quantity of waste requiring permanent isolation and disposal at a geologic repository. The high-level portion was stabilized in a glass material (vitrified) and remains stored at the site pending completion of the high-level waste geologic repository and resolution of other issues associated with disposal costs. The remaining low-activity portion was mixed with cement-forming materials, poured into drums where it solidified into grout (a cement-like material), and remains stored on-site, awaiting shipment to an off-site disposal facility. DOE’s new initiative, implemented in 2002, attempts to address the schedule delays and increasing costs DOE has encountered in its efforts to treat and dispose of high-level waste. This initiative is still evolving. DOE originally identified several strategies to help it reduce the time needed to treat and dispose of the waste. Based on these strategies, DOE set a goal of achieving up to $34 billion in savings at its three high-level waste sites and reducing the waste cleanup schedule by about 20 to 35 years compared to the existing program baseline. As of April 2003, DOE’s strategies were still under development, and DOE had revised the savings estimate to $29 billion. However, even the $29 billion estimate may not be reliable. While savings are likely if the strategies are successfully implemented, the extent of the savings is still uncertain. For the most part, DOE’s past efforts to treat and dispose of high-level waste have been plagued with false starts and failures, resulting in steadily growing estimates of the program’s total cost. Since the cleanup activities began about 20 years ago, DOE has spent about $18 billion in its attempts to prepare high-level waste for disposal. However, less than 5 percent of the waste has been successfully treated to date. Uncontrolled cost overruns, numerous schedule delays, and unsuccessful attempts to develop treatment processes have pushed the overall estimated cost of the high-level waste program from about $63 billion in 1996 (when the first comprehensive estimates were developed) to nearly $105 billion in 2003. In an attempt to gain control over DOE’s waste management program and to better ensure its affordability, in February 2002 the Assistant Secretary for Environmental Management undertook a new initiative aimed at accelerating cleanup at DOE’s sites and focusing on more rapid reduction of environmental risks. The initiative came as a result of an internal review of the cleanup program, which identified numerous problems and recommended a number of corrective actions. Among other things, the review noted that the cleanup program was not based on a comprehensive, coherent, technically supported risk prioritization; was not focused on accelerating risk reduction; and was not addressing the challenges of uncontrolled cost and schedule growth. A main focus of the initiative is high-level waste, including both the technical approach to treating the waste and improving how DOE manages the contracts and project activities. DOE developed strategies to speed the cleanup and reduce risk at all three sites. Many of these proposals involved ways to do one or more of the following: Dealing with some tank waste as low-level or transuranic waste, rather than as high-level waste. Doing so would eliminate the need to prepare the waste for off-site disposal in the geologic repository for high-level waste. Disposing of waste in the repository currently is based on immobilizing the waste in a glass-like substance through a process called vitrification. Completing the waste treatment more quickly by using additional or supplemental technologies for treating some of the waste. For example, DOE’s Hanford Site is considering using up to four supplemental technologies, in addition to vitrification, to process its low-activity waste. DOE believes these technologies are needed to help ensure it can meet a schedule milestone date of 2028 agreed to with regulators to complete waste processing. Without these technologies, DOE believes waste treatment would not be completed before 2048. Segregating the waste more fully than initially planned and tailoring waste treatment to each of the four segregated waste types. By doing so, DOE plans to apply less costly treatment methods to waste with lower concentrations of radioactivity. Closing waste storage tanks earlier than expected. DOE plans to begin closing tanks earlier than scheduled, thereby avoiding the operating costs involved in maintaining the tanks and monitoring the wastes. Table 3 shows major site-by-site proposals that have been made. DOE’s initial estimates in August 2002 were that, if the proposals were successfully implemented, total savings could be about $34 billion compared to the baseline cost estimate in place when the accelerated initiative began. As of April 2003, the savings estimate associated with the new strategies had been revised to about $29 billion (see table 4). DOE officials told us many of their new strategies are still under development and that savings estimates are still subject to additional revision. Our review of these savings estimates suggests that they may not yet be reliable and that the actual amounts to be saved if DOE successfully implements the strategies may be substantially different from what DOE is projecting. We have several concerns about the reliability and completeness of the savings estimates. These concerns include the accuracy of baseline cost estimates from which savings are calculated, whether all appropriate costs are included in the analysis, and whether the savings estimates properly reflect uncertainties or the timing of the savings. DOE’s current lifecycle cost baseline is used as the base cost from which potential savings associated with any improvements are measured. However, in recent years, we and others have raised concerns about the reliability of DOE’s baseline cost estimates. In a 1999 report, we noted that DOE lacked a standard methodology for sites to use in developing their lifecycle cost baselines, raising a concern about the reliability of data used to develop these cost estimates. DOE’s Office of Inspector General also raised a concern in a 1999 review of DOE project estimates, noting that several project cost estimates examined were not supported or complete. DOE itself acknowledged in its February 2002 review of the cleanup program that baseline cost estimates do not provide a reliable picture of project costs. The National Research Council, which has conducted research on DOE’s project management, has reported on why DOE’s baseline cost estimates are often unreliable. It noted in 1999 that DOE often sets project baselines too early and that industry practice calls for completing from 30 percent to 35 percent of a design before establishing a baseline cost estimate. In a recent example, we found that the estimated contract price of Hanford’s high-level waste treatment facility is expected to increase to $5.8 billion, about $1.6 billion above the original $4.2 billion contract price established in December 2000. The original cost estimate was established when less than 15 percent of the facility design was complete. The cost increase is due to such factors as adding contingency funds for unforeseen occurrences and making some facility modifications not in the original contract. A second reason for concern about the cost-savings estimates is that some of the savings may be based on incomplete estimates of the costs for the accelerated proposals. According to the Office of Management and Budget’s (OMB) guidance on developing cost estimates, agencies should ensure that all appropriate costs are addressed in the estimate. However, for example, the Idaho National Laboratory estimates savings of up to $7 billion, in large part, by eliminating the need to build a vitrification facility to process waste currently in calcine form and in tanks, as well as achieving associated reductions in operations and decommissioning costs. The waste, as is, may have to undergo an alternative treatment method before it can be accepted at a geological repository. The Idaho National Laboratory plans to use one of four different technologies currently being evaluated to treat its tank waste. DOE’s savings estimate reflects the potential cost of only one of those technologies. DOE has not yet developed the costs of using any of the other waste treatment approaches. DOE noted that the accelerated lifecycle estimate could likely change as one of the technologies is selected and the associated costs of treating the waste are developed. A third area of concern is that DOE’s savings estimates generally do not accurately reflect the timing of when savings will occur, the uncertainty associated with cost estimates or the reliability of a technology, or the value of potential nonbudgetary impacts of the alternative strategies. According to OMB guidance, agencies should ensure that the timing of when the savings will occur is accounted for, that uncertainties are recognized and quantified where possible, and that nonbudgetary impacts, such as a change in the level of risk to workers, are quantified, or at least described. Regarding the time value of money, applying OMB guidance would mean that estimates of savings in DOE’s accelerated plans should reflect a comparison of its baseline cost estimate with the alternative, expressed in a “present value,” where the dollars are discounted to a common year to reflect the time value of money. Instead, DOE’s savings estimates generally measure savings by comparing dollars in different years. For example, the Savannah River Site estimates a savings of nearly $5.4 billion by reducing by 8 years (from 2027 to 2019) the time required to process its high-level waste. Adjusting the savings estimate to present value in 2003 results in a savings of $2.8 billion in 2003 dollars. Regarding uncertainties, in contrast to OMB guidance, the DOE savings estimates generally do not consider uncertainties. For example, the savings projected in the Idaho National Laboratory’s accelerated plan reflect the proposal to no longer build the vitrification facility and an associated reduction in operations costs. However, the savings do not account for uncertainties, such as whether alternatives to vitrification will succeed and at what cost. Rather than reflecting uncertainties by providing a range of savings, DOE’s savings estimate is a single point estimate of $7 billion. Regarding nonbudgetary impacts, DOE’s savings estimates generally did not fully assess the value of potential nonbudgetary impacts, such as a change in the level of risk to workers or potential effects on the environment. OMB guidelines recommend identification and, where possible, quantification of other expected benefits and costs to society when evaluating alternative plans. An example where nonbudgetary impacts were partially, but not fully, considered is the Idaho National Laboratory. The Idaho National Laboratory’s accelerated plan notes that its proposal not to vitrify its calcined high-level waste significantly reduces risk to workers and the environment by eliminating the exposure that would have been incurred in cleaning up and decommissioning the vitrification facility once waste treatment had been completed. While site officials told us such analyses are currently underway, the impact has not yet been reflected in the savings estimate. However, the proposal does not assess potential increases in environmental risk, if any, from disposing of the waste without stabilizing it into a vitrified form. By not assessing these benefits and risks to workers and the environment, DOE leaves unclear how important these risks and trade-offs are to choosing an alternative treatment approach. DOE faces significant legal and technical challenges to achieving the cost and schedule reductions proposed in its new initiative. On the legal side, DOE’s proposals depend heavily on the agency’s authority to apply a designation other than “high-level waste” to the low-activity portion of the waste stream, so that this low-activity portion does not have to be disposed of as high-level waste. DOE’s authority to make such determinations is being challenged in court. On the technical side, DOE’s proposals rest heavily on the successful application of waste separation methods that are still under development and will not be fully tested before being put in place. DOE’s track record in this regard has not been strong; it has had to abandon past projects that were also based on promising—but not fully tested—technologies. Either or both of these challenges could limit the potential savings from DOE’s accelerated cleanup initiative. DOE is involved in a lawsuit over whether it has the authority to manage some tank wastes containing lower concentrations of radioactivity as other than high-level waste. The outcome could affect DOE’s ability to move forward with waste treatment on an accelerated schedule. If DOE retains its ability to manage much of the waste as other than high-level waste, it can apply less expensive treatment methods to that portion of the waste, dispose of the waste on-site, and close the tanks more quickly. If DOE loses the legal challenge, these faster and less expensive treatment alternatives may not be available. Regardless of the outcome, if an extended legal process ensues, DOE may be prevented from realizing the full potential savings associated with its accelerated cleanup initiative. DOE has traditionally managed all of the wastes in its tanks as high-level waste because the waste resulted primarily from the reprocessing of spent nuclear fuel and contains significant amounts of radioactivity. However, DOE based its approach to treatment and disposal on the radioactivity and actual constituents in the waste, as well as the source of the waste. Focusing on the radioactivity and constituents would allow DOE to use less costly and less complicated treatment approaches for the majority of what is now managed as high-level waste. DOE has developed a process for deciding when waste in the tanks should not be considered high-level waste. In July1999, DOE issued Order 435.1 setting forth procedures for the management of its radioactive wastes. Under this order, DOE formalized its process for determining which waste is incidental to reprocessing (“incidental waste”), not high level waste, and therefore will not be sent to a geological repository for high-level waste disposal. This process provides a basis for DOE to treat and dispose of some portion of its wastes less expensively as low-level or transuranic wastes. DOE’s Order 435.1 establishes the specific criteria for defining the waste that could be considered incidental to reprocessing and therefore is not high-level waste and would not require the vitrification treatment that high-level waste must undergo for disposal purposes. The criteria were developed in conjunction with the NRC, the governmental entity with regulatory authority over disposal facilities for high-level waste. The criteria generally are that the waste (1) has been or will be processed to remove key radioactive components to the maximum extent technically and economically practical; (2) will be disposed of in conformance with the safety requirements for low-activity waste as laid out in NRC regulations; and (3) will be put in a solid physical form and will not exceed radioactivity levels set by the NRC for the most radioactive category of low-level waste, referred to as “Class C standard.” DOE must first satisfy itself internally that these requirements have been met for waste it wants to determine is waste incidental to reprocessing and therefore not high-level waste. DOE then obtains a technical review of its determination from the NRC, which provides a concurrence that DOE has met its criteria. DOE then considers the waste not to be high-level waste, but waste that can be managed as either low-level or transuranic waste. DOE’s ability to define some waste as incidental to reprocessing, and to then follow a different set of treatment and disposal requirements for that waste, is central to its overall strategy for addressing its tank waste. For example, DOE plans to use its incidental waste process to manage about 90 percent of its 54 million gallons of tank waste at Hanford as low-level waste, rather than process it through a high-level waste vitrification facility. Using that approach, most of the waste would be eligible for treatment and disposal on-site. Such an approach would be less expensive than treating all of the waste as high-level waste and sending it for disposal in a high-level waste geologic repository. DOE has no current estimate of the cost increase if all 94 million gallons of tank wastes had to be treated in a high-level waste vitrification facility and stored at a geological repository. However, a 1996 environmental impact statement at the Hanford Site estimated such an alternative for the Hanford Site alone would add about $29 billion to $37 billion (in 1995 dollars), nearly doubling project costs at that site alone, primarily due to increased disposal costs at the repository. Furthermore, there would probably not be enough space at the high-level waste repository to dispose of all of this waste. Hanford is not the only site affected; as of April 2003, DOE had developed incidental waste determinations for waste at all four of its high-level waste sites. In all, DOE had used its authority to designate some of its tank waste as low-level or transuranic waste in seven separate incidental waste determinations (see table 5). Although two of these determinations were approved prior to the issuance of Order 435.1, DOE essentially followed the same criteria found in the subsequent order. DOE is planning to initiate further incidental waste determinations as it removes the waste from additional tanks. DOE is currently involved in a lawsuit focused on its authority to make incidental waste determinations. In March 2002, the Natural Resources Defense Council and others filed a lawsuit challenging DOE’s authority to manage its wastes through its incidental waste process. A primary concern of the plaintiffs is that DOE will use its incidental waste process to permanently leave intensely radioactive waste sediments in the tanks with only minimal treatment. The lawsuit alleges that DOE’s incidental waste process improperly allows DOE to reclassify high-level waste as incidental waste that does not need to be treated in the same way as high-level waste. According to the plaintiffs, the Nuclear Waste Policy Act defines all waste originating from a given source—that is, from reprocessing of spent nuclear fuel—as high-level waste and requires that such waste be managed as high-level waste, yet DOE has chosen to differentiate its wastes according to the level of radioactivity and manage them accordingly. This is not the first legal action that resulted from DOE’s process for determining which part of its waste can be designated as incidental to reprocessing and will not be managed as high-level waste. For example, in 1993, the NRC denied a formal petition from the states of Washington and Oregon requesting that NRC establish the process and criteria for determining what part of DOE’s radioactive waste could be managed as other than high-level waste. The states’ request stemmed from concerns that the criteria DOE was applying to wastes had not been formally established by regulation and thus had not been given public scrutiny. The NRC, in its ruling, concluded that DOE’s process for determining what waste was incidental to reprocessing was appropriate for making individual tank-by-tank incidental waste determinations, and that the NRC had no jurisdiction. Later, in 1998, the Natural Resources Defense Council petitioned the NRC to assume immediate licensing authority over the 51 tanks at the Savannah River Site, arguing that DOE invented the term “incidental waste” as a means of circumventing NRC’s authority and oversight and, furthermore, that waste to be left in the bottom of the tanks at Savannah River did not meet DOE’s own definition of incidental waste. The NRC concluded it did not have regulatory authority over high-level or residual wastes at Savannah River. The current legal challenge, as well as any future challenges, could affect DOE’s efforts to implement its accelerated treatment and disposal strategies. For example, the challenge could place on hold indefinitely all pending incidental waste determinations. Since the start of the lawsuit, DOE has not implemented any incidental waste determinations and has not yet decided whether to defer or move forward with its pending incidental waste determinations—such as for closing tanks. DOE is concerned that moving forward to implement such determinations could create a risk that the court could place a general ban on making any decisions about the waste until the legal challenge is resolved. In addition, final resolution of the challenge could be further delayed if either party appeals the decision. A lengthy legal process could result in delays in moving forward with treatment plans for this waste and delays in closing tanks on an accelerated schedule. For example, the Idaho National Laboratory plans to begin closing tanks in the spring of 2003, but approval for the incidental waste determination to close the tanks by managing tank waste residuals as low-level waste is still pending. A DOE official at the Idaho National Laboratory told us that while a delay of several months in obtaining incidental waste approval would not present an immediate threat to schedule dates, a delay beyond 24 months would seriously impact the site’s ability to meet its accelerated 2012 date to close all of the tanks. Savannah River also plans to begin closing additional tanks starting in early 2004. A DOE official at the Savannah River Site said that if the lawsuit continues, the site may miss a legally binding date agreed to with regulators to begin closing the tanks. If the court invalidated DOE’s incidental waste determination process, DOE may need to find an alternative solution for treating and managing its wastes that would allow it to treat waste with lower concentrations of radioactivity less expensively. In that case, DOE could begin experiencing delays affecting progress at all three of the high-level waste sites that rely on incidental waste determinations. For example, as one of its savings strategies, DOE plans to manage about 12.3 million gallons of its waste at Savannah River as low-level waste and treat this waste through a grout facility. DOE estimates it could begin treating this waste as early as August 2003. Although DOE has approved an incidental waste determination for this waste, the grout treatment facility must receive an operating permit from state regulators. To date, the state has withheld approval for the permit, pending resolution of the lawsuit. A site official said without the permit, DOE cannot go forward with its plans to accelerate treatment of the waste. At this point, the department does not appear to have a strategy in place to avoid the potential effects of challenges to its incidental waste determination authority, either from the current lawsuit or future challenges. In a December 2002 internal memorandum, the Assistant Secretary for Environmental Management issued guidelines for proceeding with making incidental waste determinations as necessary to meet cleanup commitments and requirements. However, these guidelines only include ensuring that such determinations meet the legal requirements of Order 435.1; the guidelines do not include any alternative strategies for dealing with the waste. DOE officials told us that they believe the department will prevail in the legal challenge. Because the outcome of the lawsuit is so uncertain, DOE believes it would be premature to explore alternative strategies to overcome potentially significant delays to the program that could result from a protracted legal conflict or from an adverse decision. As of April 2003, DOE had just begun to look at potential delays that could result from a lengthy legal challenge, but had developed no formal strategy to deal with those delays. Such strategies could range from exploring alternative approaches for establishing an incidental waste regulation to asking that the Congress clarify its intentions regarding DOE’s authority to implement an incidental waste policy. DOE’s initiative also faces key technical challenges related to the process for separating the various components of the waste. Waste separation involves a sequential process of filtering and extracting each major high-level waste constituent, such as cesium-137 and strontium-90, from the waste. DOE guidance recognizes the risks involved in implementing a technology without first thoroughly testing it. In order to save time, however, DOE managers at the Hanford Site are planning some of their strategies around waste separation technologies that will not be fully tested before being implemented. Past projects that took this approach have experienced major problems, and outside reviewers have raised cautions about DOE’s plans to use the same approach in this instance. Separating high-level waste into its various components is central to DOE’s treatment and disposal plans. Since the 1980s, federal and state agreements have reflected DOE’s plan that the waste be processed so that at least 90 percent of the radioactivity in high-level waste is concentrated into a much smaller waste stream and prepared for permanent isolation in a geological repository. The low-activity waste portion, which represents the majority of the waste volume but significantly less radioactivity, must also be immobilized according to federal and state agreements. Separating the waste components is important not only to comply with federal and state agreements, but also to meet waste cleanup schedule and cost goals. If the waste is not separated, all of it—about 94 million gallons—may have to be treated as high-level waste and disposed of in the geological repository. Doing so would require a much larger repository than currently planned and drive up disposal costs by billions of dollars. Successful separation will substantially reduce the volume of waste needing disposal at the repository, as well as the time and cost required to prepare it for disposal, and allow less expensive methods to be used in treating and disposing of the remaining low-activity waste. The waste separation process is complicated, difficult, and unique in scope and size at each site. The waste differs among sites not only in volume but also in the way it has been generated, managed, and stored over the years. Although the main steps in the process may vary, waste separation generally involves a sequential process of filtering and extracting various high-level waste constituents from the tank waste (see figure 4). The waste treatment approach at the Hanford Site involves designing, building, and operating one-of-a-kind separations processes and facilities. Developing a successful waste separations process has proved challenging for DOE in the past, especially at Savannah River, and the current plans for Hanford are no less challenging. At its Hanford site, DOE intends to build a facility for separating the waste before fully testing the separation processes that will be used. The technology for separating waste components at Hanford is being developed at several laboratories, including the Savannah River Technology Center. These facilities are performing tests to help validate underlying assumptions about how the processes will work. The laboratory testing includes a combination of pilot-scale testing of major individual processes and use of operational data for certain of those processes for which DOE officials said they had extensive experience. However, integrated testing will not be completed until full-scale facilities are constructed. DOE plans to fully test the processes for the first time during the operational tests of the newly constructed facilities. This approach does not fully reflect DOE guidance for incorporating new or complex technology into a project, which calls for ensuring that the technology is mature before integrating it into a project. More specifically, DOE’s project management Order 413.3 requires DOE to assess the risks associated with technology at various phases of a project’s development. For projects with significant technical uncertainties that could affect cost and schedule, corrective action plans are required to determine how the uncertainties will be resolved before the projects can proceed. In addition to this order, DOE has drafted supplementary project management guidance. This guidance suggests that technologies are to be developed to a reasonable level of maturity before a project can progress to full implementation to reduce risks and avoid cost increases and schedule delays. The guidance suggests that DOE avoid the risk of performing concurrent facility design and technology development. The laboratories working to develop Hanford’s waste separation process have identified several technical uncertainties, which they are working to address. These uncertainties or critical technology risks include problems with separating waste solids through an elaborate filtration system, problems associated with mixing the waste during separation processes, and various problems associated with the low-activity waste evaporator. The contractor is also concerned about the availability and performance of a special resin for separating out cesium-137, a radioactive constituent. The resin is currently produced by only one supplier, and that supplier currently does not have the manufacturing capability to produce the resin in the quantities needed for DOE’s full-scale operations, according to contractor officials. In an effort to resolve this uncertainty, DOE’s construction contractor has asked the manufacturer to expand resin production capability, and in April 2003, DOE signed a contract modification that allows alternative resins to be used in the separation process. Given these and other uncertainties, Hanford’s construction contractor and outside experts have seen Hanford’s approach as having high technical risk and have recommended integrated testing during project development. In April 2002, concerned about the potential for operational problems with the waste separation processes, Hanford’s construction contractor proposed building an integrated testing facility to confirm that Hanford’s processes will work at a significantly larger scale than has been tested to date. The contractor proposed conducting fully integrated tests in a pilot facility using simulated waste before full-scale separation facilities are completed. The contractor estimated the cost of the pilot facility at between $6 million and $12 million. In October 2002, an independent peer review group of industry experts concluded that an integrated pilot plant for interim testing to confirm the technical processes was a preferred approach. Several other independent experts we interviewed also shared this view. These experts are associated with the National Research Council and various research organizations, universities, and private institutions. These experts emphasized that performing integrated testing to verify that separation processes will work is an essential step, especially for treating Hanford’s unique waste in the complicated waste treatment facilities that Hanford is building. In contrast to these views, DOE’s Office of River Protection and the construction contractor decided not to construct an integrated pilot facility and instead to accept a higher-risk approach. DOE officials said they wanted to avoid increasing project costs and schedule delays, which they believe will result from building a testing facility. Instead, Hanford officials said that they will continue to conduct pilot-scale tests of major separation processes. DOE officials said they believe this testing will provide assurance that the separation processes will function in an integrated manner. After the full-scale treatment facilities are constructed, DOE plans to fully test and demonstrate the separation process during facility startup operations. Full testing of Hanford’s separation process may be a bigger challenge than originally envisioned. In April 2003, DOE modified the construction contract for the waste treatment facilities and adopted a schedule compressing the facility testing and startup period from 4 years to about 2.5 years. To meet this compressed schedule, Hanford’s construction contractor decided in late April 2003 to drop its proposal for the pilot plant. Instead, the contractor plans to continue laboratory testing of separation processes in an effort to simulate the results of an integrated pilot plant. While contractor officials stated that their original proposal for an integrated pilot plant was technically sound, they withdrew the proposal in order to ensure that they could meet revised contract schedule and budget commitments. The consequences of not adhering to sound technology development guidelines can be severe. At the Savannah River Site, for example, DOE invested nearly $500 million over nearly 15 years to develop a waste separations process, called in-tank precipitation, to treat Savannah River’s high-level waste. While laboratory tests of this process were viewed as successful, DOE did not conduct adequate testing of the components until it started full-scale operations in the newly constructed facility. DOE followed this approach, in part, because the technology was commercially available. When DOE started full-scale operations, major problems occurred. Benzene, a dangerously flammable byproduct, was produced in large quantities. Operations were stopped after DOE spent about $500 million because experts could not explain how or why benzene was being produced and could not determine how to economically reconfigure the facility to minimize it. Consequences of this technology failure included significant cost increases, schedule delays, a full-scale facility that did not work, and a less-than-optimum waste treatment operation without a viable separation process. Savannah River is now taking steps to develop and implement a new separation technology at an additional cost of about $1.8 billion and a delay of about 7 years. Subsequent assessments of the problems that developed at Savannah River found that DOE (1) relied on laboratory-scale tests to demonstrate separation processes, (2) believed that technical problems could be resolved later during facility construction and startup, and (3) decided to scale up the technology from lab tests to full-scale without the benefit of using additional testing facilities to confirm that processes would work at a larger scale. Officials at Hanford are following this same approach. Several experts with whom we talked cautioned that if separation processes at Hanford do not work as planned, facilities will have to be retrofitted, and potential cost increases and schedule delays can be much greater than those associated with integrated process testing in a pilot facility. In addition to the potential cost savings identified in the accelerated site cleanup plans, DOE continues to develop and evaluate additional proposals to reduce costs, but is still in the process of fully assessing these proposals. Because DOE is still evaluating these proposals, the potential cost savings have not been fully developed, but could be in the range of several billion dollars, if successfully implemented. At the Savannah River and Hanford sites, for example, DOE is identifying ways to increase the amount of waste that can be placed in its high-level waste canisters to reduce treatment and disposal costs. DOE also has a number of initiatives under way to improve overall program management. However, we are concerned that they may not be adequate. In our examinations of problems that have plagued DOE’s project management over the years, three contributing factors often emerged—making key project decisions without rigorous analysis, incorporating new technology before it has received sufficient testing, and using a “fast-track” approach (concurrent design and construction) on complex projects. Ensuring that these weaknesses are addressed as part of its program management initiatives would further improve the management of the program and increase the chances for success. DOE is continuing to identify other proposals for reducing costs under its accelerated cleanup initiative. Senior Environmental Management officials realize that the proposals to accelerate cleanup identified in site performance management plans do not represent a complete set of options for full achievement of DOE’s savings goals. To pursue additional potential opportunities, the Assistant Secretary for Environmental Management commissioned several special project teams to evaluate additional program improvements and cost-savings opportunities. One of these teams, the high-level waste project team, has completed the initial phase of its work. According to DOE’s high-level waste project team leader, it may be some time before their proposals are fully assessed and decisions are made about how best to proceed. The Assistant Secretary will consider the proposals from the project teams, but has not stated when final decisions will occur. Among the proposals that DOE is considering, the ones that appear to offer significant cost-savings opportunities would increase the amount of waste placed in each disposal canister. We discussed these cost-savings opportunities with both Savannah River and Hanford officials during our review. DOE officials at those sites have identified these potential savings opportunities as deserving further consideration, but have not yet fully assessed the potential benefits, or overcome technical and operational barriers. Savannah River officials are working to reduce costs by increasing the amount of waste immobilized in glass and placed in each disposal canister. They have proposed increasing the amount of waste in each canister by developing different blends of glass material, called frit, that they believe can be tailored to each batch of waste. The amount of waste that can be placed into a canister depends on a complex set of factors, including the specific mix of radioactive material combined with other chemicals in the waste, such as chromium and sulfate, that affect the processing and quality of the immobilized product. These factors affect the percentage of waste than can be placed in each canister because they indicate the likelihood that radioactive constituents could leach out of the immobilizing glass medium and into the environment. The greater the potential for leaching, the lower the allowable percentage of waste and the higher the percentage of glass frit that must be used. DOE determines that a consistently acceptable glass is produced by evaluating the leaching rates of the glass, using a combination of chemical analysis and predictive modeling. Based on a recent improvement made to DOE’s predictive model involving adjustments to the required temperature of the melted waste, and changes to the type of glass frit used, Savannah River officials believe they can increase the amount of waste loaded in each canister from 28 percent to about 35 percent and, for at least one waste batch, to nearly 50 percent. Savannah River plans to implement this new process and begin increasing the amount of waste in each canister in June 2003. If successful, Savannah River’s improved approach could reduce the number of canisters needed by about 1,000 canisters and save about $2.7 billion, based on preliminary estimates. Beyond the specific improvements Savannah River officials have already identified, there may be an additional way to increase the loading of waste into disposal canisters, resulting in additional savings for DOE. During our review, we determined that DOE’s Offices of Environmental Management and Civilian Radioactive Waste Management (Radioactive Waste Management) have been using different acceptance criteria for evaluating the rate at which waste could leach out of the glass in the disposal canisters. By conforming to the less restrictive Radioactive Waste Management criteria, Environmental Management could possibly increase the amount of waste in the canisters to a higher level. After examining this possibility, Environmental Management officials at Savannah River said that, if the higher waste loading could be achieved, this change could eliminate the need for up to 650 canisters. This may permit further cost savings of about $1.7 billion. The Savannah River officials stated that they were continuing to examine this cost-savings possibility. The Hanford Site has also proposed strategies to decrease the number of high-level waste canisters that it will need, but its approach is in a very early stage of development. In November 2002, Hanford proposed broadening the high-level waste acceptance criteria to allow waste forms other than standard borosilicate glass—the type of glass being used at Savannah River and initially planned for Hanford—to be accepted for immobilizing high-level waste. Hanford’s proposal is based on recent changes to NRC’s disposal requirements that will allow for alternative waste forms to be sent to the repository. These changes may allow Hanford to package its high-level waste in fewer canisters. Although it is unclear whether DOE orders will be changed to allow these other waste forms, DOE has significant incentives to do so. Reducing the number of canisters at Hanford is especially important because, based on the expected production capacity of the high-level waste vitrification plant, only a maximum of 9,600 of the projected 12,800 canisters that DOE will need can be filled with waste by the 2028 scheduled completion date. However, by using other types of glass, Hanford estimates that it may be able to reduce its need for disposal canisters by 2,500 to 3,900 canisters. If such a significant reduction in the number of canisters produced is possible, it could shorten Hanford’s high-level waste treatment schedule by 6 years, save billions of dollars, and help to meet its scheduled completion date. However, the wide range of Hanford’s estimate reflects the rough nature of its proposal and that cost savings have not yet been fully estimated. In addition to DOE’s efforts to identify site-specific proposals for saving time and money, DOE is also undertaking management improvements using teams to study individual issues. Nine teams are currently in place, while other teams to address issues such as using breakthrough business processes in waste cleanup and improving the environmental review process to better support decision-making have not yet been formed. Each team has a disciplined management process to follow, and even after the teams’ work is completed, any implementation will take time. These efforts are in the early stages, and therefore it is unclear if they will be effective in correcting the causes of the performance problems DOE and others have identified. We are concerned, however, that these management reforms may not go far enough in addressing performance problems with the high-level waste program. Our concerns stem from our review of initiatives underway in the management teams, our discussions with DOE officials, and our past and current work, as well as work by others inside and outside DOE. We have identified three recurring weaknesses in DOE’s management of cleanup projects that we believe need to be addressed as part of this overall review. These weaknesses cut across the various issues that the teams are working on and are often found at the center of problems that have been identified. Two of the three weaknesses have been discussed earlier in this report, as we have identified these as potentially significant obstacles to achieving savings—lack of rigor in the analysis supporting key decisions, and incorporating technology into projects before it is sufficiently mature. The final area of weakness involves using “fast-track” methods to begin construction of complex facilities before sufficient planning and design have taken place. DOE’s project management guidance emphasizes the importance of rigorous and current analysis to support decision-making during the development of DOE projects. All DOE projects with costs greater than $5 million require risk management activities, including a thorough analysis, to be applied continuously, adjusting these analyses throughout the process as necessary to ensure DOE is pursuing the best value alternative at the lowest cost. Similarly, the Office of Management and Budget guidance states that agencies should validate earlier planning decisions with updated information before finalizing decisions to construct facilities. This validation is particularly important where early cost comparisons are susceptible to uncertainties and change. However, DOE does not always follow this guidance. Proceeding without rigorous review has been a recurring cause of many of the problems we have identified in past DOE projects. For example, regarding the need to validate planning decisions with updated information before finalizing decisions, the decision at Hanford to construct a vitrification plant to treat Hanford’s low-activity waste has not undergone such a validation. Hanford’s analysis justifying the cost of this approach was prepared in 1999 and was based on technical performance data, disposal assumptions, and cost data developed in the early to mid-1990s—conditions that are no longer applicable. For example, the 1999 analysis compared DOE’s low-activity vitrification approach with a disposal approach developed in the early 1990s that involved large underground grout vaults with elaborate environmental controls. Although this grout approach was abandoned in 1994, DOE still used these disposal assumptions for the 1999 comparison and analysis. Since that time other conditions have changed, including the performance capabilities of alternative technologies such as grout, the relative costs of different technologies, and the amount of waste DOE actually intends to process through a vitrification plant. These changes suggest that earlier planning decisions need to be validated with updated information to ensure that the current approach is reasonable and appropriate. DOE’s high-level waste project team also recognized that the DOE officials at Hanford had not performed a current, rigorous analysis of low-activity waste treatment options including the use of grout as an alternative to vitrification, and encouraged the Hanford site to update its analysis based on current waste treatment and disposal assumptions. Hanford officials responded in April 2003 by developing life-cycle cost estimates that compared the cost of alternate low-activity waste approaches. However, they did not fully reassess the decision to vitrify low-activity waste. DOE officials at Hanford told us they do not plan to reassess the decision to construct a low-activity vitrification facility because their compliance agreement with the state of Washington calls for vitrification of this waste. They also stated that vitrification is a technology needed for destroying hazardous constituents in a portion of the waste. In our previous work, we noted a similar lack of rigor in reevaluating DOE decisions as conditions change. For example, at three sites—Fernald, Ohio; Oak Ridge, Tennessee; and the Idaho National Laboratory—DOE was faced with a decision about whether to dispose of low-level waste on-site or to use off-site commercial disposal facilities. Between the time that DOE decided to develop on-site disposal facilities at these three sites and the time that construction actually began, conditions changed that affected the usefulness of earlier cost estimates. However, DOE officials at the sites made little effort to update and reevaluate the original cost comparisons to validate the on-site disposal decision. In July 2002, DOE’s Office of Environmental Management issued guidance to implement our recommendation to validate cost comparisons before constructing or expanding low-level waste disposal facilities at these three sites. This weakness cuts across the issues that the DOE teams are working on; no DOE team appears to be currently addressing it. However, DOE managers need to ensure that it receives proper consideration as these management improvement efforts proceed. Our work on Department of Defense acquisitions has documented a set of “best practices” used by industry for integrating new technology into major projects. We reported in July 1999 that the maturity of a technology at the start of a project is an important determinant of success. As technology develops from preconceptual design through preliminary design and testing, the maturity of the technology increases and the risks associated with incorporating that design into a project decrease. Waiting until technology is well-developed and tested before integrating it into a project will greatly increase the chances of meeting cost, schedule, and technical baselines. On the other hand, integrating technology that is not fully mature into a project greatly increases the risk of having cost increases and schedule delays. According to industry experts, correcting problems after a project has begun can cost 10 times as much as resolving technology problems beforehand. DOE’s project management guidance issued in October 2000 is consistent with these best practices. The guidance discusses technology development and sets out suggested steps to ensure that new technology is brought to a sufficient level of maturity at each decision point in a project. For example, during the conceptual design phase of a project, “proof of concept” testing should be performed before approval to proceed to the preliminary design phase. Furthermore, the guidance states that projects that attempt to concurrently develop the technology and design the facility proceed with ill-defined risks to all three baselines—cost, schedule, and technical. Nevertheless, as we discussed earlier in this report, DOE sites continue to integrate immature technologies into their projects. For example, at Hanford, DOE is constructing a facility to separate high-level waste components, although integrated testing of the many steps in the separations process has not occurred and will not occur until after the facility is completed. DOE, trying to keep the project on schedule and within budget, has decided the risks associated with this approach are acceptable. However, there are many projects in which this approach created schedule delays and unexpected costs. The continued reliance on this approach in the face of so many past problems is a signal of an area that needs careful attention as DOE proceeds with its management reform efforts. At present, no DOE management team is addressing this issue. Finally, we have concerns about DOE’s practice of launching into construction of complex, one-of-a-kind facilities well before their final design is sufficiently developed, again in an effort to save time and money. Both DOE guidance and external reviews stress the importance of adequate upfront planning before beginning project construction. DOE’s project management guidance identifies a series of well-defined steps before construction begins and suggests that complex projects with treatment processes that have never before been combined into a facility do not lend themselves to being expedited. However, DOE guidance does not explicitly prohibit a fast-track—or concurrent design and construction—approach to complex, one-of-a-kind projects, and DOE often follows this approach. For example, at the Hanford Site, DOE is concurrently designing and constructing facilities for the largest, most complex environmental cleanup project in the United States. Problems are already surfacing. Only 24 months after the contract was awarded, the project was 10 months behind schedule dates, construction activities have outpaced design work causing inefficient work sequencing, and DOE has withheld performance fee from the design/construction contractor because of these problems. DOE experienced similar problems in concurrent design and construction activities on other waste treatment facilities. Both the spent nuclear fuel project at Hanford and the waste separations facility at the Savannah River Site encountered schedule delays and cost increases in part because the concurrent approach led to mistakes and rework, and required extra time and money to address the problems. In its 2001 follow-up report on DOE project management, the National Research Council noted that inadequate pre-construction planning and definition of project scope led to cost and schedule overruns on DOE’s cleanup projects. The Council reported that research studies suggest that inadequate project definition accounts for 50 percent of the cost increases for environmental remediation projects. Again, no team is specifically examining the “fast-track” approach, yet it frequently contributed to past problems and DOE continues to use this approach. DOE’s efforts to improve its high-level waste cleanup program and to rein in the uncontrolled growth in project costs and schedules are important and necessary. The accelerated cleanup initiative represents at least the hope of treating and disposing of the waste in a more economical and timely way, although the actual savings are unknown at this time. Furthermore, specific components of this initiative face key legal and technical challenges. Much of the potential for success rests on DOE’s continued ability to dispose of large quantities of waste with relatively low concentrations of radioactivity on-site by applying its incidental waste process. DOE’s authority in this regard has been challenged in a lawsuit that is still pending. Much of the success also rests on DOE’s ability to obtain successful technical performance from its as-yet unproven waste separation processes. Any technical problems with these processes will likely result in costly delays. At DOE’s Hanford Site, we believe the potential for such problems warrants reconsidering the need for more thorough testing of the processes. DOE’s accelerated cleanup initiative should mark the beginning, not the end, of DOE’s efforts to identify other opportunities to improve the program by accomplishing the work more quickly, more effectively, or at less cost. As DOE continues to pursue other management improvements, it should reassess certain aspects of its current management approach, including the quality of the analysis underlying key decisions, the adequacy of its approach to incorporating new technologies into projects, and the merits of a fast-track approach to designing and building complex nuclear facilities. Although the challenges are great, the opportunities for program improvements are even greater. Therefore, DOE must continue its efforts to clean up its high-level waste while demonstrating tangible, measurable program improvements. To help ensure that DOE’s accelerated cleanup initiative is effective and that cleanup of high-level waste proceeds in a timely and cost-effective manner, we recommend that the Secretary of the Department of Energy seek clarification from the Congress regarding DOE’s authority for designating waste as incidental to reprocessing if the current challenge becomes an extended legal process, in order to help DOE determine what strategy it needs to move its initiative forward and realize potential savings; reassess the potential risks, costs, and benefits of constructing an integrated pilot-scale waste separation facility at the Hanford site to more fully test separation technologies before completing construction of a full-scale facility; and ensure that DOE’s high-level waste projects (1) include a current and rigorous analysis of the risks, costs, and benefits associated with the decisions being implemented, in accordance with OMB guidance; (2) incorporate new technologies consistent with best practices and DOE guidance so that risks and costs are more effectively managed; and (3) are carefully evaluated as to the appropriateness of using a fast-track approach to designing and constructing complex nuclear facilities, and that the potential risks and costs associated with this approach are explicitly identified and considered. We provided a draft of this report to the Department of Energy for its review and comment. DOE’s Assistant Secretary for Environmental Management responded for DOE. DOE’s written comments acknowledged the challenges that DOE faces in its high-level waste program, as discussed in our report. DOE cited its recent initiative to accelerate cleanup and reduce environmental risks as its response to those challenges. DOE agreed to consider our recommendation to seek clarification from the Congress regarding DOE’s authority to determine what waste is incidental to reprocessing, if legal challenges to DOE’s authority to make such determinations have a significant effect on implementing proposed cost-saving and risk-reduction initiatives. However, DOE disagreed with our recommendation that it conduct integrated pilot testing of its waste separation processes at Hanford while constructing a full-scale facility. In addition, regarding opportunities to improve program management, DOE said that at the Hanford project it was already effectively conducting rigorous analyses to support decision-making, incorporating new technologies into the project consistent with best practices and agency guidelines, and using a fast-track approach of concurrently designing and building complex nuclear facilities. Regarding our recommendation that DOE pursue integrated, pilot-scale testing of the waste separations facility at Hanford, DOE believes that its current approach is adequate to manage the risks associated with designing and constructing the facility. DOE said that it does not intend to pursue an integrated pilot test facility that we believe would increase the chances of success with the full-scale facility. DOE’s position is based on two main arguments. DOE believes that (1) the technologies planned for the separations facility are commercially available and thus are mature technologies having low technical risk and (2) relying on pilot testing of individual components of the separation processes in the laboratory provides adequate mitigation of the risks involved. We disagree with DOE’s view that the separations approach planned for the Hanford Site is low risk. DOE has experience with the individual technologies, but does not have experience in operating an integrated separations process that incorporates all of the operations required for Hanford’s unique and complex waste. Furthermore, DOE has experienced problems with another separation facility where adequate testing was not done until the facility was fully constructed—the in-tank precipitation facility at Savannah River. In that case, the separations process failed after DOE spent about $500 million trying to make it work properly. And the primary technologies used at Savannah River were also in use commercially, but had not been fully adapted to the unique Savannah River wastes. We also disagree that DOE’s plan to conduct extensive testing in the laboratory to mitigate the technology risks involved with the separation processes will provide adequate assurance that the full-scale separations facility will perform effectively. Numerous experts and DOE’s contractor have proposed constructing and operating an integrated pilot-scale facility. They made the proposals while knowing about DOE’s intention to conduct extensive laboratory testing of separation processes. The contractor as well as outside experts view the separations facility as having significant project risk, in contrast to DOE’s statement that the separation processes pose low project risk. Given the risks associated with fully constructing the separations facility before conducting integrated testing and the cost of any delays associated with having significant problems with the separation processes once the facility is fully constructed, we continue to believe that conducting integrated pilot-scale testing is an important risk- and schedule-management tool and that DOE should reconsider its use for the Hanford project. DOE officials at Hanford acknowledged that the pilot facility could be included in the project without extending the project’s schedule. Regarding management improvement issues, DOE said that we inadequately portrayed the progress it has made in the three areas in which we recommended management improvements. However, our report addresses the three management issues from the broader context of DOE’s project activities over several years and at a number of sites. Our past work has clearly linked these weaknesses to problems on cleanup projects. Because DOE did not take issue with that broader context in this report, but did assert improved performance on the Hanford project, the following comments are limited to needed improvements to the Hanford project. Regarding DOE’s view that it performed current and rigorous analyses of risks, cost, and benefits for the Hanford waste treatment project, our report illustrates our concerns about the analysis DOE performed to support its decision to vitrify a portion of Hanford’s low-activity waste. DOE stated that this decision, originally made in 1994, has been revisited numerous times using rigorous analysis and provided us with three studies that specifically compared the cost of low-activity waste vitrification with other approaches, such as grout, to support its decision. None of these studies included a current and rigorous analysis of risks, costs, and benefits, as called for in OMB guidance. For example, even the most recent study, completed in 2003, was primarily based on technical performance, disposal assumptions, and cost data developed in the early 1990s. The team leader of the high-level waste project team confirmed that these analyses were not a full and rigorous assessment of the risks, cost, and benefits of vitrifying low-activity waste. Thus, we continue to believe that additional efforts are needed in this area. Regarding our recommendation to follow best practices and DOE guidance when incorporating new technology into cleanup projects, DOE commented that it was continuing to consider opportunities to improve the Hanford project and that the contractor was using a risk-based management process to address technical and programmatic project risks. We agree that a risk-based management process is appropriate on the project. However, we continue to believe that DOE’s approach to incorporating the separation technologies planned for the Hanford project is not fully consistent with best practices and DOE guidance because the approach involves incorporating technologies into the project before they have been fully tested as an integrated process. This testing of the integrated process in an operational mode is needed to demonstrate that the technologies are sufficiently mature to ensure their effective performance when deployed on the project. Concerning the appropriateness of using a “fast-track” construction approach to design and construct complex nuclear facilities for the Hanford project, DOE said that our report incorrectly portrays the overall strategy for the Hanford project. We believe our report accurately describes DOE’s approach, which includes using concurrent design, construction, and technology development. We have previously reported on the risks associated with this approach, including the increased potential for project schedule delays and cost increases. DOE also provided technical clarifications and corrections to our report, which we incorporated as appropriate. The full text of DOE’s comments and our responses are presented in appendix II. We conducted our review from July 2002 through May 2003, in accordance with generally accepted government auditing standards. Appendix I provides details on our scope and methodology. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies to the Secretary of Energy. We will also make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions on this report, please call me at (202) 512-3841. Other staff contributing to this report are listed in appendix III. To describe the components of DOE’s high-level waste and the process involved in preparing the waste for permanent disposal, we analyzed information and documents provided by DOE officials and contractors at the four sites containing DOE high-level waste: Hanford, Washington; Idaho National Laboratory, Idaho; Savannah River, South Carolina; and West Valley, New York. We did not independently verify the accuracy of the information provided by each DOE site. From these same sites, we also obtained information on the types, age, and condition of the facilities used to store the high-level waste. To assist in evaluating technical aspects of high-level waste, we obtained assistance from our technical consultant, Dr. George Hinman. Dr. Hinman has a Doctor of Science degree in physics, is Professor Emeritus at the Washington State University, and has extensive experience in the nuclear energy field in industry, government, and academia. To examine DOE’s initiative for accelerating its high-level waste cleanup and the associated potential cost savings, we obtained and reviewed the Performance Management Plans for each of DOE’s four high-level waste sites (Hanford, Savannah River, Idaho National Laboratory, and West Valley). We discussed these initiatives thoroughly with officials from each of the sites and obtained documentation discussing the proposed initiatives, as well as savings estimates. We reported all dollar estimates as provided by DOE in current dollars and did not adjust these figures to constant dollars. We did not verify the accuracy of cost information provided by DOE. We also reviewed guidance from the Office of Management and Budget circulars, especially circular A-94, on the type of analysis that federal agencies should use when developing benefit and cost estimates, and compared DOE’s proposed savings estimates to that guidance. We analyzed savings estimate figures provided by DOE’s Savannah River staff, discounting the dollars to provide an estimate in constant dollars. To identify the legal challenges DOE faces, we obtained documentation relating to the current Natural Resources Defense Council (NRDC) lawsuit. We discussed the lawsuit separately with attorneys from the NRDC, as well as from DOE. We also discussed the waste-incidental-to- reprocessing process with staff at the NRC. We documented each site’s incidental waste determinations, as well as historical information on the development of DOE Order 435.1. We also reviewed the appropriate statutes, related regulations and orders. To identify the technical challenges and issues that must be resolved to realize potential savings, we obtained documentation on the technical uncertainties and risks associated with the waste treatment approaches at the Hanford, Idaho National Laboratory, and Savannah River sites. Because waste separation is central to successful high-level waste treatment and disposal, we documented the status of each site’s approach. We identified the major technical concerns, uncertainties, and risks associated with the waste separations approaches and discussed them with DOE and contractor officials at each site. We also visited the Savannah River Technology Center to review the progress and results of laboratory tests conducted to develop the Savannah River and Hanford sites’ waste separations technology. With the assistance of our technical consultant, we contacted a variety of independent experts in industry and academia to obtain their views on the risks associated with these technologies. To determine additional opportunities for reducing high-level waste program costs, we reviewed DOE waste acceptance policies and requirements, planning documents, position papers, and internal memos. We discussed the opportunities with DOE officials, contractors, and laboratory officials primarily at the Hanford, Idaho National Laboratory, and Savannah River sites. We compared the cost-savings concepts with those presented in performance management plans at each site to document that they represented additional opportunities. We also relied on the expertise of our technical consultant to help assess the technical viability of DOE’s proposals. To determine opportunities to improve the management of the program, we reviewed DOE’s Top-to-Bottom report and we discussed management reform proposals with officials at DOE headquarters. We also obtained documentation on DOE’s project review teams. We reviewed prior reports from GAO, DOE’s IG and the National Research Council to identify recurring weaknesses in DOE management of its cleanup program, and we developed current examples of those weaknesses from our work at the high-level waste sites and meetings with DOE officials. We also compared management weaknesses we identified to DOE’s current reform efforts to determine the extent to which the weaknesses were being addressed and to identify areas needing continued attention. We conducted our review from July 2002 through May 2003 in accordance with generally accepted government auditing standards. 1. We agree and have modified the final report to clarify that the low-activity portion of the separated tank waste would be immobilized and disposed of permanently on-site, or at other designated locations. 2. We agree and have modified the final report to clarify that DOE’s approach generally involves separating the waste into two main streams. 3. We modified the final report to clarify that the intentional discharges from the tanks were only at the Hanford Site. We do not agree with DOE’s statement that the tank wastes discharged into the soil contained relatively low-levels of radioactivity. According to DOE’s records, the tank waste discharged into the soil at the Hanford Site contained radioactive components with long half-lives, such as technetium-99. The available records show that, as of December 1989, decades after the waste was discharged into the soil, the 121 million gallons still contained more than 65,000 curies of radioactivity. 4. We agree and have modified the final report accordingly. 5. We believe that using the term “contaminated water” when referring to water from the tanks that may include radioactive and hazardous components is more accurate. The use of the term “water” by itself could be misleading for the general reader. 6. We agree and have modified the final report to clarify that the use of process knowledge is a central part of the characterization step. 7. Although DOE may use constant dollars to report the department’s environmental liabilities under its Government Results and Reporting Act requirements, it has not done so in its savings estimates or public disclosures for its accelerated cleanup initiative. In addition, to correctly compare costs of alternatives with different timing, DOE should compare “present values” of costs and not merely the constant dollars. Therefore, we made no change to the final report. 8. We agree and have modified the final report to include the cost contingency as a factor in the cost growth for the Hanford high-level waste treatment facility. 9. We believe that this comment reinforces the message in the draft report that some of the proposed savings may be based on incomplete estimates of the costs for the accelerated proposals. DOE commented that the range of costs for the alternative technologies for the sodium-bearing waste in the tanks—from $150-400 million—was less than the $1 billion estimated cost of vitrifying the waste, and therefore was not included in the savings estimate. We continue to believe that the savings estimates in the accelerated plan should have reflected all associated costs, including the difference between the costs for the alternative technologies and the costs for vitrification. We disagree that the $7 billion in estimated savings is solely attributable to the differences in strategy for treating calcine waste. The July 2002 accelerated plan for the Idaho National Laboratory specifically states that the $7 billion will be saved by the new cleanup approach for both calcine and sodium-bearing waste that eliminates the need for a vitrification facility. 10. We believe that this comment reinforces the message in the report that the use of a single point estimate does not reflect uncertainties. We disagree that including a section in the accelerated plan that catalogs the government furnished services and items is the same or similar to accounting for uncertainties by providing a range of savings estimates. 11. While the accelerated plan for the Idaho National Laboratory briefly discusses reductions in risk to workers from less intrusive characterization and sampling techniques and elimination of a vitrification facility, it does not fully describe the advantages and disadvantages to workers and the environment. Therefore, we continue to believe that the savings estimates do not fully discuss the nonbudgetary impacts such as environmental risks. 12. We believe this section of the report, including the summary paragraph, adequately describes DOE’s management of waste processing activities. 13. Although section 114 of the Nuclear Waste Policy Act limits the amount of nuclear waste that can be deposited in the repository, this limitation is not relevant to the point in this paragraph. Therefore, we made no change to the final report. 14. We believe the report adequately conveys this information. 15. We address these comments in the Agency Comments section of the report. 16. We agree and have modified the final report to acknowledge that DOE had implemented the GAO recommendation to validate cost comparisons before constructing or expanding disposal facilities for low-level waste. In addition to the individual named above, Carole Blackwell, Robert Crystal, Doreen Feldman, Chris Hatscher, George Hinman, Gary Jones, Nancy Kintner-Meyer, Avani Locke, Mehrzad Nadji, Cynthia Norris, Tom Perry, and Stan Stenersen made key contributions to this report. | The Department of Energy (DOE) oversees one of the largest cleanup programs in history--the treatment and disposal of 94 million gallons of highly radioactive nuclear waste from the nation's nuclear weapons program. This waste is currently at DOE sites in Washington, Idaho, and South Carolina. In 2002, DOE began an initiative to reduce the estimated $105-billion cost and 70-year time frame of this cleanup. GAO was asked to determine the status of this initiative, the legal and technical challenges DOE faces in implementing it, and any further opportunities to reduce costs or improve program management. DOE's initiative for reducing the costs and time required for cleanup of high-level wastes is still evolving. DOE's main strategy for treating high-level waste continues to include separating and concentrating much of the radioactivity into a smaller volume for disposal in a geologic repository. Under the initiative, DOE sites are evaluating other approaches, such as disposing of more waste on site. DOE's current savings estimate for these approaches is $29 billion, but the estimate may not be reliable or complete. For example, the savings estimate does not adequately reflect uncertainties or take into account the timing of when savings will be realized. DOE faces significant legal and technical challenges to realize these savings. A key legal challenge involves DOE's authority to decide that some waste with relatively low concentrations of radioactivity can be disposed of on site. This authority is being challenged in court, and a prolonged challenge or an adverse decision could seriously hamper DOE's ability to meet its accelerated schedules. A key technical challenge is that DOE's approach relies on laboratory testing to confirm separation of the waste into high-level and low-activity portions. At the Hanford Site in Washington State, DOE plans to build a facility before integrated testing of the separation technology--an approach that has failed on other projects in the past, resulting in significant cost increases and schedule delays. DOE is exploring proposals, such as increasing the amount of high-level waste in each disposal canister, which if successful could result in billions of dollars in additional savings. However, considerable evaluation remains to be done. DOE also has opportunities to improve program management by fully addressing recurring weaknesses GAO has identified in DOE's management of cleanup projects. |
Like financial institutions, credit card companies, telecommunications firms, and other private sector companies that take steps to protect customers’ accounts, CMS uses information technology to help predict or detect cases of improper claims and payments. For more than a decade, the agency and its contractors have used automated software tools to analyze data from various sources to detect patterns of unusual activities or financial transactions that indicate payments could be made for fraudulent charges or improper payments. For example, to identify unusual billing patterns and support investigations and referrals for prosecutions of cases, analysts and investigators access information about key actions taken to process claims as they are filed and the specific details about claims already paid. This would include accessing information on claims as they are billed, adjusted, and paid or denied; check numbers on payments of claims; and other specific information that could help establish provider intent. CMS uses many different means to store and manipulate data and, since the establishment of the agency’s program integrity initiatives in the 1990s, has built multiple disparate databases and analytical software tools to meet individual and unique needs of various programs within the agency. In addition, data on Medicaid claims are scattered among the states in multiple systems and data stores, and are not readily available to CMS. According to agency program documentation, these geographically distributed, regional approaches to storing and analyzing data result in duplicate data and limit the agency’s ability to conduct analyses of data on a nationwide basis. CMS has been working for most of the past decade to consolidate its disparate data and analytical tools. The agency’s efforts led to the IDR and One PI programs, which are intended to provide CMS and its program integrity contractors with a centralized source of Medicare and Medicaid data and a web-based portal and set of analytical tools by which these data can be accessed and analyzed to help detect cases of fraud, waste, and abuse. In 2006, CMS officials expanded the scope of a 3-year-old data modernization strategy to not only modernize data storage technology, but also to integrate Medicare and Medicaid data into a centralized repository so that CMS and its partners could access the data from a single source. They called the expanded program IDR. According to program officials, the agency’s vision was for IDR to become the single repository for CMS’s data and enable data analysis within and across programs. Specifically, this repository was to establish the infrastructure for storing data related to Medicaid and Medicare Parts A, B, and D claims processing, as well as a variety of other agency functions, such as program management, research, analytics, and business intelligence. CMS envisioned an incremental approach to incorporating data into IDR. Specifically, it intended to incorporate data related to paid claims for Medicare Part D by the end of fiscal year 2006, and for Medicare Parts A and B by the end of fiscal year 2007. The agency also planned to begin to incrementally add all Medicaid data for the 50 states in fiscal year 2009 and to complete this effort by the end of fiscal year 2012. Initial program plans and schedules also included the incorporation of additional data from legacy CMS claims-processing systems that store and process data related to the entry, correction, and adjustment of claims as they are being processed, along with detailed financial data related to paid claims. According to program officials, these data, called “shared systems” data, are needed to support the agency’s plans to incorporate tools to conduct predictive analysis of claims as they are being processed, helping to prevent improper payments. Shared systems data, such as check numbers and amounts related to claims that have been paid, are also needed by law enforcement agencies to help with fraud investigations. CMS initially planned to have all the shared systems data included in IDR by July 2008. Table 1, presented in our prior report, summarized CMS’s original planned dates and actual dates for incorporating the various types of data into IDR as of the end of fiscal year 2010. Also in 2006, CMS initiated the One PI program with the intention of developing and implementing a portal and software tools that would enable access to and analysis of claims, provider, and beneficiary data from a centralized source. The agency’s goal for One PI was to support the needs of a broad program integrity user community, including agency program integrity personnel and contractors who analyze Medicare claims data, along with state agencies that monitor Medicaid claims. To achieve its goal, CMS officials planned to implement a tool set that would provide a single source of information to enable consistent, reliable, and timely analyses and improve the agency’s ability to detect fraud, waste, and abuse. These tools were to be used to gather data from IDR about beneficiaries, providers, and procedures and, combined with other data, find billing aberrancies or outliers. For example, an analyst could use software tools to identify potentially fraudulent trends in ambulance services by gathering the data about claims for ambulance services and medical treatments, and then use other software to determine associations between the two types of services. If the analyst found claims for ambulance travel costs but no corresponding claims for medical treatment, it might indicate that further investigation could prove that the billings for those services were fraudulent. According to agency program planning documentation, the One PI system was also to be developed incrementally to provide access to IDR data, analytical tools, and portal functionality. CMS planned to implement the One PI portal and two analytical tools for use by program integrity analysts on a widespread basis by the end of fiscal year 2009. The agency engaged contractors to develop the system. IDR had been in use by CMS and its contractors who conduct Medicare program integrity analysis since September 2006 and incorporated data related to claims for reimbursement of services under Medicare Parts A, B, and D. According to program officials, the integration of these data into IDR established a centralized source of data previously accessed from multiple disparate system files. However, although the agency had been incorporating data from various data sources since 2006, our prior report noted that IDR did not include all the data that were planned to be incorporated by the end of 2010 and that are needed to support enhanced program integrity initiatives. For example, IDR did not include the Medicaid data that are critical to analysts’ ability to detect fraud, waste, and abuse in this program. While program officials initially planned to incorporate 20 states’ Medicaid data into IDR by the end of fiscal year 2010, the agency had not incorporated any of these data into the repository. Program officials told us that the original plans and schedules for obtaining Medicaid data did not account for the lack of funding for states to provide Medicaid data to CMS, or the variations in the types and formats of data stored in disparate state Medicaid systems. Consequently, the officials were not able to collect the data from the states as easily as they expected and did not complete this activity as originally planned. In December 2009, CMS initiated another agencywide program intended to, among other things, identify ways to collect Medicaid data from the many disparate state systems and incorporate the data into a single data store. As envisioned by CMS, this program, the Medicaid and Children’s Health Insurance Program Business Information and Solutions (MACBIS) program, was to include activities in addition to providing expedited access to current data from state Medicaid programs. According to agency planning documentation, as a result of efforts to be initiated under the MACBIS program, CMS would incorporate Medicaid data for all 50 states into IDR by the end of fiscal year 2014. However, program officials had not defined plans and reliable schedules for incorporating these data into IDR. Until the agency does so, it cannot ensure that current development, implementation, and deployment efforts will provide the data and technical capabilities needed to enhance efforts to detect potential cases of fraud, waste, and abuse. In addition to the Medicaid data, initial program integrity requirements included the incorporation of the shared systems data by July 2008; however, all of these data had not been added to IDR. According to IDR program officials, the shared systems data were not incorporated as planned because funding for the development of the software and acquisition of the hardware needed to meet this requirement was not approved until the summer of 2010. Subsequently, IDR program officials developed project plans and identified user requirements. In updating us on the status of this activity, the officials told us in November 2011 that they began incorporating shared systems data in September 2011 and plan to make them available to program integrity analysts in spring 2012. Beyond the IDR initiative, CMS program integrity officials had not taken appropriate actions to ensure the use of One PI on a widespread basis for program integrity purposes. According to program officials, the system was deployed to support Medicare program integrity goals in September 2009 as originally planned and consisted of a portal that provided web-based access to software tools used by CMS and contractor analysts to retrieve and analyze data stored in IDR. As implemented, the system provided access to two analytical tools—a commercial off-the-shelf decision support tool that is used to perform data analysis to, for example, detect patterns of activities that may identify or confirm suspected cases of fraud, waste, or abuse, and another tool that provides users extended capabilities to perform more complex analyses of data. For example, it allows the user to customize and create ad hoc queries of claims data across the three Medicare plans. However, while program officials deployed the One PI portal and two analytical tools, the system was not being used as widely as planned because CMS and contractor analysts had not received the necessary training. In this regard, program planning documentation from August 2009 indicated that One PI program officials had planned for 639 analysts to be trained and using the system by the end of fiscal year 2010, including 130 analysts who conduct reviews of Medicaid claims. However, CMS confirmed that by the end of October 2010, only 42 Medicare analysts who were intended to use One PI had been trained, with 41 actively using the portal and tools. These users represented fewer than 7 percent of the users originally intended for the program. Further, no Medicaid analysts had been trained to use the system. While the use of One PI cannot be fully optimized for Medicaid integrity purposes until the states’ Medicaid claims data are incorporated into IDR, the tools provided by the system could be used to supplement data currently available to Medicaid program integrity analysts and to enhance their ability to detect payments of fraudulent claims. For example, with training, Medicaid analysts may be able to compare data from their state systems to Medicare claims data in IDR to identify duplicate claims for the same service. Program officials responsible for implementing the system acknowledged that their initial training plans and efforts had been insufficient and that they had consequently initiated activities and redirected resources to redesign the One PI training plan in April 2010; they began to implement the new training program in July of that year. As we reported in June, One PI officials stated that 62 additional analysts had signed up to be trained in 2011, and that the number of training classes for One PI had been increased from two to four per month. Agency officials, in commenting on our report, stated that since January 2011, 58 new users had been trained; however, they did not identify an increase in the number of actual users of the system. Nonetheless, while these activities indicated some progress toward increasing the number of One PI users, the number of users reported to be trained and using the system represented a fraction of the population of 639 intended users. Moreover, One PI program officials had not yet made detailed plans and developed schedules for completing training of all the intended users. Agency officials concurred with our conclusion that CMS needed to take more aggressive steps to ensure that its broad community of analysts is trained, including those who conduct analyses of Medicaid claims data. Until it does so, the use of One PI may remain limited to a much smaller group of users than the agency intended and CMS will continue to face obstacles in its efforts to deploy One PI for widespread use throughout its community of program integrity analysts. Because IDR and One PI were not being used as planned, CMS officials were not in a position to determine the extent to which the systems were providing financial benefits or supporting the agency’s initiatives to meet program integrity goals and objectives. As we have reported, agencies should forecast expected benefits and then measure actual financial benefits accrued through the implementation of IT programs. Further, the Office of Management and Budget (OMB) requires agencies to report progress against performance measures and targets for meeting them that reflect the goals and objectives of the programs. To do this, performance measures should be outcome-based and developed with stakeholder input, and program performance must be monitored, measured, and compared to expected results so that agency officials are able to determine the extent to which goals and objectives are being met. In addition, industry experts describe the need for performance measures to be developed with stakeholders’ input early in a project’s planning process to provide a central management and planning tool and to monitor the performance of the project against plans and stakeholders’ needs. While CMS had shown some progress toward meeting the programs’ goals of providing a centralized data repository and enhanced analytical capabilities for detecting improper payments due to fraud, waste, and abuse, the implementation of IDR and One PI did not yet position the agency to identify, measure, and track financial benefits realized from reductions in improper payments as a result of the implementation of either system. For example, program officials stated that they had developed estimates of financial benefits expected to be realized through the use of IDR. Their projection of total financial benefits was reported to be $187 million, based on estimates of the amount of improper payments the agency expected to recover as a result of analyzing data provided by IDR. With estimated life cycle program costs of $90 million through fiscal year 2018, the resulting net benefit expected from implementing IDR was projected to be $97 million. However, as of March 2011, program officials had not identified actual financial benefits of implementing IDR. Further, program officials’ projection of financial benefits expected as a result of implementing One PI was reported to be approximately $21 billion. This estimate was increased from initial expectations based on assumptions that accelerated plans to integrate Medicare and Medicaid data into IDR would enable One PI users to identify increasing numbers of improper payments sooner than previously estimated, thus allowing the agency to recover more funds that have been lost due to payment errors. However, the implementation of One PI had not yet produced outcomes that positioned the agency to identify or measure financial benefits. CMS officials stated at the end of fiscal year 2010—more than a year after deploying One PI—that it was too early to determine whether the program had provided any financial benefits. They explained that, since the program had not met its goal for widespread use of One PI, there were not enough data available to quantify financial benefits attributable to the use of the system. These officials said that as the user community expanded, they expected to be able to begin to identify and measure financial and other benefits of using the system. In addition, program officials had not developed and tracked outcome- based performance measures to help ensure that efforts to implement One PI and IDR would meet the agency’s goals and objectives for improving the results of its program integrity initiatives. For example, outcome-based measures for the programs would indicate improvements to the agency’s ability to recover funds lost because of improper payments of fraudulent claims. However, while program officials defined and reported to OMB performance targets for IDR related to some of the program’s goals, they did not reflect the goal of the program to provide a single source of Medicare and Medicaid data that supports enhanced program integrity efforts. Additionally, CMS officials had not developed quantifiable measures for meeting the One PI program’s goals. For example, performance measures and targets for One PI included increases in the detection of improper payments for Medicare Parts A and B claims. However, the limited use of the system had not generated enough data to quantify the amount of funds recovered from improper payments. Moreover, measures of One PI’s program performance did not accurately reflect the existing state of the program. Specifically, indicators to be measured for the program included the number of states using One PI for Medicaid integrity purposes and decreases in the Medicaid payment error rate; however, One PI did not have access to those data because they were not yet incorporated into IDR. Because it lacked meaningful outcome-based performance measures and sufficient data for tracking progress toward meeting performance targets, CMS did not have the information needed to ensure that the systems were useful to the extent that benefits realized from their implementation could help the agency meet program integrity goals. Until the agency is better positioned to identify and measure financial benefits and establishes outcome-based performance measures to help gauge progress toward meeting program integrity goals, it cannot be assured that the systems will contribute to improvements in CMS’s ability to detect and prevent fraud, waste, and abuse, and improper payments of Medicare and Medicaid claims. Given the critical need for CMS to reduce improper payments within the Medicare and Medicaid programs, we included in our June 2011 report a number of recommended actions that we consider vital to helping the agency achieve more widespread use of IDR and One PI for program integrity purposes. Specifically, we recommended that the Administrator of CMS finalize plans and develop schedules for incorporating additional data into IDR that identify all resources and activities needed to complete tasks and that consider risks and obstacles to the IDR program; implement and manage plans for incorporating data in IDR to meet schedule milestones; establish plans and reliable schedules for training all program integrity analysts intended to use One PI; establish and communicate deadlines for program integrity contractors to complete training and use One PI in their work; conduct training in accordance with plans and established deadlines to ensure schedules are met and program integrity contractors are trained and able to meet requirements for using One PI; define any measurable financial benefits expected from the implementation of IDR and One PI; and with stakeholder input, establish measurable, outcome-based performance measures for IDR and One PI that gauge progress toward meeting program goals. In commenting on a draft of our report, CMS agreed with the recommendations and indicated that it planned to take steps to address the challenges and problems that we identified during our study. In conclusion, CMS’s success toward meeting goals to enhance program integrity efforts through the use of IDR and One PI depends upon the incorporation of all needed data into IDR, and effective use of the systems by the agency’s broad community of Medicare and Medicaid program integrity analysts. It is also essential that the agency identify measurable financial benefits and performance goals expected to be attained through improvements in its ability to prevent and detect fraudulent, wasteful, and abusive claims and resulting improper payments. In taking these steps, the agency will better position itself to determine whether these systems are useful for enhancing CMS’s ability to identify fraud, waste, and abuse and, consequently, reduce the loss of billions of dollars to improper payments of Medicare and Medicaid claims. Chairmen Platts and Gowdy, Ranking Members Towns and Davis, and Members of the Subcommittees, this concludes my prepared statement. I would be pleased to answer any questions that you may have. If you have questions concerning this statement, please contact Valerie C. Melvin, Director, Information Management and Technology Resources Issues, at (202) 512-6304 or [email protected]. Other individuals who made key contributions include Teresa F. Tucker (Assistant Director), Amanda C. Gill, and Lee A. McCracken. 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 Centers for Medicare and Medicaid Services (CMS) is responsible for administering and safeguarding its programs from loss of funds. As GAO reported in June 2011, CMS utilizes automated systems and tools to help improve the detection of improper payments for fraudulent, wasteful, and abusive claims. To integrate claims information and improve its ability to detect fraud, waste, and abuse in these programs, CMS initiated two information technology system programs: the Integrated Data Repository (IDR) and One Program Integrity (One PI). GAO was asked to testify on its earlier report that examined CMS's efforts to protect the integrity of the Medicare and Medicaid programs through the use of information technology. In that prior study, GAO assessed the extent to which IDR and One PI have been developed and implemented, and CMS's progress toward achieving its goals and objectives for using these systems to detect fraud, waste, and abuse. GAO previously reported that CMS had developed and begun using both IDR and One PI, but had not incorporated into IDR all data as planned. IDR is intended to be the central repository of Medicare and Medicaid data needed to help CMS and states' program integrity staff and contractors prevent and detect improper payments. Program integrity analysts use these data to identify patterns of unusual activities or transactions that may indicate fraudulent charges or other types of improper payments. IDR has been operational and in use since September 2006 but did not include all the data that were planned to be incorporated by fiscal year 2010. For example, IDR included most types of Medicare claims data, but not the Medicaid data needed to help analysts detect improper payments of Medicaid claims. According to program officials, these data were not incorporated because of obstacles introduced by technical issues and delays in funding. Until the agency finalizes plans and develops reliable schedules for efforts to incorporate these data, CMS may face additional delays in making available all the data that are needed to support enhanced Medicare and Medicaid program integrity efforts. Additionally, CMS had not taken steps to ensure widespread use of One PI to enhance efforts to detect fraud, waste, and abuse. One PI is a web-based portal that is to provide CMS staff and contractors, and Medicaid analysts with a single source of access to data contained in IDR, as well as tools for analyzing those data. While One PI had been developed and deployed to users, no Medicaid analysts and only a few Medicare program integrity analysts were trained and using the system. Specifically, One PI program officials planned for 639 program integrity analysts, including 130 Medicaid analysts, to be using the system by the end of fiscal year 2010; however, as of October 2010, only 41--less than 7 percent--were actively using the portal and tools. According to program officials, the agency's initial training plans were insufficient and, as a result, they were not able to train the intended community of users. Until program officials finalize plans and develop reliable schedules for training users and expanding the use of One PI, the agency may continue to experience delays in reaching widespread use of the system. While CMS had made progress toward its goals to provide a single repository of data and enhanced analytical capabilities for program integrity efforts, the agency was not yet positioned to identify, measure, and track benefits realized from its efforts. As a result, it was unknown whether IDR and One PI as implemented had provided financial benefits. According to IDR officials, they did not measure benefits realized from increases in the detection rate for improper payments because they relied on business owners to do so; One PI officials stated that, because of the limited use of that system, there were not enough data to measure and gauge the program's success toward achieving the $21 billion in financial benefits that the agency projected. GAO is not making new recommendations at this time. GAO recommended in June 2011 that CMS take actions to finalize plans and schedules for achieving widespread use of IDR and One PI, and to define measurable benefits. CMS concurred with GAO's recommendations. |
Authorized by the Title XVIII of the Social Security Act, Medicare is the nation’s largest health insurance program. In 2006, Medicare provided medical services to 43.2 million beneficiaries and paid claims totaling $402 billion in 2006. CMS, an operating division of the Department of Health and Human Services (HHS), administers the Medicare program. Medicare benefits are divided into four parts: (1) Part A consists of inpatient hospital care, skilled nursing facility care, qualified home health care, and hospice care; (2) Part B includes physicians’ services, outpatient hospital services, treatment for end-stage renal disease, laboratory services, durable medical equipment, certain elements of home health care, and other medical services and supplies; (3) Part C, the Medicare Advantage program, includes traditional health maintenance organizations, preferred provider organizations, and private fee-for-service plans; and (4) Part D offers beneficiaries an outpatient prescription drug benefit through private plans that contract with Medicare. For Medicare Parts A and B, also known as fee-for-service, CMS Medicare contractors are responsible for screening Medicare providers prior to enrollment into the Medicare program. Medicare contractors also process and pay Medicare fee-for-service claims and are reimbursed by CMS through the Medicare Trust Fund. Our analysis found that over 27,000 Medicare providers had over $2 billion in unpaid federal taxes as of September 30, 2006. This represented over 6 percent of the approximately 436,000 Medicare providers paid during calendar year 2006. This represented over 6 percent of the approximately 436,000 Medicare providers paid during calendar year 2006. The amount of unpaid federal taxes we identified among Medicare providers was substantially understated because (1) we intentionally limited our scope to providers with agreed-to federal tax debt for tax periods prior to 2006; (2) the IRS taxpayer data reflected only the amount of unpaid taxes either reported by the taxpayer on a tax return or assessed by IRS through its various enforcement programs and thus the unpaid tax debt amount did not include entities that did not file tax returns or underreported their income; and (3) our analysis does not include Medicare providers that owed taxes under separate TINs from those that received the Medicare payments. As shown in figure 1, 73 percent of the approximately $2 billion in unpaid taxes comprised individual income and payroll taxes. The other 27 percent of taxes included corporate income, excise, unemployment, and other types of taxes. As shown in figure 1, Medicare providers owed $896 million in payroll taxes. Employers are subject to civil and criminal penalties if they do not remit payroll taxes to the federal government. When an employer withholds taxes from an employee’s wages, the employer is deemed to have a responsibility to hold these amounts “in trust” for the federal government until the employer makes a federal tax deposit in that amount. When these withheld amounts are not forwarded to the federal government, the employer is liable for these amounts as well as the employer’s matching Federal Insurance Contribution Act contributions for Social Security and Medicare. Individuals within the business (e.g., corporate officers) may be held personally liable for the withheld amounts not forwarded and assessed a civil monetary penalty known as a trust fund recovery penalty (TFRP). Failure to remit payroll taxes can also be a criminal felony offense punishable by imprisonment of not more than 5 years, while the failure to properly segregate payroll taxes can be a criminal misdemeanor offense punishable by imprisonment of up to a year. The law imposes no penalties on an employee for the employer’s failure to remit payroll taxes since the employer is responsible for submitting the amounts withheld. The Social Security and Medicare trust funds are subsidized or made whole for unpaid payroll taxes by the general fund. Thus, personal income taxes, corporate income taxes, and other government revenues are used to pay for these shortfalls to the Social Security and Medicare trust funds. A substantial amount of the unpaid federal taxes shown in IRS records owed by Medicare providers had been outstanding for several years. As reflected in figure 2, about 54 percent of the $2 billion in unpaid taxes were for tax periods from calendar year 2000 through calendar year 2004, and approximately 32 percent of the unpaid taxes were for tax periods prior to calendar year 2000. Our previous work has shown that as unpaid taxes age, the likelihood of collecting all or a portion of the amounts owed decreases. This is, in part, because of the continued accrual of interest and penalties on the outstanding tax debt, which, over time, can dwarf the original tax obligation. The amount of unpaid federal taxes reported above does not include all tax debts owed by Medicare providers because of statutory provisions that give IRS a finite period under which it can seek to collect unpaid taxes. Generally, there is a 10-year statutory collection period beyond which IRS is prohibited from attempting to collect tax debt. Consequently, if the Medicare providers owe federal taxes beyond the 10- year statutory collection period, the older tax debt may have been removed from IRS’s records. We were unable to determine the amount of tax debt that had been removed. As shown in figure 3, Medicare providers did not disclose to IRS a significant amount of taxes owed instead the taxes were discovered through IRS examination or investigation. Specifically, $784 million, or about 39 percent of the $2 billion in unpaid taxes, was assessed by an IRS examination or investigation. Medicare providers did report about $857 million of the tax debt amount. These amounts were generally reported on tax returns filed but containing a balance due. Although the over $2 billion in unpaid federal taxes owed by Medicare providers as of September 30, 2006, is a significant amount, it likely substantially understates the full extent of unpaid taxes owed by these or other businesses and individuals. The IRS tax database reflected only the amount of unpaid federal taxes either reported by the individual or business on a tax return or assessed by IRS through its various enforcement programs. The IRS database does not reflect amounts owed by businesses and individuals that have not filed tax returns and for which IRS has not assessed tax amounts due. For example, during our audit, we identified several instances from our 25 case studies in which Medicare providers failed to file tax returns for a particular tax period and IRS had not assessed taxes for these tax periods. Consequently, while these providers had unpaid federal taxes, they were listed in IRS records as having no unpaid taxes for those periods. Further, our analysis did not attempt to account for businesses or individuals that purposely underreported income and were not specifically identified by IRS as owing the additional federal taxes. According to IRS, underreporting of income accounted for more than 80 percent of the estimated $345 billion annual gross tax gap. Finally, our analysis did not attempt to identify Medicare providers that owed taxes under separate TINs from those that received the Medicare payments. For example, sole proprietors and certain LLCs may file Medicare claims under their employer identification numbers. If these Medicare providers owe personal income taxes the analysis will not capture the amount of the personal income taxes owed. Consequently, the full extent of unpaid federal taxes for Medicare providers is not known. For all 25 cases involving Medicare providers with outstanding tax debt that we audited and investigated, we found abusive activity, potentially criminal activity, or both related to the federal tax system. All of these cases involved Medicare providers that had unpaid payroll taxes, many dating as far back as the early 1990s. Rather than fulfill their role as “trustees” of this money and forward it to IRS as required by law, these Medicare providers diverted the money for other purposes. IRS had TFRPs in effect for 11 of the 25 business cases at the time of our review. In addition, as discussed previously, willful failure to remit payroll taxes is a criminal felony offense punishable by imprisonment up to 5 years. Our review of selected Medicare providers revealed significant challenges that IRS faces in its enforcement of tax laws, a continuing high-risk area for IRS. Although the nation’s tax system is built upon voluntary compliance, when businesses and individuals fail to pay voluntarily, IRS has a number of enforcement tools, including the use of levies, to compel compliance or elicit payment. Our review of the 25 Medicare providers found that IRS attempted to work with the businesses and individuals to achieve voluntary compliance, pursuing enforcement actions later rather than earlier in the collection process. Our review of IRS records with respect to the 25 cases showed that IRS did not issue paper levies to the Medicare contractors to levy the payments of Medicare providers for 10 of the 25 cases. As a result, many of the Medicare providers in our case studies continued to receive Medicare payments while failing to pay their federal taxes. Our investigations revealed that despite owing substantial amounts of federal taxes to IRS, some owners of Medicare providers had substantial personal assets—including multimillion-dollar homes and luxury cars. For example, the auditor for one Medicare provider found that the owner misappropriated assets for personal gain. At the same time as owing taxes, the owner was building a multimillion-dollar residence and had over $1.5 million in home furnishings and artwork. In addition to failure to pay taxes, our investigations also revealed that certain Medicare providers had significant quality-of-care and other problems. For example, several cases involved quality-of-care problems, including patient neglect, for example, losing track of a patient in the provider’s care who has not been found and not taking appropriate actions to prevent a patient’s suicide. In addition, a couple of nursing homes were cited by regulators for violating patient health and safety regulations. In another case, an owner of one Medicare provider was excluded from the Medicare program for submitting false Medicare claims, and in another case a provider continued to receive Medicare payments even though it was barred from receiving government contracts. In yet another case, the owner used funds from the business to fund the owner’s statewide political campaign during the time the business was not paying its payroll taxes. Table 1 highlights 10 of the 25 cases of Medicare providers with unpaid taxes. IRS has collection actions during 2007 on 18 of 25 cases. Appendix II provides details on the other 15 cases we examined. We are referring all 25 cases we examined to IRS for further collection activity and criminal investigation. The following provides illustrative detailed information on four of the cases we examined. Case 4: The nursing home consists of several companies that received over $15 million in Medicare payments while owing more than $7 million in tax debts. IRS records indicated that the company owners attempted to conceal assets through questionable business entities such as trusts, partnerships, LLCs, and other fictitious entities. While the nursing home owed taxes, the owner possessed a $1 million personal residence and an additional $1 million piece of real estate. IRS records also showed that the owner purchased luxury cars and other personal items from money funneled through a charitable foundation. Specifically, the company owner donated large sums of money to the foundation then claimed the deductions on their personal tax return while purchasing expensive personal items. Case 5: The nursing home has a history of tax noncompliance since the late 1990s. The nursing home received over $1 million in Medicare payments while owing more than $11 million in tax debt. IRS records indicated that the nursing home owner has attempted to shield income through partnerships, tiered agreements, and leasehold agreements. In addition, the owner has various companies using over 100 bank accounts, wire transfers, an overseas billing company, and a large financial transaction to an overseas bank account. The nursing home has been sanctioned by regulators for quality-of-care deficiencies so serious that the home was barred from accepting new admissions. Case 6: The nursing home received over $4 million in Medicare payments and hundreds of thousands of dollars in federal government contracts while simultaneously owing over $4 million in tax debt. Although the owners of the nursing home claimed an inability to pay delinquent taxes because of lack of resources, one owner constructed a $4 million home while the other owner lived in a multimillion-dollar home while owing taxes. IRS records indicated that the owners also underreported income on their personal tax returns and received financial compensation, such as salary and bonuses, from another company to disguise reporting of income. IRS records indicated that one company owner may relocate overseas to avoid paying taxes. Case 10: The company received over $21 million in Medicare payments while simultaneously owing over $15 million in tax debt. The company was under investigation for underreporting income, bankruptcy fraud, and submitting false claims to Medicare. The company’s owner also owns a multimillion-dollar residence. CMS does not prevent Medicare providers with tax debts from becoming Medicare providers or receiving payments from the Medicare program. Neither Medicare regulations nor CMS implementing guidance require CMS or its contractors to screen Medicare providers for tax debts prior to enrollment. Even if such requirements did exist, absent taxpayer consent, federal law generally prohibits IRS from disclosing taxpayer data, and consequently, CMS and its contractors have no access to tax data directly from IRS. In addition, CMS has not fully participated in the continuous levy program. Specifically, CMS has not incorporated Medicare fee for service payments in the continuous levy program. As a result, the federal government potentially lost opportunities to collect over $140 million in unpaid taxes during calendar year 2006. CMS Medicare contractors are generally responsible for screening Medicare providers prior to enrollment into the Medicare program. However, as part of the screening process, neither CMS policies nor CMS regulations require Medicare contractors to consider the tax debts or tax- related abuses of prospective Medicare providers or conduct any criminal background checks on these individuals. Medicare contractors are required to review the HHS Office of Inspector General (OIG) exclusion list and the GSA debarment list; however, these lists do not include all individuals or businesses that have abused the federal tax system. Exclusion of certain individuals and entities from participation in Medicare programs is made by statute. The statute provides for both mandatory and permissive exclusions. Mandatory exclusions are confined to health-related criminal offenses, while permissive exclusions concern primarily non-health-related offenses. The Federal Acquisition Regulation cites conviction of tax evasion as one of the causes for debarment; indictment on tax evasion charges is cited as a cause for suspension. Moreover, while a felony offense, the deliberate failure to remit taxes, in particular payroll taxes, will likely not result in an individual or entity being placed on the OIG exclusion or GSA debarment lists unless the taxpayer is convicted. Based on our work, we believe that it is unlikely that companies will be excluded or debarred for failure to pay delinquent payroll taxes. Even if a taxpayer is convicted of tax evasion or other tax-related crime, the individual or business still may not be placed on the OIG exclusion or GSA debarment lists. To place them on these lists, federal agencies must identify those individuals and businesses and provide them with due process. As part of due process, the agency must determine whether the exclusion or debarment is in the government’s interest. For example, in our March 2007 testimony, we noted several cases involving conviction of tax-related crimes where the providers were not reported on the OIG exclusion or GSA debarment lists. Further complicating CMS decision making on the consideration of tax debts for Medicare, federal law does not permit IRS to disclose taxpayer information, including tax debts, to CMS or Medicare contractor officials unless the taxpayer consents, which CMS does not currently require. Thus, certain tax debt information can only be discovered from public records if IRS files a federal tax lien against the property of a tax debtor or a record of conviction for tax offense is publicly available. Consequently, CMS and its contractors do not have ready access to information on unpaid tax debts to consider in making decisions on Medicare providers. Further, CMS has not implemented a process for continuously levying payments made by Medicare contractors. As a result, IRS does not capture at least a portion of payments made to Medicare providers that owe federal tax debts. Thus, none of the 25 providers on which we performed a detailed review had their Medicare fee-for-service payments subject to the continuous levy program. As stated earlier, federal law allows IRS to continuously levy federal vendor payments until the tax debt is paid. IRS implemented this authority by creating a continuous levy program that utilizes FMS’s Treasury Offset Program system. In July 2001, we reported that CMS did not have any plan to participate in the continuous levy program and we recommended that the Commissioners of IRS and FMS work with CMS to develop plans to include Medicare payments in the continuous levy program. In July 2006, IRS began to pursue HHS participation in the continuous levy program through the Federal Contractor Tax Compliance (FCTC) Task Force, a multiagency group dedicated to improving the continuous levy process. In response to IRS’s request, and a month before your subcommittee’s hearing on Medicare physicians, health professionals, and suppliers that owe federal taxes, CMS began to participate in the FCTC Task Force meetings in February 2007. According to CMS officials, CMS plans to incorporate all payments made through HIGLAS, Medicare’s central accounting system, into the levy program by October 2008. CMS officials stated that this will cover about 60 percent of all Medicare fee-for-service payments. CMS officials said that the remaining 40 percent will be implemented into the continuous levy program in the next several years as the Medicare contractors convert their systems to HIGLAS. If there was an effective levy program in place, we estimate that CMS through its Medicare contractors potentially could have collected over $140 million of unpaid federal taxes during fiscal year 2006. This estimate was based on those debts that IRS reported to the Treasury Offset Program as of September 30, 2006. As federal deficits continue to mount, the federal government must take all effective measures to collect the billions of dollars of unpaid taxes. Because payroll taxes fund the Medicare program, Medicare providers should especially pay their fair share of taxes owed, especially payroll taxes. However, with respect to the continuous levy program, the federal government continues to fail to reach its potential. A substantial amount of Medicare payments to delinquent taxpayers will continue to go uncollected until CMS can establish a process to incorporate its payments into the continuous levy program. The failure to enforce tax laws against Medicare providers has a detrimental affect on compliance. We recommend that the Administrator of CMS take the following two actions: To enhance program integrity, consider (1) issuing guidance requiring Medicare contractors to determine to the extent feasible if prospective Medicare providers (including any Medicare providers that reenroll into Medicare) have delinquent federal taxes, including obtaining applicant consent to inquire as to tax debt status from IRS, and (2) using the results of those inquiries in determining whether to enroll such providers into the Medicare program. In making this determination, CMS could also build in consideration of the potential adverse effect that this requirement may have on Medicare’s ability to provide health care to the elderly and other Medicare beneficiaries. Incorporate all Medicare payments into the continuous levy program as expeditiously as possible. We provided a draft of our report to FMS, CMS, and IRS for review and comment. FMS did not have any comments on the draft. We received written comments on a draft of this report from the Commissioner of Internal Revenue (see app. III). We also received comments from the Acting Administrator of CMS on our draft, who did not disagree with our two recommendations (see app. IV). The Commissioner of Internal Revenue stated that he understood the importance and potential benefits of considering unpaid federal tax debt in the Medicare screening process and will support CMS in addressing our recommendations to CMS. Further, the Commissioner of Internal Revenue stated that if CMS established a process by which Medicare providers supply their TINs to IRS, IRS would be able to provide CMS a historical record of the taxpayers’ accounts, which would indicate any periods of unpaid taxes. The Commissioner of Internal Revenue stated that IRS is currently working with CMS and FMS on a pilot program to levy CMS Medicare payments through the continuous levy program. In its response to the draft of the report, the Acting Administrator of CMS stated that CMS has taken some actions and is planning other actions to address our recommendations. Specifically, in response to our first recommendation, CMS stated that it issued proposed rules that would require prospective durable medical equipment, prosthetic, and orthotic suppliers to be free of federal or state tax debt. CMS stated that it will consider whether to use its authority to establish a similar requirement for the other provider and supplier types. CMS also stated that it will carefully consider public policy implications of balancing the interests of denying or revoking Medicare program participation with Medicare’s responsibility for paying for the health care needs of the Medicare beneficiaries. In response to our second recommendation, CMS stated that it is scheduled to begin subjecting its Medicare fee-for-service payments to the levy program in October 2008. We are pleased that both CMS and IRS have shown the willingness to improve the process of utilizing available tax information to prevent providers with tax problems from participating in Medicare and collecting tax debts. As discussed in our draft report, we agree with CMS that in determining whether to require the screening of prospective Medicare providers for delinquent federal taxes, CMS should consider the potential adverse effect that this requirement may have on Medicare’s ability to provide health care to the elderly and other Medicare beneficiaries. Further, as also discussed in our draft report, we also believe that the incorporation of Medicare fee-for-service payments into the levy program will significantly improve collections of outstanding federal taxes owed by Medicare providers. As agreed with your offices, unless you publicly release its contents earlier we plan no further distribution of this report until 30 days from its date. At that time, we will send copies of this report to the Secretary of the Treasury, the Commissioner of the Financial Management Service, the Commissioner of Internal Revenue, the Acting Administrator of Centers for Medicare & Medicaid Services, and other interested parties. The report is also available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions concerning this report, please contact either Gregory D. Kutz at (202) 512-6722 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. To identify the magnitude of unpaid federal taxes owed by Medicare providers, we obtained and analyzed the Internal Revenue Service (IRS) tax debt data as of September 30, 2006. We also obtained and analyzed calendar year 2006 Medicare payments to providers from the Centers for Medicare & Medicaid Services (CMS). Our analysis included all Medicare providers (i.e., Parts A, B, C and D) that were paid during calendar year 2006. We matched the Medicare payment data to the IRS unpaid assessment data using the taxpayer identification number (TIN) field. To avoid overestimating the amount owed by Medicare providers with unpaid tax debts and to capture only significant tax debts, we excluded from our analysis tax debts and paid claims meeting specific criteria to establish a minimum threshold in the amount of tax debt and in the amount of paid claims to be considered when determining whether a tax debt is significant. The criteria we used to exclude tax debts are as follows: tax debts that IRS classified as compliance assessments or memo accounts for financial reporting, tax debts from calendar year 2006 tax periods, and total unpaid taxes and Medicare paid claims of less than $100. The criteria above were used to exclude tax debts that might be under dispute or generally duplicative or invalid and tax debts that are recently incurred. Specifically, compliance assessments or memo accounts were excluded because these taxes have neither been agreed to by the taxpayers nor affirmed by the court, or these taxes could be invalid or duplicative of other taxes already reported. We excluded tax debts from calendar year 2006 tax periods to eliminate tax debt that may involve matters that are routinely resolved between the taxpayer and IRS, with the taxes paid or abated within a short period. We excluded tax debts and Medicare paid claims of less than $100 because they are insignificant for the purpose of determining the extent of taxes owed by Medicare providers. To identify indications of abuse or potentially criminal activity, we selected 25 Medicare providers for a detailed audit and investigation. The 25 providers were chosen using a nonrepresentative selection approach based on our judgment, data mining, and a number of other criteria. Specifically, we narrowed the 25 providers with unpaid taxes based on the amount of unpaid taxes, number of unpaid tax periods, amount of payments reported by Medicare, and indications that owner(s) might be involved in multiple companies with tax debts. For these 25 cases, we obtained copies of automated tax transcripts and other tax records (for example, revenue officer’s notes) from IRS and performed additional searches of criminal, financial, and public records. In cases where record searches and IRS tax transcripts indicate that the owners or officers of a business are involved in other related entities that have unpaid federal taxes, we also reviewed the related entities and the owner(s) or officer(s), in addition to the original business we identified. Because our investigations were generally limited to publicly available information, our audit of the 25 cases may not have identified all related parties, criminal activity or significant assets (such as personal bank data, companies established to hide assets, etc.) related to these Medicare providers. To determine the potential levy collections on Medicare payments during calendar year 2006, we used 15 percent of the total paid claim or total tax debt amount reported to the TOP per IRS records, whichever was less. A gap will exist between what could be collected and the maximum levy amount calculated because (1) tax debts in TOP may not be eligible for immediate levy because IRS has not completed due process notifications and (2) tax debts may become ineligible for levy because of a change in collection status (e.g., tax debtor filed for bankruptcy). To determine the extent to which Medicare payments to providers are continuously levied to pay tax debts, we examined the statutory and regulatory authorities that govern the continuous levy program and interviewed officials from CMS, IRS, and the Financial Management Service (FMS) to determine whether any legal barriers exist. To determine the potential levy collections on Medicare payments during calendar year 2006, we used 15 percent of the total paid claim or total tax debt amount reported to the Treasury Offset Program (TOP) per IRS records, whichever is less. A gap will exist between what could be collected and the maximum levy amount calculated because (1) tax debts in TOP may not be eligible for immediate levy because IRS has not completed due process notifications and (2) tax debts may become ineligible for levy because of a change in collection status (e.g., tax debtor filed for bankruptcy). To determine the reliability of the IRS unpaid assessments data, we relied on the work we performed during our annual audits of IRS’s financial statements. While our financial statement audits have identified some data reliability problems associated with the coding of some of the fields in IRS’s tax records, including errors and delays in recording taxpayer information and payments, we determined that the data were sufficiently reliable to address this report’s objectives. Our financial audit procedures, including the reconciliation of the value of unpaid taxes recorded in IRS’s masterfile to IRS’s general ledger, identified no material differences. For the Medicare payment databases and FMS’s TOP databases, we interviewed CMS and FMS officials responsible for their respective databases. In addition, we performed electronic testing of specific data elements in the databases that we used to perform our work. Based on our discussions with agency officials, our review of agency documents, and our own testing, we concluded that the data elements used for this testimony were sufficiently reliable for our purposes. We conducted this forensic audit from July 2007 to June 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. We performed our investigative work in accordance with standards prescribed by the President’s Council on Integrity and Efficiency. This appendix presents summary information on the abusive or potentially criminal activity associated with 15 of our 25 case studies. Table 2 summarizes the abuse or potentially criminal activity related to the federal tax system for these 15 Medicare providers. The cases involving businesses primarily involved unpaid payroll taxes. The following are GAO’s comments on CMS’s letter dated May 29, 2008. 1. IRS Form 1099 is an annual information report of income to IRS. However, this report cannot be used to continuously levy Medicare payments because they reflect prior calendar year payments that have already been made to the provider. 2. We have revised the report to state that CMS reported that it received 970 paper levies from IRS revenue officers totaling $109 million. We also noted that while CMS did not report the amount it actually collected from these paper levies, we do not believe paper levies are a significant source of revenue collection. 3. We have revised the report to include the amount of Medicare payments that are subject to the continuous levy program. 4. IRS provided documentation that showed that in July 2006 IRS began to pursue Department of Health and Human Services participation in the continuous levy program through the Federal Contractor Tax Compliance Task Force. 5. The IRS/CMS/SSA data match program is not used to collect delinquent federal taxes. Therefore, a discussion of this program is not relevant to our report. 6. We have revised the report to clarify that the 27,000 Medicare providers with unpaid federal taxes encompasses all Medicare providers that have received payments during calendar year 2006. This includes all Medicare providers for Parts A, B, C, and D. Our analysis only included Medicare providers that had TINs that received Medicare payments greater than $100. As our draft report states, we believe that our estimate is substantially understated because, among other things, our analysis does not include Medicare providers that owed taxes under separate TINs from those that received the Medicare payments. 7. In our draft report, we stated that we believe that it is unlikely that companies will be excluded or debarred for failure to pay delinquent payroll taxes. Although we appreciate CMS’s solicitation, we are not making any recommendations on the use of the existing debarment system to collect unpaid taxes at this time. 8. In our draft report, we state that to determine the potential levy collections on Medicare payments during calendar year 2006, we used 15 percent of the total paid claim or total tax debt amount reported to TOP per IRS records, whichever was less. A gap will exist between what could be collected and the maximum levy amount calculated because (1) tax debts in TOP may not be eligible for immediate levy because IRS has not completed due process notifications and (2) tax debts may become ineligible for levy because of a change in collection status (e.g., tax debtor filed for bankruptcy). We plan to follow up on our recommendation to CMS in incorporating Medicare payments into the continuous levy program; however, we do not believe that a revision to the estimate in this report is necessary. 9. In our draft report, we state that our analysis only included tax debts and Medicare paid claims of $100 or more because they are significant for the purpose of determining the extent of taxes owed by Medicare providers. | Under the Medicare program, the Centers for Medicare & Medicaid Services (CMS) and its contractors paid over $400 billion in Medicare benefits in calendar year 2006. GAO was asked to determine if Medicare providers have unpaid federal taxes and, if so, to (1) determine the magnitude of such debts, (2) identify examples of Medicare providers that have engaged in abusive or potentially criminal activities, and (3) determine whether CMS prevents delinquent taxpayers from enrolling in Medicare or levies payments to pay taxes. To determine amount of unpaid taxes owed by Medicare providers, GAO compared claim payment data from CMS and tax debt data from the Internal Revenue Service (IRS). In addition, GAO reviewed policies, procedures, and regulations related to Medicare. GAO also performed additional investigative activities. Our analysis of data provided by CMS and IRS indicates that over 27,000 health care providers (i.e., about 6 percent of all such providers) paid under Medicare during calendar year 2006 had payroll and other agreed-to federal tax debts totaling over $2 billion. The $2 billion in unpaid tax debts only includes those debts reported on a tax return or assessed by IRS through its enforcement programs. This $2 billion figure is understated because some of these Medicare providers owed taxes under separate tax identification numbers (TIN) from the TINs that received the Medicare payments or they did not file their tax returns. We selected 25 Medicare providers with significant tax debt for more in-depth investigation of the extent and nature of any abusive or potentially criminal activity. Our investigation found abusive and potentially criminal activity, including failure to remit to IRS payroll taxes withheld from their employees. Rather than fulfill their role as "trustees" of this money and forward it to IRS as required by law, these Medicare providers diverted the money for other purposes. Willful failure to remit payroll taxes is a felony under U.S. law. Furthermore, individuals associated with some of these providers at the same time used payroll taxes withheld from employees for personal gain. Some of these individuals accumulated substantial wealth and assets, including million-dollar houses and luxury vehicles, while failing to pay their federal taxes. In addition, some providers received Medicare payments even though they had quality-of-care issues, such as losing track of a patient in their care who has not been found. CMS has not developed a policy to require contractors (1) to obtain consent for IRS disclosure of federal tax debts and (2) to screen providers for unpaid taxes. Further complicating this issue, absent consent by the taxpayer, which CMS does not require, federal law generally prohibits the disclosure of taxpayer data to CMS or its contractors. IRS can continuously levy up to 15 percent of each payment made to a federal payee--for example, a Medicare hospital--until that tax debt is paid. However, CMS has not incorporated most of its Medicare payments into the continuous levy program. As a result, for calendar year 2006, the government lost opportunities to potentially collect over $140 million in unpaid taxes. |
DOD’s current space network is comprised of constellations of satellites, ground-based systems, and associated terminals and receivers. Among other things, these assets are used to perform intelligence, surveillance, and reconnaissance functions; perform missile warning; provide communication services to DOD and other government users; provide weather and environmental data; and provide positioning and precise timing data to U.S. forces as well as national security, civil, and commercial users. DOD is now implementing a new acquisition management policy tailored to its space systems. It expects to finalize the policy this fiscal year. The policy is similar to the one used by the National Reconnaissance Office (NRO). The policy is different from a new acquisition management policy DOD is implementing for most other weapons-related acquisitions in several respects. Key decisions, including the decision to start product development and to start building and testing a satellite, will be made earlier in the development process. According to DOD, this is because satellites incur most of their costs during the early phases of development. The decision to build and produce a satellite will be made at the same time instead of sequentially. According to DOD, this is because satellites are produced in very small numbers as compared to other acquisitions. Figure 1 provides an overview of differences in key decision points. The new space acquisition policy is also different than DOD’s policy for other weapon systems in terms of decision-making support. For example, the new policy has created an advisory board distinct from the DOD’s Defense Acquisition Board (DAB). The Defense Space Acquisition Board (DSAB), comprised of senior-level DOD officials and mission partners, will advise the Under Secretary of the Air Force, as the milestone decision authority, on whether significant investments should move forward in the development process. Also, temporary Independent Program Assessment teams (IPA) will be used to conduct an intensive review before key decisions are made. Under DOD’s process for other weapon systems, standing Integrated Product Teams (IPT) are used to help programs conduct key analyses as well as to advise the DAB. Table 1 provides more details on these differences. DOD is already applying this new process to major satellite programs, including the Space-Based Infrared System (High) (SBIRS-High), the Transformational Communications Satellite (TSAT), the Advanced Extremely High Frequency (AEHF) system, the Mobile User Objective System (MUOS), the Global Positioning System (GPS), the National Polar-orbiting Operational Environmental Satellite System (NPOESS), and the Space-Based Radar (SBR) system. (See app. I for a further description of DOD’s current and planned systems.) SBR is the first system to receive approval for the first key decision point—key decision point (KDP) A—which begins a study phase. Other systems will come in at a later decision point—KDP B, which starts the acquisition program, or KDP C, which starts the process of building, testing, and launching the satellite. Some space-related systems, such as user equipment, are produced in mass numbers. They will be overseen under a process that is more similar to the DOD-wide acquisition process. The majority of satellite programs we have reviewed over the past 2 decades experienced problems during acquisition that drove up costs and schedules and increased technical risks. Several programs were restructured by DOD in the face of delays and cost growth. We have found that these problems, which are common among many weapon systems, are largely rooted in a failure to match the customer’s needs with the developer’s resources—technical knowledge, timing, and funding—when starting product development. In other words, commitments were made to satellite launch dates and achieving certain capabilities without knowing whether technologies being pursued could really work as intended. Time and costs were consistently underestimated. Leading commercial firms expect that their program managers will deliver high quality products on time and within budgets. Doing otherwise could result in losing a customer in the short term and losing the company in the long term. Thus, these firms have adopted practices that put their individual program managers in a good position to succeed in meeting these expectations on individual products. Collectively, these practices ensure that a high level of knowledge exists about critical facets of the product at key junctures during its development and is used to deliver capability as promised. While DOD is different from the commercial world in terms of its need to push for cutting edge technology to maintain military superiority, its policies for major weapon systems recognize that maturing technology outside of product development allows needed stability in executing budgets and allows capability to be delivered to the warfighter sooner. Our reviews have shown that there are three critical junctures at which firms must have knowledge to make large investment decisions. First, before product development is started, a match must be made between the customer’s needs and the available resources—technical and engineering knowledge, time, and funding. Second, a product’s design must demonstrate its ability to meet performance requirements and be stable about midway through development. Third, the developer must show that the product can be manufactured within cost, schedule, and quality targets and is demonstrated to be reliable before production begins. The process is building block in nature as the attainment of each successive knowledge point builds on the proceeding one. While the knowledge itself builds continuously without clear lines of demarcation, the attainment of knowledge points is sequential. In other words, production maturity cannot be attained if the design is not mature, and design maturity cannot be attained if the key technologies are not mature. In applying the knowledge-based approach, the most leveraged decision point of the three junctures is matching the customer’s needs with the developer’s resources. This initial decision sets the stage for the eventual outcome—desirable or problematic. The match is ultimately achieved in every development program, but in successful development programs, it occurs before product development. In successful programs, negotiations and trade-offs occur before product development is started to ensure that a match exists between customer expectations and developer resources. Technologies that are not mature continue to be developed in the technology base (for example, a research laboratory). With achievable requirements and commitment of sufficient investment to complete the development, programs are better able to deliver products at cost and on schedule. Our past work has shown that space programs have not typically achieved a match between requirements and resources before starting product development. Product development was often started based on a rigid set of requirements that proved to be unachievable within a reasonable development time frame. At times, even more requirements were added after the program began. When problems arose, adding resources in terms of time and money became the primary option for solving problems, since customer expectations about the product’s performance had already become hardened. For example: After starting its AEHF satellite program, DOD substantially and frequently changed requirements. In addition, after the failure of one of DOD’s legacy communications satellites, DOD decided to accelerate its plans to build AEHF satellites. The contractors proposed, and DOD accepted, a high risk schedule that turned out to be overly optimistic and highly compressed, leaving little room for error and depending on a chain of events taking place at certain times. Moreover, at the time DOD decided to accelerate the program, it did not have funding needed to support the activities and manpower needed to design and build the satellites quicker. The effects of DOD’s inability to match requirements to resources were significant. Cost estimates produced by the Air Force reflected an increase from $4.4 billion in January 1999 to $5.6 billion in June 2001—a difference of 26 percent. Although considered necessary, many changes to requirements were substantial, leading to cost increases of hundreds of millions of dollars because they required major design modifications. Also, schedule delays occurred when some events did not occur on time, and additional delays occurred when the program faced funding gaps. Scheduling delays eventually culminated into a 2-year delay in the launch of the first satellite. We also reported that there are still technical and production risks that need to be overcome in the AEHF program, such as a less-than-mature satellite antenna system and complications associated with the production of the system’s information security system. The SBIRS-High contract for engineering, manufacturing and development amounted to $2.4 billion. In the fall of 2001, DOD identified cost growth of $2 billion or more, triggering a mandatory program review and recertification under 10 U.S.C. section 2433. Currently, SBIRS-High is under contract for $4.4 billion. We reported that when DOD’s SBIRS-High satellite program began in 1994, none of its critical technologies were mature. Moreover, according to a DOD-chartered independent review team, the complexity, schedule, and resources required to develop SBIRS-High, in hindsight, were misunderstood when the program began. This led to an immature understanding of how requirements translated into detailed engineering solutions. Even though the program was restructured by DOD, the independent review team noted that SBIRS-High still faced significant risks. DOD has initiated several programs and spent several billion dollars over the past 2 decades to develop low-orbiting satellites that can track ballistic missiles throughout their flight. However, it has not launched a single satellite to perform this capability. We have reported that a primary problem affecting these programs was that DOD and the Air Force did not relax rigid requirements to more closely match technical capabilities that were achievable. Program baselines were based on artificial time and/or money constraints. Over time, it became apparent that the lack of knowledge of program challenges had led to overly optimistic schedules and budgets that were funded at less than what was needed. Attempts to stay on schedule by approving critical milestones without meeting program criteria resulted in higher costs and more slips in technology development efforts. For example, our 1997 and 2001 reviews of DOD’s $1.7 billion SBIRS-Low program showed that the program would enter into the product development phase with critical technologies that were immature and with optimistic deployment schedules. Some of these technologies were so critical that SBIRS-Low would not be able to perform its mission if they were not available when needed. DOD eventually restructured the SBIRS-Low program because of the cost and scheduling problems, and it put the equipment it had partially built into storage. In view of the program’s mismatch between expectations and what it could achieve, the Congress directed DOD to restructure the program (now known as the Space Tracking and Surveillance System or STSS) as a research and development effort. We recently reported on crosscutting factors that make it more difficult for DOD to achieve a match between resources and requirements for space acquisitions. In particular, space programs often involve a diverse array of organizations with competing interests involved in overall satellite development—from the individual military services, to testing organizations, contractors, civilian agencies, and in some cases, even international partners and industry. This creates challenges in making tough tradeoff decisions. In addition, like other weapon programs, space acquisition programs have historically attempted to satisfy all requirements in a single step, regardless of the design challenge or the maturity of technologies to achieve the full capability. This approach has made it more difficult to match requirements to available resources. DOD’s new space acquisition oversight process may help increase insight into gaps between requirements and resources. In particular, tools being adopted, such as technology readiness assessments, alternatives analyses, and independent cost estimates, may help provide more consistent and robust information on technologies, requirements, and costs. However, the value of these tools depends largely on whether or not the knowledge is used to make decisions. According to DOD officials, similar tools are also being adopted by other weapon system programs. First, DOD is requiring that all space programs conduct technology maturity assessments before key oversight decisions to assess the maturity level of technology. One tool used by many weapon systems is known as Technology Readiness Levels (TRL). The tool associates different TRLs with different levels of demonstrated performance, ranging from paper studies to proven performance on the intended product. The value of using a tool based on demonstrated performance is that it can presage the likely consequences of incorporating a technology at a given level of maturity into a product development, enabling decision-makers to make informed choices. The tool is even more valuable if it is commonly used. Our previous reviews have found the use of TRLs to be a best practice. (App. II describes TRL levels.) Second, DOD is requiring space programs to more rigorously assess alternatives, consider how their systems will operate in the context of larger families of systems, and think through operational, technical, and system requirements before programs are started. For example, programs will be required to develop an architecture that specifies the structure of system components, their relationships, and the principles and guidelines governing their design and evolution over time. It is important for DOD to increase attention to requirements earlier in the acquisition process and force DOD to think through whether there are more cost-effective alternatives to pursue. A recent DOD study found that understanding of requirements often occurs too late to affordably change the system and, more specifically, that space programs do not always understand how systems fit in with other systems with which they need to interact and that often a lack of mutual understanding of requirements exists between the government and contractors. The SBIRS independent review team also found a need across space programs for more rigorous up front development of requirements. In addition, in previous reviews, we found that space programs often do not examine potentially more cost-effective approaches. In 2001, for example, we reported that DOD’s SBIRS-Low program was not adequately analyzing alternatives to SBIRS-Low that could satisfy critical missile defense requirements, such as Navy ship-based radar capability. At the time, other studies supported the possibility that other types of sensors could be used to track missiles in the midcourse of their flight and to cue interceptors. Third, the new policy seeks to improve the accuracy of cost estimates by establishing an independent cost estimating process in partnership with DOD’s Cost Analysis Improvement Group (CAIG) and by adopting methodologies and tools used by the NRO. To ensure timely cost analyses, the CAIG will augment its own staff with cost estimating personnel drawn from across the entire national security space cost estimating community, including cost estimating teams belonging to the intelligence communities, the Air Force, NRO, the Army, and the Navy. The policy also calls on programs to produce performance metrics that compare estimated to actual costs. The policy allows programs to request assistance from the CAIG for purposes other than DSAB reviews. However, there is no point in the process that requires DOD to commit to fully fund a space program. Improving reliability of cost estimates is critical. Several of our studies— such as ones on GPS, Evolved Expendable Launch Vehicle (EELV), and AEHF—have called attention to problems with estimating system costs, such as errors, omissions, and conflicting assumptions. For example, in 1980 we reported that the cost to acquire and maintain GPS satellites through 2000 increased from $1.7 billion to $8.6 billion due largely to estimates not previously included for replenishment of satellites, launches, and user equipment. Moreover, recent DOD studies found initial cost estimates for the AEHF program as well as SBIRS-High did not accurately capture program content and risk and were based on optimistic assumptions. We also reported that costs would be better estimated if DOD required more knowledge before starting a program. Without knowing that technologies can work as intended, for example, programs cannot reliably estimate costs and schedules. Another tool that could be useful in gaining insight into whether programs are positioned for success is the IPA team. IPA teams are to be drawn from experts who are not directly affiliated with the program. They are to spend about 8 weeks on-site working full-time with program officials to study the program, particularly by assessing the acquisition strategy, contracting information, cost analyses, system engineering, and requirements. After this study, they are to conclude their work with recommendations to the DSAB on whether or not to allow the program to proceed, typically using the traditional “red,” “yellow,” and “green” assessment colors to indicate whether the program has satisfied key criteria in areas such as requirements setting, cost estimates, and risk reduction. The Under Secretary of the Air Force, however, makes the decision on whether to allow the program to proceed. IPA team studies already performed have called attention to risks faced by the GPS III, NPOESS, and SBR programs. The NPOESS study, for example, noted that risk mitigation plans needed to be strengthened and that independent cost estimates needed to include the winning contractor’s negotiated contract. The SBR study found that the program needed to better define how the system would operate in the context of DOD’s transformational communications architecture and work with key intelligence systems, such as the planned Distributed Common Ground Station. Both reviews recommended that the programs move forward (NPOESS into the build phase and SBR into the study phase) on the condition that these programs address areas of concern. An IPA team studying GPS III found the program was too optimistic in estimating resources that would be needed. For example, the study noted that the program budget was not sufficient to support the program plan by several hundred million dollars. The team also pointed out that the system’s architecture and acquisition strategy were not sufficiently defined. DOD’s new acquisition management policy for space systems does not alter DOD’s practice of committing major investments before knowing what resources will be required to deliver promised capability. Instead, the policy allows programs to continue to mature technologies while they are designing the system and undertaking other product development activities. While space systems are different than other weapon systems in terms of how they are developed and tested, it is still necessary to mature technology before starting product development and match resources to requirements in order to prevent cost increases and schedule delays. We previously recommended that DOD should not allow technologies to enter into a weapon system’s product development until they are assessed at a TRL 7, meaning that a prototype has been demonstrated in an operational environment. According to DOD officials, the new space acquisition policy does not set TRL criteria for deciding what the threshold for being mature should be. However, DOD officials stated that technologies may well enter into product development at a TRL 5, meaning basic components have only been tested in a laboratory, or an even lower level of maturity. This means that programs will design the system and conduct other program activities at the same time they build representative models of key technologies and test them in an environment that simulates the conditions of space. In essence, DOD will be concurrently building knowledge about technology and design—an approach with a problematic history. As shown in figure 2, the knowledge building approach for space stands in sharp contrast to that followed by successful programs and the approach recommended by DOD’s new acquisition policy for weapon systems. Successful programs will not commit to undertaking product development unless they have high confidence that they have achieved a match between what the customer wants and what the program can deliver. Technologies that are not mature continue to be developed in an environment that is focused solely on technology development. This puts programs in a better position to succeed because they can focus on design, system integration, and manufacturing. By contrast, allowing technology development to carry over into product development increases the risk that significant problems will be discovered late in development. Addressing such problems may require more time, money, and effort to fix because they may require more extensive retrofitting and redesign as well as retesting. The approach also makes it more difficult for programs to demonstrate the same level of design stability since technology and design activities will be done concurrently. Further, the consequences of problems experienced during development will be much greater for space programs since the design review occurs at the same time as the commitment to build and deliver the first product to a customer. Space acquisition officials we spoke with acknowledged the added risks that come when programs concurrently develop technologies and design the system. However, they maintain that concurrent technology and product development is necessary for space acquisitions for several reasons. First, while some testing on satellites can be done on the ground in thermovac or other environmental simulation chambers and some systems can also be tested via aircraft, the only way to test satellites in a true operational space environment is to build one or more demonstrator satellites and launch them into orbit. Launching demonstrators is costly and time consuming. Our prior reports have recognized that space systems are uniquely difficult to test in a true operational environment. However, DOD has found ways to test sensors and other critical technologies on experimental satellites and it has built and launched technology demonstrator satellites. Second, in view of the length of time it takes to develop space systems, DOD asserts that it will not be able to ensure that satellites, when launched, will have the most advanced technologies, unless program managers are continually developing technologies. DOD officials have stated that they would reduce the added risks of their approach by not allowing programs to start if too many technologies were deemed to be immature or by deferring certain capabilities if it turned out that technologies did not test well. We agree that continuing to develop leading edge technology is important for all system capabilities, not just space systems. However, history has shown and we have repeatedly reported that conducting technology development within a product environment consistently delays the delivery of capability to the user, robs other programs of necessary funds through unanticipated cost overruns, and consequently, can result in money wasted and fewer units produced than originally stated as necessary. A technology development environment is more forgiving and less costly than a delivery-oriented acquisition program environment. Events such as test “failures,” new discoveries, and time spent in attaining knowledge are considered normal in this environment. Further, judgments of technology maturity have proven to be insufficient as the basis for accurate estimates of program risks relative to cost, schedule, and capability. Finally, because operation and support costs make up a smaller portion of total costs for satellites than other weapon programs, DOD asserts that earlier insight and decisions are needed on space programs. We agree that early insight into programs is important, as we have reported that over 80 percent of the cost of a weapon system program is determined by requirements set at the beginning. However, moving decisions to an earlier point in the product development process without additional knowledge may actually increase the risk of promising more than can be delivered and at higher costs. The growing importance of space systems to military and civil operations requires DOD to develop cutting edge technologies and achieve timely delivery of capability. DOD’s new space acquisition policy does not position space programs to do either. By allowing major investment commitments to continue to be made with unknowns about technology readiness, requirements, and funding, programs will likely continue to experience problems that require more time and money to address than anticipated. Over the long run, the extra investment required to address these problems may well prevent DOD from pursuing more advanced capabilities. By contrast, DOD is taking steps to better position other weapon systems for success. By separating technology development and product development, the policy will help to align customer expectations with resources, and therefore minimize problems that could hurt the program in its design and production phases. In finalizing DOD’s new space acquisition management policy, we recommend that the Secretary of the Air Force, who is DOD’s executive agent for space, modify the policy to ensure that customer expectations can be matched to resources before starting product development (phase B). Specifically, we recommend that the Secretary separate technology development from product development. To ensure that this is done, we also recommend that the Secretary set a minimum threshold of maturity for allowing technologies into a program. As noted in our report, we previously recommended that DOD should not allow technologies to enter into a weapon system’s product development until they are assessed at a TRL 7, meaning that a prototype has been demonstrated in an operational environment. In commenting on a draft of this report, the Assistant Secretary of Defense for Networks and Information Integration disagreed with our finding that the new space policy perpetuates risks for space programs since it does not separate technology development from product development. DOD disagreed with our recommendations as well, citing its need to keep up with the fast-paced development of advanced technologies for space systems and a requirement in its draft policy for technology readiness assessments to be conducted at appropriate milestones. In fact, it is DOD’s long-standing and continuous inability to bring the benefits of technology to the warfighter in a timely manner that underlies the report’s findings and recommendations. In our reviews of numerous DOD programs, including many satellite developments, it has been clear that committing to major investments in design, engineering, and manufacturing capacity without knowing a technology is mature and what resources are needed to ensure that the technology can be incorporated into a weapon system has consistently resulted in more money, time, and talent spent than either was promised, planned for, or necessary. The impact of such mistakes in individual programs has also had a damaging effect on military capability as other programs are taxed to meet unplanned cost increases and production units are often cut because unit costs increase and funds run out. Although each DOD program differs in its characteristics, GAO’s work with successful product developers in DOD and the commercial sector has found that the process of developing leading edge technology and products that have more capability than their predecessors does not differ. In fact, successful product developments are marked by adherence to a disciplined process that collects metrics and establishes and uses common and consistent criteria for decision-making. We have found that companies that adopt these best practices often do so out of necessity, when their existence is threatened. While the Air Force has taken some promising steps in drafting the policy to address DOD’s poor record of developing satellites within cost and schedule targets and with promised performance, it will miss an opportunity to dramatically improve outcomes if it does not adopt similar practices. Therefore, we have not changed our recommendation. DOD’s detailed comments and our responses are provided in appendix III. In conducting our review, we analyzed DOD’s new interim acquisition management policy for space. Because of the limited time of our review, we focused on the question of whether the policy will enable DOD to match requirements to resources at the onset of product development, which our work has shown to be the most critical determinant for successful outcomes of acquisitions. We compared the new space policy to DOD’s new acquisition policy for other weapon systems as well as our past reviews of the best practices of commercial and military acquisitions. In addition, we discussed this policy with Air Force space acquisition officials. We analyzed IPA studies performed under the new policy on DOD’s NPOESS, GPS III, and SBR programs. We also analyzed our past reviews of space programs as well as DOD studies on the SBIRS-High program and on space systems development growth. See Related GAO Products at the end of this report for a list of past GAO reports we relied on. We conducted our review from June 2003 through August 2003 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretaries of Defense and the Air Force and interested congressional committees. 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 concerning this report, please contact me at (202) 512-4841. Key contributors to this report were Cristina Chaplain, Jean Harker, Natalie Britton, and Bradley Terry. Space-Based Infrared System (High) National Reconnaissance Office (NRO) Ultra High Frequency Follow-On satellite Global Positioning System (GPS) Lowest level of technology readiness. Scientific research begins to be translated into applied research and development. Examples might include paper studies of a technology’s basic properties. 2. Technology concept and/or application formulated. Invention begins. Once basic principles are observed, practical applications can be invented. The application is speculative and there is no proof or detailed analysis to support the assumption. Examples are still limited to paper studies. 3. Analytical and experimental critical function and/or characteristic proof of concept. Active research and development is initiated. This includes analytical studies and laboratory studies to physically validate analytical predictions of separate elements of the technology. Examples include components that are not yet integrated or representative. 4. Component and/or breadboard validation in laboratory environment. Basic technological components are integrated to establish that the pieces will work together. This is relatively “low fidelity” compared to the eventual system. Examples include integration of “ad hoc” hardware in a laboratory. 5. Component and/or breadboard validation in relevant environment. Fidelity of breadboard technology increases significantly. The basic technological components are integrated with reasonably realistic supporting elements so that the technology can be tested in a simulated environment. Examples include “high fidelity” laboratory integration of components. 6. System/subsystem model or prototype demonstration in a relevant environment. Representative model or prototype system, which is well beyond the breadboard tested for technology readiness level (TRL) 5, is tested in a relevant environment. Represents a major step up in a technology’s demonstrated readiness. Examples include testing a prototype in a high fidelity laboratory environment or in simulated operational environment. 7. System prototype demonstration in an operational environment. Prototype near or at planned operational system. Represents a major step up from TRL 6, requiring the demonstration of an actual system prototype in an operational environment, such as in an aircraft, vehicle or space. Examples include testing the prototype in a test bed aircraft. 8. Actual system completed and “flight qualified” through test and demonstration. Technology has been proven to work in its final form and under expected conditions. In almost all cases, this TRL represents the end of true system development. Examples include developmental test and evaluation of the system in its intended weapon system to determine if it meets design specifications. 9. Actual system “flight proven” through successful mission operations. Actual application of the technology in its final form and under mission conditions, such as those encountered in operational test and evaluation. In almost all cases, this is the end of the last “bug fixing” aspects of true system development. Examples include using the system under operational mission conditions. The following are GAO’s comments on the Department of Defense’s letter dated September 5, 2003. 1. We agree that there are consistencies between the two policies in terms of how they enhance the development of requirements. However, the policies are very different in terms of their views on technology development. DOD’s policy for weapon systems clearly requires technologies to be mature (demonstrated in a relevant, preferably operational environment) before beginning product development. The space policy does not. In fact, DOD officials stated that, under the space policy, technologies may well enter product development without being demonstrated in a relevant environment. This might not occur until DOD is close to making its production decision. In our view, this difference will be a detriment to the future success of space programs. 2. DOD contended that our recommendation to set a minimum threshold of maturity for allowing technologies into a program ignores differences among programs and ignores evolutionary acquisition. We disagree with these points. Technology maturity is fundamental to the success of all programs and cannot be ignored as part of a satellite’s business case. While it is possible to take a gamble on a key technology and have it work out in the end, DOD’s experiences show that this is an unlikely result. Moreover, this is not an approach that successful product developers emulate. In addition, technology maturity is essential to successful evolutionary acquisitions. The principle of evolutionary development is reaching full capability in more doable steps. Technical maturity essentially defines what is doable for each increment or block. 3. DOD asserted that it is not feasible for space programs to separate technology development from product development because it would delay delivery of the product and make its technologies obsolete. We disagree. Separation of technology development from product development has been found to be essential to reducing overall development cycle times and delivering new products within estimated resources. The DOD policy for other weapons acquisitions is quite clear on this as well. In successful programs, the technologies are matured, hybrid organizations and agreements between the technologists and the product developers are established, and preliminary designs are done, thus providing the basis for a match between the user's needs and the developer's resources--all before the commitment to product development is made. By maturing technologies before committing significant time and money to product development and following an evolutionary approach, the product development cycle time is reduced, while opportunities for inserting new technologies are more frequent. 4. DOD asserted that satellite programs cannot be demonstrated in an operational environment (TRL 7). We disagree. NASA, the creator of TRLs, tests some technologies to a TRL 7 if they are mission critical. Moreover, while we recognize the difficulties in attaining this level of maturity for space systems, the space policy does not even encourage programs to demonstrate technologies in a relevant environment before committing to a program. In fact, according to DOD officials, under the space policy, technologies could enter product development with a TRL 5 or even lower. The policy is silent on what the minimum threshold for maturity should be, leaving that decision to the milestone decision authority. 5. DOD stated that none of our prior best practices case studies included a commercial satellite producer, making the knowledge points irrelevant to space systems. This assertion is wrong. In the report that first promulgated the knowledge points (GAO/NSIAD-98-56), one of the key case studies was Hughes Space and Communications and its experience with the HS-702 satellite. We deliberately included Hughes because it was a low-volume, high technology producer. Hughes insisted on having process control for all key processes and proved them either through use on other satellite production or through statistical process control techniques. Hughes was also included as part of our best practice study on technology development (GAO/NSIAD-99-162). 6. DOD asserted that moving decision points to an earlier point in the program reduces risks, rather than increases them as our report states. We disagree. The space policy proposes to make commitments to product development (including point estimates on cost, schedule, and performance) before sufficient knowledge has been achieved and requires decision makers to commit first to product development without having technology in hand and second to production of the first two products without production knowledge in hand. This is the traditional DOD approach, which has consistently resulted in capability being delivered much later and much more expensively than planned. The commitment to product development (and the requisite estimates) can be done more confidently and the product development cycle time can be much shorter only if decisions are knowledge-based. 7. While officials have told us that the intent of the policy is to complete technology development during phase B, they acknowledged that the policy does not identify an end point for technology development and that, in some cases, it could continue until the point the program is ready to begin building the first satellite. Military Space Operations: Common Problems and Their Effects on Satellite and Related Acquisitions. GAO-03-825R. Washington, D.C.: June 2, 2003. Polar-Orbiting Environmental Satellites: Project Risks Could Affect Weather Data Needed by Civilian and Military Users. GAO-03-987T. Washington, D.C.: July 15, 2003. Missile Defense: Alternate Approaches to Space Tracking and Surveillance System Need to Be Considered. GAO-03-597. Washington, D.C.: May 23, 2003. Military Space Operations: Planning, Funding, and Acquisition Challenges Facing Efforts to Strengthen Space Control. GAO-02-738. Washington, D.C.: September 23, 2002. Polar-Orbiting Environmental Satellites: Status, Plans, and Future Data Management Challenges. GAO-02-684T. Washington, D.C.: July 24, 2002. Defense Acquisitions: Space-Based Infrared System-Low at Risk of Missing Initial Deployment Date. GAO-01-6. Washington, D.C.: February 28, 2001. Defense Acquisitions: Assessments of Major Weapon Programs. GAO-03-476. Washington, D.C.: May 15, 2003. 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. Best Practices: Better Acquisition Outcomes Are Possible If DOD Can Apply Lessons from F/A-22 Program. GAO-03-645T. Washington, D.C.: April 11, 2003. Best Practices: Setting Requirements Differently Could Reduce Weapon Systems’ Total Ownership Costs. GAO-03-57. Washington, D.C.: February 11, 2003. Best Practices: Capturing Design and Manufacturing Knowledge Early Improves Acquisition Outcomes. GAO-02-701. Washington, D.C.: July 15, 2002. Defense Acquisitions: DOD Faces Challenges in Implementing Best Practices. GAO-02-469T. Washington, D.C.: February 27, 2002. Best Practices: DOD Teaming Practices Not Achieving Potential Results. GAO-01-510. Washington, D.C.: April 10, 2001. Best Practices: Better Matching of Needs and Resources Will Lead to Better Weapon System Outcomes. GAO-01-288. Washington, D.C.: March 8, 2001. Best Practices: A More Constructive Test Approach Is Key to Better Weapon System Outcomes. GAO/NSIAD-00-199. Washington, D.C.: July 31, 2000. Defense Acquisitions: Employing Best Practices Can Shape Better Weapon System Decisions. GAO/T-NSIAD-00-137. Washington, D.C.: April 26, 2000. Best Practices: Better Management of Technology Development Can Improve Weapon System Outcomes. GAO/NSIAD-99-162. Washington, D.C.: July 30, 1999. Best Practices: Successful Application to Weapons Acquisitions Requires Changes in DOD’s Environment. GAO/NSIAD-98-56. Washington, D.C.: February 24, 1998. | The Department of Defense is spending nearly $18 billion annually to develop, acquire, and operate satellites and other space-related systems. The majority of satellite programs that GAO has reviewed over the past 2 decades experienced increased costs and delayed schedules. DOD has recently implemented a new acquisition management policy, which sets the stage for decision making on individual space programs. GAO was asked to assess the new policy. DOD's new space acquisition policy may help provide more consistent and robust information on technologies, requirements, and costs. For example, the policy employs a new independent cost estimating process, independent program reviews performed by space experts not connected with the program, and more rigorous analyses of alternatives, requirements, and system interdependencies. This information may help decision-makers assess whether gaps exist between expectations and what the program can deliver. However, the benefits that can be derived from these tools will be limited since the new policy does not alter DOD's practice of committing major investments before knowing what resources will be required to deliver promised capability. Instead, the policy encourages development of leading edge technology within product development, that is, at the same time the program manager is designing the system and undertaking other product development activities. As our work has repeatedly shown, such concurrency increases the risk that significant problems will be discovered as the system is integrated and built, when it is more costly and time-consuming to fix them. Moreover, when even one technology does not mature as expected, the entire program can be thrown off course since time and cost for invention cannot be reliably estimated. DOD's new acquisition policy for its other weapon systems recognizes these risks and consequently requires technology and product development to be done separately. |
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. |
The study by five DOE national laboratories was prepared in response to a growing recognition that any national effort to reduce the growth of greenhouse gas emissions must consider ways of increasing energy productivity. According to DOE laboratory officials, project discussions began in the summer of 1996, a peer review committee was formed in November 1996, and official authorization and a budget of $500,000 were provided in December 1996 to “analyze the impact of energy efficiency technology on energy demand growth in the United States.” Requested by DOE’s Office of Energy Efficiency and Renewable Energy, the five-lab study had a central goal of quantifying the potential for energy-efficient and low-carbon technologies to reduce carbon emissions in the United States by 2010 for four sectors of the U.S. economy—buildings, industry, transportation, and electricity production. The building sector includes residential and commercial buildings, where energy is used for heating and cooling, lighting, refrigeration, cooking, heating water, and operating electrical appliances. The industrial sector includes all manufacturing, as well as agriculture, mining, and construction activities. The transportation sector includes passenger cars and light-duty trucks, freight trucks, railroads, aircraft, and marine vessels. The electricity-producing sector includes electric power produced from coal, oil, natural gas, nuclear energy, hydroelectric systems, wind, solar energy, and biomass. Initially, the study’s focus was on energy efficiency from technology and the carbon savings that may accrue from such technologies. Subsequently, DOE laboratory officials said that the study’s objectives were expanded about March 1997 to include not only the potential for carbon savings from energy efficiency, but also carbon savings from switching fuel supply options for electric power generation, such as from coal to natural gas. Because it was recognized that few low-carbon technologies would be implemented by the electricity sector without some type of external incentive or regulation, the officials told us that the study’s objectives were also expanded to include an assessment of the impact of increasing the price of carbon-based fuels by $25 and $50 per ton. The officials noted that it is not unusual for a study to evolve over time and that the expansion of the study’s objectives was in large part due to early comments from peer reviewers. In calculating the carbon savings that could be achieved for each of the four sectors of the U.S. economy, the study uses three different, increasingly more aggressive, scenarios: (1) an efficiency scenario that assumes the United States takes an active role in public and private efforts to promote energy efficiency through enhanced research and development and market transformation activities; (2) a high-efficiency/low-carbon scenario that assumes a more aggressive national commitment to energy efficiency coupled with a $25 per ton carbon fee; and (3) a high-efficiency/low-carbon scenario that, in addition to the aggressive national commitment to energy efficiency, assumes a $50 per ton carbon fee. As shown in table 1, the study’s estimate of carbon savings for the most aggressive scenario is more than 200 percent greater than its estimate for the first scenario. It is important to note that, at numerous points, the five-lab study qualifies its 2010 estimates by noting, among other things, that the calculations generally represent an “optimistic but feasible potential” for carbon savings. In some cases, particularly transportation, major breakthroughs in technologies would be needed to achieve these savings. DOE laboratory officials noted that, with the exception of the transportation sector, they believe the majority of the study’s 394 million metric tons of emissions reductions come from technologies that exist now or are near the end of their development phase. For example, the officials said that the 62 million metric tons of carbon emissions reductions estimated for the building sector can be achieved solely from technologies that exist today. Additionally, the officials emphasized that the study was not a projection of what would happen by 2010 but of what could happen if the nation embarked on a path to reduce carbon emissions that included aggressive federal policies and programs, strengthened state programs, and very active private sector involvement, beginning in 2000 and being progressively phased in by 2010. The five-lab study is an important step in evaluating the role that energy-efficient and low-carbon technologies can play in the nation’s efforts to reduce global warming gases, according to several groups that we contacted; however, the study’s scope and methodology may limit its usefulness. For example, the study does not identify the type of policies that would be needed to get consumers and businesses to reduce carbon emissions by 394 million metric tons by 2010, and it does not indicate how these policies would be implemented. Additionally, the study does not address the broader economic effects on the nation’s economy, such as how the $50 per ton carbon fee may affect energy prices, energy consumption; and, eventually, economic activity and employment levels in the rest of the economy. “shed much light on what government can or should do to enhance the role technology will play in mitigating the growth of carbon emissions. In particular, the contribution of the report is to document energy savings and emissions reductions that would accrue if U.S. consumers and businesses move closer to the current (and, in some cases, reasonably anticipated) technology frontier. Despite its efforts to justify these moves as ’cost-effective,’ the report does not address the policies that would be needed to actually get consumers and businesses to adopt the technologies described in the report, nor does it present a rigorous assessment of the societal costs that would accrue if they did.” In its August 1997 peer review comments to DOE, the Council of Economic Advisors was also critical of the study’s failure to present the specific policies that would stimulate the adoption of these technologies. Similarly, according to an October 1997 study, the kinds of policies implemented to achieve any particular target for reducing greenhouse gas emissions “will have a significant impact on the costs.” While acknowledging that the types of policies chosen can have an impact, officials of DOE’s Office of Energy Efficiency and Renewable Energy noted that, in their view, the main point of the October 1997 study is that there are many policies that could be implemented and have a low, if any, net cost. DOE laboratory officials agreed that the study does not discuss the policies needed to achieve carbon savings by 2010 but explained that this was not a study objective or task from DOE. However, the officials also noted that there is fairly recent historic precedent for the types of behavior by consumers and industry modeled under the study’s most aggressive scenario. For example, the officials said the growth in the demand for energy assumed under this scenario (0.13 percent annually through 2010) is more conservative than the actual growth in demand from 1973 through 1986 when the nation’s economy grew by about 35 percent while primary energy demand remained unchanged. Additionally, the American Council for an Energy-Efficient Economy (ACEEE) indicated that the study’s message is clearer because its focus on technology is unencumbered by policy discussions. The study does not address the various broader economic effects on the nation’s economy. The study employed a methodology that, in essence, involved adding together the estimated net cost or savings to the economy for the adoption and use of each individual energy-efficient, carbon-reducing technology, with the savings based on the direct cost of adopting these technologies compared to the study’s estimated energy savings over the life of these technologies. However, this methodology focuses on one aspect of the economy—energy—and does not consider the broader impacts on other non-energy related aspects of the U.S. economy. Without considering the interrelationships between the changes that the five-lab study proposes—such as imposing a $50 per ton carbon fee—and other sectors of the economy, the full effects of these changes are not known. For example, the study does not include any analysis of the impacts of a $50 per ton carbon fee on energy consumption or economic activities elsewhere in the U.S. economy, including the impacts of these fees on energy prices and energy demand, as well as potential employment impacts. Several of the groups we contacted, such as the Global Climate Coalition and the International Project for Sustainable Energy Paths, believe the lack of an economic “feedback effect” in the study’s methodology limits the usefulness of the study’s results. DOE laboratory officials recognized that the study does not address these broader economic feedback effects. In their opinion, these impacts would be minor because only one sector—electricity generation—relies primarily on the increased price of carbon as an economic stimulus to achieve significant carbon reductions. The officials noted that the study assumes that the estimated carbon reductions for two sectors—buildings and industry—rely primarily on more aggressive policies, and for another sector—transportation—the estimated carbon reductions rely on technological breakthroughs. Regarding increased prices for electricity generation, the officials envisioned that the overall net impact of the most aggressive scenario on the nation’s economy would be small.Additionally, the officials acknowledged that the study does not provide a quantitative analysis to support their view that the broader effects would be minor. Officials of DOE’s Office of Energy Efficiency and Renewable Energy agreed that the full costs to the nation’s economy are not considered in the study but emphasized that neither are the full range of benefits from energy-efficient technologies, such as the lower cost of state compliance with Clean Air Act regulations or the decreases in the costs for oil imports. The study’s calculations of carbon savings depend, in large measure, on the assumptions made about a host of factors in four sectors of the U.S. economy, including assumptions about consumers’ purchasing behavior, loan rates, appliance standards, industrial capital constraints, the commercialization of near-term technologies, technological breakthroughs, future costs, and future benefits. Comments from interested and affected parties about the reasonableness of selected assumptions illustrated disparities in their views on some key assumptions, including those on discount rates, capital recovery factors, the rate of adoption of new technologies, the timing of technological breakthroughs, and the impact of changing the electricity-generating sector by 2010. The choice of a discount rate is a key assumption because it can affect whether an investment is viewed as cost-beneficial or not. In the five-lab study, the discount rate is used to value the stream of future benefits, such as estimated energy savings, accruing throughout the lifetime of an investment. Once these accumulated benefits have been calculated, they are used to determine the cost-effectiveness of a technology (energy savings less added investment cost). The study assumes that only cost-effective technologies will be adopted to achieve the level of carbon reductions estimated for each scenario. Assuming a higher discount rate will, among other things, cause fewer technologies to be viewed as cost-beneficial, whereas a lower discount rate means that more long-term investments with higher initial costs will be viewed as cost-beneficial. The study evaluates costs and benefits from two perspectives. The first, or more optimistic, case uses real discount rates of 7 percent for buildings, 10 percent for transportation, and 12.5 percent for industry. The second case uses higher discount rates—15 percent for buildings and 20 percent for transportation and industry, thus reducing the value of energy savings. According to DOE laboratory officials, the technologies included in the study are cost-effective even with the higher discount rates, and these rates are higher than those recommended by the Office of Management and Budget (OMB) for evaluating the costs and benefits of public policies. The study’s assumed discount rates for the transportation sector were not a significant issue among the groups we contacted; however, some groups were skeptical of the assumption of a 7-percent real discount rate for the building sector. For example, the Association of Home Appliance Manufacturers told us that the consumer discount rate for most replacement appliances, such as refrigerators, clothes washers, clothes dryers, and dishwashers, ranges from 12 to 15 percent. Similarly, officials from the Energy Information Administration (EIA) noted that consumers often charge such items on credit cards where the discount rate would range from about 12 to 16 percent, or more. Representatives of the Global Climate Coalition, National Association of Home Builders, and others also found the study’s assumption of a 7 percent discount rate for the building sector too optimistic. Some noted, however, that the 7 percent would be reasonable for appliances included in new home purchases. EIA officials and others also noted that some replacement appliances—such as hot water heaters—are often purchased without regard to energy efficiency or cost-effectiveness. The officials explained that, although water heaters are a significant energy item in most homes, when water heaters fail, consumers rarely calculate a life cycle cost analysis, choosing instead to take what the plumber or local appliance store has most readily available. Representatives of other groups considered the 7-percent rate for the building sector reasonable and pointed out that rebates and low-interest financing, such as past utility-administered energy-efficiency programs, could lower the effective discount rate on building sector purchases to 7 percent. DOE laboratory officials explained that the 7-percent rate for the building sector would be consistent with a scenario in which the nation embarked on a path to reduce carbon emissions that included aggressive federal policies and programs. Additionally, the officials noted that the higher discount rates that some groups were more comfortable with are still within the range of discount rates that the study’s most aggressive scenario concludes are still cost-effective. A key assumption for the industrial sector involves the length of time expected for a capital investment to recover its costs—known as the payback period. The study assumes that, for investment planning purposes, industry can be persuaded to change the length of time expected for a capital investment to recover its costs for energy-efficiency investments from about 3 years to nearly 7 years. Under this scenario, the study assumes industry would install new energy-efficient technologies on twice as many operations as they would normally. Most of the representatives of seven industries that used about 80 percent of the manufacturing energy consumed in the United States in 1994 indicated that the capital recovery factor assumed for the industrial sector may not realistically consider the capital constraints, market conditions, and existing manufacturing processes these industries operate under today. For example, in a November 1997 letter to the Secretary of Energy, the Chemical Manufacturers Association noted that the study’s assumption that the industry could double the rate of capital stock turnover is “impossible or at a minimum, highly improbable.” Representatives of the American Petroleum Institute explained that, in a business investment, (1) there is nothing special about energy-efficiency investments; (2) such investments have to compete directly with other investments for limited capital assets; and (3) the longer the payback period, the greater the risk and the uncertainty associated with an investment. Most of the representatives of the seven industries indicated that they would not be able to accept more than a 4-year payback; several said 3 years or less would remain their industry’s normal payback period. Generally, the representatives said that a 7-year payback is not realistic because of the higher risks and uncertainties associated with longer investments, the competing demands within their firms for investment capital, and their increasingly global competition. On the other hand, the Director of ACEEE believed that industry could achieve this goal with little difficulty, and pointed out that this is consistent with the Council’s 1997 report, which noted that industry often does not fully account for all the savings (both energy and nonenergy) in its financial analyses of such projects. DOE laboratory officials also believed that, given an aggressive package of federal policies promoting low-carbon technologies, along with federal research and development funds, industries would begin to look at such investments more favorably. They noted that for some larger investments—known as strategic investments—industry has been willing in the past to look at payback over a longer period of time. This is consistent, they noted, with a 1986 study which found that the capital budgeting practices of 12 large manufacturers varied based on the size of the project, with large projects having capital recovery rates ranging from 15 to 25 percent (paybacks ranging from about 7 to 4 years, respectively), and small- and medium-sized projects having capital recovery rates ranging from 35 to 60 percent (paybacks ranging from about 3 to less than 2 years, respectively). Many energy-efficiency projects in the industrial sector would be viewed as large projects. One of the study’s key assumptions involves the choice of “penetration rates,” or the rates of adoption and use of energy-efficient technologies within a certain time frame. For the building sector, the study assumes a 65-percent penetration rate for its most aggressive scenario. This means that 65 percent of the energy savings achievable from maximum cost-effective energy-efficiency improvements are realized in residential and commercial buildings constructed or renovated from 2000 to 2010 and in the equipment subject to replacement during this time period. Among the groups we contacted, we found a disparity of views on the reasonableness of the assumed 65-percent penetration rate. Several were skeptical of this level of penetration and questioned its reasonableness for some categories of new and retrofitted structures—such as low-cost, or entry-level, housing and rental properties. For example, the National Association of Home Builders told us that the entry-level housing market is extremely cost-sensitive and questioned whether builders of these structures would install the higher initial cost but more energy-efficient technologies described in the five-lab study. They were also skeptical that such homes would be equipped with higher initial cost, but more energy-efficient appliances. Similarly, the Air-Conditioning and Refrigeration Institute noted that the study’s assumption of a 65-percent penetration rate is unrealistic, noting that generally “the people making the purchasing decision of air conditioning equipment are usually not the ones who will be paying the energy bills, so first cost becomes more important than operating cost.” Conversely, officials from the Alliance to Save Energy and ACEEE said that, in their view, the study’s assumptions for the building sector are probably conservative. The officials said that, in the building sector, such things as aggressive national codes and standards over the home building industry and significantly higher energy-efficiency standards for appliance manufacturers could achieve the level of carbon emissions reductions estimated in the study. DOE laboratory officials noted that the 65-percent penetration rate was based on retrospective studies and their judgment of the percentage of cost-effective technologies that can reasonably be adopted over time with strong policy incentives. Additionally, the officials said that the 65-percent penetration rate for the building sector is conservative in their opinion because their analysis of this sector does not rely on any technological breakthroughs. Some industry groups we talked with questioned the study’s assumptions about the feasibility of some technologies being available by the 2010 time frame, noting that, in a few cases, the study’s description of these technologies as “incremental” is incorrect because they still require fundamental breakthroughs. For example, according to officials of The Aluminum Association, the study’s assumption that the aluminum industry will be able to use inert anode technology to cost effectively smelt aluminum by 2010 is overly optimistic, with a more realistic time frame for implementing this breakthrough technology being 2020. To be cost-effective, the officials explained, anodes must last for 8 to 10 years, but anode life in ongoing experiments has ranged from a matter of hours to several weeks. Similarly, some groups were skeptical that the breakthrough technologies envisioned for the transportation sector will be forthcoming soon enough to substantially reduce carbon emissions by 2010. According to representatives of the American Automobile Manufacturers Association (AAMA), the technology relied on for much of the carbon savings envisioned for light-duty vehicles is not expected to be available as quickly as the study assumes, and even if the technologies are demonstrated as viable, the benefits will probably not be realized until after 2010. For example, a substantial amount of the assumed reduction in light-duty vehicles’ carbon emissions is expected to come from lean-burn engines that improve fuel economy but produce excessive amounts of nitrogen oxide, a Clean Air Act-regulated pollutant and an ozone precursor. According to AAMA officials, these engines still require significant technological development before they can be used in the U.S. market. They said that U.S. automotive manufacturers have been working on this type of engine for over 20 years, and—while it is technically feasible—it is still a question of technological cost-effectiveness today. They also pointed out that the median expected lifetimes of passenger cars and light-duty trucks—now about 14 and 16 years, respectively—are increasing, making it more difficult to achieve part of the carbon reductions estimated for the transportation sector by 2010. Officials of DOE’s Office of Energy Efficiency and Renewable Energy noted that longer vehicle lifetimes will slow the pace of technological change but emphasized that the study scenarios consider these extended lifetimes. “because the outcomes postulated in the high-efficiency/low-carbon scenario require technological breakthroughs, they require a certain degree of luck to be achieved by 2010. There are no credible methods to accurately gauge the probability of such breakthroughs; we believe they stand a decent chance of occurring with an intensification of research efforts, but we stop short of claiming that they are a likely outcome of such an intensification.” DOE laboratory officials acknowledged that, in some areas such as the transportation sector, technological breakthroughs will be needed but noted that it is plausible that additional funding for research and development activities could accelerate such breakthroughs. Additionally, officials of DOE’s Office of Energy Efficiency and Renewable Energy noted that the study’s most aggressive scenario does not anticipate that fuel cell vehicles will enter the market until 2007, yet, according to DOE, a number of manufacturers, including Daimler Benz, have announced that they plan to have such vehicles on the road before 2007. Also, according to DOE, Toyota has announced that it plans to introduce a hybrid vehicle in the U.S. market in 2000, several years ahead of the entry year assumed in the study’s most aggressive scenario. Furthermore, officials from the American Forest and Paper Association said the assumptions about some breakthrough technologies for their industry, such as impulse drying, multiport cylinder drying, and on-machine sensors, are reasonable. Some groups believed the study’s assumptions about changes that would occur in the electricity sector may be too optimistic. For example, the study’s cost-benefit analysis assumes that a large segment of the electricity-generating sector can change from coal to natural gas without causing the price of natural gas to increase. However, officials from EIA, the American Petroleum Institute, and the Edison Electric Institute said that it is optimistic to assume that significant switching from coal to natural gas can occur without resulting in an increase in gas prices. DOE laboratory officials explained that this could happen due partly to the study’s assumed reduction in overall energy demand for the building sector, after this sector adopts more energy-efficient technologies, such as highly efficient windows, doors, and appliances. One group questioned whether the assumed carbon savings would occur. A June 1998 American Petroleum Institute report asserts that a $50 increase in the price of carbon-based fuels would not cause coal plants to convert to natural gas, and that—in order to achieve such conversions—the five-lab study further assumes that coal plants incur an additional environmental compliance cost of $1,400 per ton for nitrogen oxides and $100 per ton for sulfur dioxides. DOE laboratory officials disagreed with this report and emphasized that the five-lab study’s analysis of opportunities to convert coal plants to natural gas was based on a detailed plant-by-plant assessment of conversion costs. In October 1997, the administration announced key elements of its proposal to reduce the emissions of greenhouse gases to the levels they were in 1990 by no later than 2012, with additional reductions below the 1990 levels in the ensuing 5-year period. Among other things, this proposal provided the framework for the level of greenhouse gas emissions reductions that the United States would commit to achieve in the next international negotiation to be held in December 1997 in Kyoto, Japan. Unlike the 1992 international climate change agreement that had called for voluntary reductions, the Kyoto conference was to establish binding commitments for reductions in greenhouse gases. In the administration’s October 1997 proposal, the five-lab study was cited as illustrating how greater use of many existing technologies could reduce carbon emissions. Also, the OMB Associate Director of Natural Resources, Energy and Science, told us that the administration relied on several key studies, including the five-lab study, in determining which activities should be a part of the administration’s climate change initiatives. According to the five-lab study, the estimated amount of carbon that the United States would need to reduce in order to meet 1990 levels by 2010 is 390 million metric tons per year. The study found that, for its most aggressive scenario, the United States could reduce its emissions by 394 million metric tons by 2010 with a low to no net cost to the economy. According to the Principal Deputy Assistant Secretary for Energy Efficiency and Renewable Energy, the five-lab study increased in its importance as support for the administration’s climate change proposal when, in June 1997, a major study dealing with the economic effects of global climate change policies could not be finalized. In its December 1997 Kyoto Protocol negotiations, the United States agreed—subject to Senate ratification—to reduce the emissions of six greenhouse gases to 7 percent below 1990 levels. However, one greenhouse gas—carbon dioxide—is by far the largest contributor to total U.S. greenhouse gas emissions, constituting more than 80 percent of total U.S. emissions in 1990 and projected to represent more than 80 percent in 2010. With its technological focus on the ability of the nation to significantly reduce carbon emissions, the five-lab study was also one of the key documents cited as support for the December 1997 Kyoto Protocol’s emission-reduction commitments for the United States, according to DOE’s Assistant Secretary for Energy Efficiency and Renewable Energy. We provided a draft of this report to the Department of Energy (DOE) for review and comment. The agency generally agreed with the overall message of the report, noting that it showed reasonable balance and was consistent with information DOE had received following publication of the five-lab study. DOE suggested several changes to clarify information in the report. For example, the agency suggested that we note in the section on other economic effects that, while the five-lab study did not consider the full range of costs to the nation, it also did not consider the full range of benefits of employing these energy-efficient and low carbon technologies, such as a lower cost of compliance with Clean Air Act regulations. We made this change and incorporated DOE’s other comments where appropriate. The agency expressed concern with the section on the study’s limitations. While noting that the agency did not disagree with the two principal limitations presented in our report, DOE suggested that we state in that section that these limitations do not invalidate the conclusions of the five-lab study, most notably the study’s essential conclusion that “a vigorous national commitment to develop and deploy energy efficient and low-carbon technologies has the potential to restrain the growth of U.S. energy consumption and carbon emissions . . . and can produce energy savings that are roughly equal to or exceed costs.” We did not make this change, however, because the types of policies that might be needed to actually get consumers and businesses to adopt the technologies described in the report are not specified, and some have expressed concerns about the costs of these policies. For example, the Treasury Department questioned the study’s conclusion that carbon emissions can be reduced in ways that reduce energy costs more than they increase other societal costs, noting that in its view the study “substantially understates the costs of government policies to promote technology.” Additionally, as noted in the section on key assumptions, the study’s finding that a widespread adoption of energy-efficient technologies can be achieved with a low to no net cost to the nation is heavily dependent on the assumptions made, and we found a disparity of views on some of the key assumptions that may have influenced the study’s results. DOE also suggested that we include in our report that, since publication of the five-lab study, the administration has provided many of the elements of the policy roadmap in its announcement of a Climate Change Technology Initiative, which is a combination of higher budgets for technology research and tax incentives to accelerate the use of energy-efficient and low-carbon technologies. We did not include this in our report, however, since this initiative was outside the scope of our review. Also, in our April 1998 report Department of Energy: Proposed Budget in Support of the President’s Climate Change Technology Initiative (GAO/RCED-98-147, Apr. 10, 1998), we raised several questions regarding DOE’s proposed budget that the Congress may want DOE to address before the agency implements this initiative. Additionally, uncertainties regarding the lack of specific performance goals associated with this initiative were discussed in our June 1998 testimony Global Warming: Administration’s Proposal in Support of the Kyoto Protocol (GAO/T-RCED-98-219, June 4, 1998). DOE also questioned the relevancy of including comments from organizations that criticized some assumptions of the five-lab study as optimistic when compared to current conditions. We believe the viewpoints of these organizations are relevant and appropriately reflect their opinions of the reasonableness of certain key assumptions used in the study, taking into consideration current conditions and historical trends. Appendix III contains the full text of the agency’s written comments and our responses. We conducted our review from December 1997 through August 1998 in accordance with generally accepted government auditing standards. A detailed discussion of our scope and methodology is provided in appendix I. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 15 days after its date. At that time, we will send copies of the report to the Secretary of Energy and other interested parties. We will also make copies available to others upon 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 IV. In view of the Department of Energy’s (DOE) five-lab study’s potential influence on U.S. climate change policy, Senators Larry Craig, Chuck Hagel, Jesse Helms, and Frank Murkowski asked us to provide information on (1) how the study’s scope and methodology may limit its usefulness, (2) key assumptions that may have influenced the study’s results, and (3) the study’s role in the formulation of the October 1997 climate change proposal and the Kyoto Conference’s emission-reduction goals for the United States. To obtain information on the study’s limitations and assumptions, we obtained and reviewed the final study, drafts of the study, and intramural and extramural peer reviewers’ comments on drafts of the study. We also reviewed DOE’s Energy Information Administration’s (EIA) 1997 Annual Energy Outlook, which served as the principal basis for the estimated 2010 carbon emission levels under the five-lab study’s business-as-usual case,and we discussed various assumptions in the study with EIA officials associated with the development of the 1997 Annual Energy Outlook, as well as EIA’s more recent 1998 Annual Energy Outlook. Additionally, we interviewed officials and obtained documents from Oak Ridge National Laboratory and Lawrence Berkeley National Laboratory, the two key laboratories in developing the study. We also contacted 52 organizations that we selected as being interested and affected parties, many with energy-efficiency expertise or able to offer informed opinions about the study’s assumptions and limitations based on a particular field of expertise. In selecting these representatives, we contacted potentially interested and affected parties that were identified as being knowledgeable of the study, as well as energy-efficiency, industry, and environmental experts and other groups we identified from Internet searches, discussions with energy-efficiency experts, and our previous experiences. We selected organizations that represent different aspects of the four sectors of the U.S. economy discussed in the study—buildings, industry, transportation, and electricity production—as well as environmental groups. Not all of the representatives we contacted had read the study or wanted to express their views on it. Others had read and analyzed only those parts of the study that related to their sector, and they limited their comments accordingly. Of the 52 groups contacted, 31 commented on one or more aspects of the study. A list of the groups commenting appears in appendix II. Additionally, while we discussed some aspects of the assumptions associated with the engineering-economic modeling approach used in some parts of the study, we did not attempt to verify the adequacy of these models or the alterations made to them for analyzing various study scenarios, such as the alterations of EIA’s National Energy Modeling System model. To describe the extent to which the final report’s results were reflected in the October 1997 climate change proposal and the December 1997 Kyoto Conference’s greenhouse gases emission-reduction goals for the United States, we relied on interviews, memorandums, press, and other briefings by the administration that cited the study as partial support for these proposals, the proposal and conference documents themselves, and testimony before the U.S. Senate. We conducted our review from December 1997 through August 1998 in accordance with generally accepted government auditing standards. The following are GAO’s comments on the Department of Energy’s letter dated July 27, 1998. 1. We agreed with this comment and have revised the report accordingly. 2. See comment 1. 3. See comment 1. 4. The statement suggested by DOE has not been included because this section of our report only addresses the building sector and because the adoption rate of new technologies for the transportation sector was questioned by officials of the American Automobile Manufacturers Association. 5. This sentence was clarified to note that, because the entry-level housing market is so cost-sensitive, the National Association of Homebuilders questioned whether builders of entry level housing would install the higher-initial-cost but more energy-efficient technologies described in the study. 6. The study in question does not use the term “strategic investments” to describe the capital budgeting practices of firms, as suggested by DOE. The study does indicate that the capital budgeting practices of firms varied based on the size of the project, with large projects having capital recovery rates ranging from 15 to 25 percent, medium-sized projects, from 25 to 40 percent, and small projects, from 35 to 60 percent. We have added a clarifying note that DOE’s interpretation of the study in question is that, under the most aggressive scenario, investments in energy-efficient technologies would be on the lower end of the range (according to DOE, about 15 percent for large projects and 35 percent for small- and medium-sized projects). 7. DOE’s views have been added to this section of the report. 8. Due to a typographical error in the draft sent to DOE, the words “resulting in” were omitted, which distorted the meaning of the sentence. We have revised the report accordingly. 9. The information suggested by DOE has been added to this section of the report. 10. Although our draft report already noted that DOE laboratory officials disagreed with the American Petroleum Institute report, we added DOE’s suggested language about the analyses supporting the five-lab study’s assessment of conversion costs. 11. We agreed with this comment and have added a clarifying note to this section of our report. William F. McGee, Assistant Director Mehrzad Nadji, Assistant Director, Economic Analysis Group James R. Beusse, Evaluator-in-Charge Philip L. Bartholomew, Evaluator Hamilton C. Greene, Jr., Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO provided information on the study conducted by five Department of Energy (DOE) national laboratories on reducing U.S. emissions through energy-efficient and low-carbon technologies, focusing on: (1) how the study's scope and methodology may limit its usefulness; (2) key assumptions that may have influenced the study's results; and (3) the study's role in the formulation of the October 1997 climate change proposal and the Kyoto Conference's emission-reduction goals for the United States. GAO noted that: (1) the five-lab study is an important step in evaluating the role that energy-efficient and low-carbon technologies can play in the nation's efforts to reduce global warming gases; (2) however, the study's usefulness is limited because it does not discuss the specific policies needed to achieve its estimate of 394 million metric tons of carbon reductions by 2010 and does not fully consider the costs to the nation's economy of reaching this goal; (3) according to DOE laboratory officials, specifying the types of policies needed to achieve such significant reductions by 2010 was not one of the study's objectives; (4) furthermore, the study assumes a fee of $50 per ton for carbon emissions, which would increase the cost of energy; however, the study does not evaluate the broader impacts that this cost may have on the economy; (5) DOE officials acknowledge that the study does not examine the broader economic impacts of such a carbon fee on the U.S. economy but said that, in their opinion, these broader economic impacts would be minor; (6) the study's finding that the widespread adoption of energy-efficient technologies can be achieved with low to no net cost to the nation is heavily dependent on the assumptions made for four sectors of the U.S. economy--buildings, industry, transportation, and electricity production; (7) among the groups that GAO interviewed, GAO found a disparity of views on key assumptions that may have influenced the study's results; (8) several of the groups questioned some of these assumptions as being too optimistic, such as those about the payback period, rate of adoption of new technologies, or timing of technological breakthroughs; (9) however, most of the representatives of the seven industries that used about 80 percent of the manufacturing energy consumed in the United States in 1994 indicated this assumption may be too optimistic given their current capital constraints, market conditions, and existing manufacturing processes; (10) on the other hand, some groups believed that certain assumptions in the study appear reasonable; (11) the study has been cited as one of many documents considered in formulating the administration's October 1997 climate change proposal; and (12) according to the Department's Assistant Secretary for Energy Efficiency and Renewable Energy, the study was one of the documents considered in formulating the emission-reduction goals for the United States at the December 1997 Kyoto Conference. |
Fraud and abuse in the SDVOSB program allowed ineligible firms to improperly receive millions of dollars in set-aside and sole-source SDVOSB contracts, potentially denying legitimate service-disabled veterans and their firms the benefits of this program. We identified 10 case-study examples of firms that did not meet SDVOSB program eligibility requirements, received approximately $100 million in SDVOSB contracts, and over $300 million in additional dollars of 8(a), HUBZone, and non-SDVOSB federal government contracts. SBA found four of the firms ineligible for the SDVOSB program through the agency’s bid protest process. Nevertheless, because there are no requirements to terminate contracts when firms are found ineligible, several contracting agencies allowed the ineligible firms to continue their work. In addition, we identified six other case-study firms that were not eligible for the SDVOSB program. The misrepresentations case-study firms made included a firm whose owner was not a service-disabled veteran, a serviced-disabled veteran who did not control the firm’s day-to-day operations, a service- disabled veteran who was a full-time contract federal employee at MacDill Air Force Base, and firms that served as a “pass-through” for large and sometimes foreign-based corporations. In the case of a pass-through, a firm or joint venture lists a service-disabled veteran as the majority owner, but contrary to program requirements, all work is performed and managed by a non-service-disabled person or a separate firm. Federal regulations set requirements for a small business to qualify as an SDVOSB. As stated above, SDVOSB eligibility regulations mandate that a firm must be a small business and at least 51 percent–owned by one or more service-disabled veterans who control the management and daily business operations of the firm. In addition, SDVOSB regulations also place restrictions on the amount of work that can be subcontracted. Specifically, regulations require the SDVOSB to incur a mandatory percentage of the cost of the contract performance that can range from 15 percent to 50 percent, depending on the type of goods or services. The Federal Acquisition Regulation (FAR) requires all prospective contractors to update ORCA to state whether their firm qualifies as an SDVOSB under specific NAICS codes. Pursuant to 15 U.S.C. § 657 f(d), firms that knowingly making false statements or misrepresentations in certifying SDVOSB status are subject to penalties. Of the 10 cases we identify in this report, all 10 of them represented to be SDVOSBs in the Central Contractor Registration (CCR). Table 1 provides details on our 10 case- study firms that fraudulently or abusively misrepresented material facts related to their eligibility for the SDVOSB program. We plan to refer all 10 firms to appropriate agencies for further investigation and consideration for removal from the program. Case 1: This firm fraudulently certified itself as an SDVOSB in CCR so it could compete for over $200 million in SDVOSB contract awards that FEMA set aside for site maintenance for trailers provided to Hurricane Katrina and Rita victims in Louisiana. In May 2006, the same month as the FEMA request for proposals were posted, the majority owner of the SDVOSB applied for the first time to VA for service-connected disability compensation related to claimed injuries incurred during military service in the mid-1970s. In July 2006, VA requested that the SDVOSB’s owner provide evidence of his/her service-connected disability. The owner never responded. In December 2006, the VA denied the owner’s application for compensation and status as a service-disabled veteran. Six months later, SBA issued a decision, in response to an SDVOSB status protest, stating that the owner of the firm was not a service-disabled veteran. In its decision, the SBA concluded the SDVOSB firm and its joint venture did not qualify for SDVOSB contracts. Based on this decision, in July 2007, FEMA sent a letter terminating any future task orders for the firm and the joint venture and giving them until the end of August 2007 to cease all operations under both contract awards. In the end, the firm received approximately $7.5 million dollars from FEMA’s SDVOSB set-aside contracts prior to termination. The firm received no other punishments or sanctions for the fraudulent misrepresentation and has not been suspended or debarred from receiving future government contracts. Case 2: This firm, functioning as a pass-through for non-SDVOSB firms, improperly received over $5 million in SDVOSB contracts. Our investigation revealed that this firm, located in Chico, California, improperly subcontracted 100 percent of the work from an SDVOSB contract to a corporation headquartered in Europe that reported almost $12 billion dollars in revenue in 2008. The firm consists of two owners and three full-time employees. While the majority owner listed on company documents is a service-disabled veteran, neither the owner nor the firm’s employees perform any of the work related to SDVOSB contracts the firm receives. SDVOSB janitorial service contracts require that at least half of the personnel costs are incurred by employees of either the firm or another SDVOSB. When we interviewed the firm’s service-disabled veteran owner, he/she acknowledged that he/she subcontracted all of the firm’s work to other non-SDVOSB firms. The owner said the company’s business model is to (1) use Federal Business Opportunities (FedBizOps) to search for SDVOSB set-asides that the firm can find a subcontractor to complete; then (2) take over a portion of the subcontractor’s payroll to meet the percentage requirement for completing the work. The owner stated this process was used for the firm’s $3.5 million contract for janitorial services at a VA hospital in California, where the SDVOSB firm functioned as a pass-through for a non-SDVOSB foreign-based corporation, which is one of the world’s largest facility-service groups, with operations in 50 countries and almost $12 billion in annual revenue in 2008. For this contract, all employees performing the janitorial services were from the foreign-based corporation. The firm—with two owners and only three employees—has secured 21 SDVOSB contracts in nine different states for janitorial, construction, and other services. The work that is passed through to non-SDVOSB firms is valued at $5 million. Case 5: Our investigation found that a non-SDVOSB company used two SDVOSB firms as pass-throughs to obtain over $3 million in SDVOSB contracts. It did not have the SDVOSB firms perform the majority of the contract work as required. The company located in Austin, Texas, formed joint ventures with the two SDVOSB firms to receive contracts for septic- tank and related services from the Army at Fort Drum, New York, and Fort Irwin, California. The Fort Drum set-aside contract was protested in June 2008 through the SBA bid-protest process, which determined that the service-disabled veteran owner was not in control of the business. The SBA disqualified both the non-SDVOSB company and its joint venture from the SDVOSB program and deemed them ineligible to bid on such contracts in the future; however, SBA did not process either the company or the SDVOSB firm for suspension or debarment, which would generally exclude the firms from doing business with the federal government. Furthermore, SBA’s ruling did not result in the Army’s termination of its contracts with the joint ventures that were the subject of the protest because there are no requirements to terminate contracts awarded to firms ineligible for SDVOSB set-aside or sole-source contracts. The company that used the SDVOSB as a pass-through was allowed to continue to provide septic-tank and related services at Fort Drum through 2013 for a total value of up to $1.1 million. In 2009 the same non-SDVOSB company from Texas partnered with a different SDVOSB firm to receive a contract at Fort Irwin valued at up to $3 million for septic-tank and related services. Based on our case analysis, the SDVOSB owner does not control the SDVOSB firm. The SDVOSB owner is a former employee of the joint venture “partner” from Texas, as are 8 out of 10 employees. The SDVOSB owner also works 3 days each week at his brother’s bar in Illinois—located 1,800 miles away from the project site in California. In addition, the SDVOSB owner does not have control over payments received from the work performed at Fort Irwin. The non-SDVOSB company’s accountant, who is located in San Antonio, Texas, manages the SDVOSB firm’s bank accounts. Furthermore, a visit to the work site at Fort Irwin in June 2009 also revealed, as shown in figure 1 below, that the portable toilets and hand-wash stations on site all displayed the name and phone number of the non-SDVOSB company. In June of 2009 we visited the contract performance site at Fort Irwin, with the intention of inspecting the site unannounced. However, a Fort Irwin contracting officer notified the SDVOSB firm in advance of our site visit. Prior to our arrival it appeared that the SDVOSB owner had made an effort to conceal the true management and control over the contract. Specifically, upon arrival, the SDVOSB owner from Illinois was present on site to greet us, despite the fact that he lived over 1,800 miles away. In addition, a service truck displaying the SDVOSB firm’s logo was prominently displayed at the contract location. Further investigation revealed that the truck’s registration had been transferred the day of our visit from the non-SDVOSB company from Texas to the SDVOSB firm. However, the registration address remains in Texas at the office of the accountant for both businesses. Case 10: This case-study firm, functioning as a pass-through for a non- SDVOSB company, received approximately $900,000 for an SDVOSB contract. Our investigation found that the owner of the SDVOSB passed through all of the work for this furniture design and installation contract to a furniture dealer that his wife worked for, who then passed the work to a furniture manufacturer that actually designed and installed the furniture. When we interviewed the SDVOSB firm owner, he admitted that he had no experience in the furniture business. In addition, the SDVOSB owner works full-time at MacDill Air Force base—the same location as the contract award. This award is questionable on three counts: the SDVOSB owner’s full-time job with another employer should make it impossible for him to manage and control daily business operations on a large SDVOSB contract; the contract work was passed through to the manufacturer; and the owner’s daily interactions with Air Force personnel on base create the perception of preferential treatment. In addition, as shown in figure 2 below, the legitimacy of the SDVOSB firm is also in question because the firm’s physical address is the owner’s home and its mailing address is a mail-box rental store. When questioned, contracting officials at the base stated that they were aware that the SDVOSB firm owner was also a DOD contract employee and that he would likely not perform a majority of the work on the contract. Nevertheless, they felt the contract was awarded appropriately. MacDill Air Force Base awarded the firm, which has no employees, an SDVOSB set-aside contract for approximately $900,000 for furniture layout design, delivery, and installation. The SDVOSB firm owner has worked at the base for over 20 years as a telecommunications contract employee. The base director of contracting and the legal counsel who approved the award had prior working relationships with the SDVOSB owner on the base. Contracting officials told us that during the decision process for the award of the furniture contract, heavy emphasis was placed on past performance rather than price; however, the SDVOSB firm had no past- performance history. Contracting officials at the base instead allowed the SDVOSB firm to use past performance ratings of the furniture dealer, where the owner’s wife worked to meet the past-performance requirement. In addition, contracting officials were aware of the SDVOSB owner’s limited involvement in performing the contract. They even stated that the service-disabled veteran would likely not show up until it was time to collect his check. The military personnel in charge of overseeing the furniture layout design, delivery, and installation stated that the manufacturer was more involved than the SDVOSB or its affiliate dealer. We observed the delivery and installation of some of the furniture related to this contract. The manufacturer was the only company present to lead the installation process, with the plans they designed in-hand and their logo clearly printed on them. Despite the fact that this SDVOSB award clearly functioned as a pass-through for a non-SDVOSB firm, base officials did not consider the award to be improper. In fact, the Director of Contracting at the base stated that he estimates 90 percent of SDVOSB contracts are pass-throughs for non-SDVOSB companies. The 10 case studies discussed above show that significant control weaknesses in the SDVOSB program allow ineligible firms to receive millions in SDVOSB contracts. The lack of effective fraud-prevention controls by SBA and agencies awarding contracts allowed these ineligible firms to receive approximately $100 million of sole-source or set-aside SDVOSB contracts over the last several years. The SDVOSB program is essentially an eligibility-based program. However, neither the SBA, except when responding to a protest, nor contracting officials are currently verifying the eligibility of firms claiming to be SDVOSBs. For example, currently the SBA and contracting agencies do not have a process in place to access the VA service-disabled veteran’s database listing individuals that are valid service-disabled veterans. In addition, contracting officers are not required to validate that a firm’s owner is a service-disabled veteran prior to award. Unlike other small business contracting programs, such as the HUBZone and 8(a) programs, there also are no documentation submissions to substantiate eligibility for the program or application process associated with the SDVOSB program. This lack of controls substantially increases the risk for fraud and abuse in the SDVOSB program. The only process in place to detect fraud in the SDVOSB program involves a formal bid protest process at the SBA, whereby interested parties to a contract award can protest if they feel a firm misrepresented its small business size or SDVOSB eligibility in its bid submission. However, as shown by our case studies, this self-policing process does not prevent ineligible firms from receiving SDVOSB contracts. For example, bid- protest decisions do not always result in the termination of contracts with ineligible firms, even when termination costs would be minimal in cases where contract work had not begun. As some of our case studies show, even when firms are found ineligible to receive a contract, they can still retain it because current regulations do not require that the contracting agency terminate the contract. In addition, none of the firms found ineligible by the SBA through SDVOSB-status protests were suspended or debarred from receiving SDVOSB and other government contracts. When asked about its bid protest process, SBA officials stated that the bid protest process focuses on determining the eligibility of a firm for a specific contract and providing details on why a firm was found to be eligible or ineligible. SBA officials also stated that bid protest decisions do not include recommendations for suspension or debarment. Recently, in response to the Veterans Benefits, Health Care, and Information Technology Act, VA has taken steps to develop a validation program for contracts it awards to SDVOSBs and Veteran-Owned Small Businesses (VOSB). While not yet fully implemented, this validation program includes steps to verify a firm’s eligibility for the program including validating an owner’s SDV status and his/her control of day-to-day operations. The VA program also includes plans for site visits to firms seeking VA certification as an SDVOSB or VOSB. Our 10 case studies clearly show that fraud and abuse exist within the SDVOSB program. Without preventive controls our case studies show that millions of dollars of SDVOSB set-aside and sole-source contracts are being awarded to ineligible firms. Fraud prevention requires a system of rules which, in their aggregate, minimize the likelihood of fraud occurring while maximizing the possibility of detecting any fraudulent activity at a reasonable cost. Fraud-prevention systems set forth what actions constitute fraudulent conduct and specifically spell out who in the organization handles fraud matters under varying circumstances. The potential of being caught and disciplined can, in some cases, persuade likely perpetrators not to commit the fraud. Because of this principle, the existence of a thorough fraud-prevention system is essential to fraud prevention and detection. However, as shown by our case studies, there are at times no consequences for firms that fraudulently misrepresent their status as SDVOSBs or otherwise abuse the current system. Not only are firms not prosecuted, suspended, or debarred, but in many cases, because there is no requirement for agencies to terminate contracts awarded to ineligible firms, the firms are allowed to continue performing contracts, even when contract termination costs would be minimal in cases where contracted work had not begun. In addition, ineligible firms in some instances continue bidding on SDVOSB contracts without consequences. As of July 2009, the federal government does not have in place the key elements of an effective fraud-prevention system for the SDVOSB program. As shown in figure 3 below, a well-designed fraud-prevention system should consist of three crucial elements: (1) up-front preventive controls, (2) detection and monitoring, and (3) investigations and prosecutions. For the SDVOSB program this would mean (1) front-end controls over program eligibility prior to contract award, (2) fraud detection and monitoring of firms already receiving SDVOSB contracts, and (3) the aggressive pursuit and prosecution of individuals committing fraud to include suspension and debarment, or requirement to terminate the contract. In addition, as shown in figure 3, the organization should also use “lessons learned” from its detection and monitoring controls and investigations and prosecutions to design more-effective preventive controls. Currently the SDVOSB program has no preventive controls in place to prevent fraud and abuse in the program. In addition, the SBA and agencies awarding contracts do not have access to a database listing individuals that are valid service-disabled veterans. We have previously reported that fraud prevention is the most efficient and effective means to minimize fraud, waste, and abuse. This is especially important in a program like the SDVOSB program where even firms identified as receiving contracts through fraud or abuse face no real consequences as discussed below. Thus, controls that prevent fraudulent firms and individuals from entering the program in the first place are the most important element in an effective fraud-prevention program. The most crucial element of effective fraud-prevention controls is a focus on substantially diminishing the opportunity for fraudulent access into the system through front-end controls. Currently there are no preventive controls in place for the SDVOSB program. The SDVOSB program is essentially an eligibility-based program. However neither the SBA or contracting officials are required to verify the eligibility of firms claiming to be SDVOSBs. This lack of controls substantially increases the risk for fraud and abuse in the SDVOSB program. Although preventive controls are the most effective way to minimize fraud and abuse, continual monitoring is an important component in detecting and deterring fraud. Monitoring and detection within a fraud-prevention program involve actions such as data mining for fraudulent and suspicious applicants and evaluating firms to provide reasonable assurance that they continue to meet program requirements. Currently, the only process in place that can detect fraud and abuse in this program is the bid-protest process administered by SBA. Through the bid-protest process, interested parties self-police the SDVOSB program by exercising their right to challenge an SDVOSB award that is suspected to have been awarded to an ineligible firm. SBA will determine the eligibility of the firm, and if ruled ineligible, the SBA protest decision will state that the firm is supposed to be ineligible for additional SDVOSB awards. However, based on our case studies this process does not prevent the firms from bidding on SDVOSB contracts, because SBA protest decisions are not listed in CCR or ORCA, and therefore contracting officials may not be aware of protest decisions. Officials from the Inspector General offices within SBA and VA stated that they will respond to allegations of fraud and abuse within the SDVOSB program, but they do not actively monitor the program for fraud and abuse. Without continual monitoring of the program, the risk for persistent fraud and abuse increases. The final element of an effective fraud prevention system is the aggressive investigation and prosecution of individuals who commit fraud against the federal government. The SBA, through the bid-protest process, makes determinations of eligibility status in the SDVOSB program. However, there is not an effective process for prosecution, suspension, or debarment of program abusers. Without consequences, the bid-protest process is not an effective control for preventing future abuse. As mentioned in case studies above, firms determined to be ineligible for SDVOSB awards are not required to terminate those awards. In one case, a joint venture was determined to be a pass-through—it completed the contract and created another pass-through with a different service-disabled veteran to win another SDVOSB contract. Furthermore, although SBA’s regulations state that firms misrepresenting themselves as SDVOSB concerns may be suspended or debarred from government contracting and may suffer civil and criminal penalties for knowingly making false statements to the SBA, to-date, the SBA program office has never referred any firms for debarment or suspension proceedings, or both, based on SBA findings from its program-eligibility reviews. When asked about its bid protest process, SBA officials stated that the bid protest process focuses on determining the eligibility of a firm for a specific contract and providing details on why a firm was found to be eligible or ineligible. SBA officials also stated that bid protest decisions do not include recommendations for suspension and debarment. By failing to hold firms accountable, SBA and contracting agencies have sent a message to the contracting community that there is no punishment or consequences for committing fraud or abusing the intent of the SDVOSB program. The Veterans Benefits, Health Care, and Information Technology Act— which took effect in June 2007—requires VA to maintain a database of SDVOSBs and Veteran Owned Small Businesses (VOSB) so contractor eligibility can be verified. It also requires the VA to determine whether SDVOSBs and VOSBs are indeed owned and controlled by veterans or service-disabled veterans in order to bid and receive VA contracts. Lastly, it requires VA set-aside and sole-source awards be made only to firms that have had their eligibility verified. Currently these controls are being developed to validate eligibility for awarding VA contracts only. At the time the act took effect, VA already maintained an online database, VetBiz Vendor Information Pages, referred to as VA’s VetBiz database, in which nearly 16,500 firms had self-certified as SDVOSBs or VOSBs. VA began accepting applications to validate eligibility for the SDVOSB program from firms registered in the database in May 2008, after it published guidelines for the verification program in an interim final rule. To date, VA’s validation process has focused on cross-referencing information submitted by owners with the agency’s own data to confirm majority ownership by veterans or service-disabled veterans. VA also expects to pilot procedures for more detailed reviews of selected firms to verify day-to-day control by a service-disabled or other veteran. According to VA officials, the agency will begin requiring its contracting officers to use the set-aside and sole-source award authorities only with verified SDVOSBs and VOSBs after the agency finalizes rule making related to implementation of these authorities. As of March 2009, these program controls have not been implemented. Until this new program becomes operational, existing VA policy states that firms only have to be registered in VA’s database to receive set-aside or sole-source awards. Currently there are no plans to implement these controls governmentwide. Additional controls that VA plans to develop include its own certification process for prospective SDVOSB businesses. The process is to include a review of documents, validation of the owner’s status as a service-disabled veteran, and potential site visits to businesses bidding on VA SDVOSB contracts. Requiring submission of documents to demonstrate ownership and control of an SDVOSB has some value as a deterrent—ownership documents could have prevented instances demonstrated in our case studies where the service-disabled veteran was receiving less than 51 percent of the profits. The most effective preventive controls involve the verification of information, such as verifying service-disabled status with the VA’s database and service-disabled veteran participation in the business through an unannounced site visit. Verification of service- disabled veteran status by using the VA’s database could have prevented the most egregious example of fraud where the owner was not even a service-disabled veteran. Although VA’s proposed system was not intended for governmentwide use, once the certification system is in place, all SDVOSBs wishing to do business with VA will have to be certified. The SDVOSB program does not have effective governmentwide fraud- prevention controls in place and is vulnerable to fraud and abuse. In just the 10 cases we show in this report, the consequences of this lack of control include approximately $100 million of sole source and set aside SDVOSB contracts to companies that have figured out how to manipulate the current system. Even the few companies identified as ineligible through the bid-protest system face no real consequences, in times being allowed by the government to complete the contract they obtained through fraudulent representations. Victims of the fraud and abuse in this program are the legitimate service-disabled veterans and their firms. SBA’s only requirement is a “self-certification” process, whereby SDVOSB concerns self-certify their eligibility. However, VA has begun to develop a process for certifying the eligibility of SDVOSB firms prior to contract award, but that process currently only relates to firms bidding on VA SDVOSB contracts. To address governmentwide vulnerabilities we identified, an effective governmentwide process is necessary to certify the eligibility of all firms bidding on SDVOSB contracts. To be effective, this process should include coordination between the different agencies with the authority to improve program controls, and some form of punishment, such as prosecution, suspension, and debarment of fraudulent individuals and their companies. Our work documents numerous cases where the current governmentwide self-certification system over the SDVOSB program has allowed ineligible firms to receive millions of dollars in federal contracts. However, through the Veterans Benefits, Health Care, and Information Technology Act of 2007, Congress required VA to maintain a database of SDVOSBs, determine whether SDVOSBs are indeed owned and controlled by service-disabled veterans, and required VA set-aside and sole-source awards be made only to firms that have had their eligibility verified. Currently, the only efforts to put fraud prevention controls in place are at VA through their VetBiz program, which applies only to VA contracts. Given that outside of VA there is no verification program in place for SDVOSB contracting, Congress should consider providing VA with the authority and resources necessary to expand its SDVOSB eligibility verification process to all contractors seeking to bid on SDVOSB contracts governmentwide. In an effort to minimize the potential for fraud and abuse in the Service- Disabled Veteran-Owned Small Business (SDVOSB) program and to assure that legitimate service-disabled veterans and their firms reap the benefits of this program, we recommend that the Administrator of the Small Business Administration (SBA) and the Secretary of the Veterans Affairs (VA) coordinate with the Office of Federal Procurement Policy (OFPP) to explore the feasibility of expanding the use of the VA VetBiz “verified” database governmentwide for purposes of validating all SDVOSB eligible firms for contracting and, requiring that all contractors who knowingly misrepresent their status as an SDVOSB be debarred for a reasonable period of time. In addition, we recommend the Administrator of SBA refer all SDVOSB firms that submit misrepresentations of their status to SBA’s Office of Inspector General for review and further investigation. SBA and VA provided general observations and technical comments in response to a draft of this report. They also responded directly to our recommendations. Their responses are included in appendixes II and III. We have made revisions based on the observations and technical comments where appropriate. In response to our recommendations, VA generally agreed with our two recommendations. In its response VA expressed that specific authority would be required for other agencies to be able to rely on the department’s VetBiz database and exclude firms from acquisitions if not “verified” in this database. We recognize that additional authority may be required for other federal agencies to rely on certifications made in VA’s VetBiz database, and have raised this issue in our matter for congressional consideration. In addition, VA stated that governmentwide applicability of authority for federal agencies, other than VA, to initiate debarment actions related to acquisitions for any firms that misrepresent information on the status of that firm as a small business owned and controlled by veterans or service-disabled veterans would require OFPP to seek a revision to the Federal Acquisition Regulation to add SDVOSB status misrepresentation as a cause for debarment. Our recommendation concerning coordination between VA, SBA, and OFPP addresses this concern. SBA’s response, provided by the Associate Administrator for Government Contracting and Business Development, generally agreed with our recommendations; however, in its general observations and specific responses to our recommendations, SBA stated that they have limited responsibilities over the SDVOSB program and questioned the efficacy of one of our recommendations. Specifically, SBA stated that agency contracting officers bear the primarily the responsibility for ensuring only eligible SDVOSB firms perform SDVOSB set aside and sole source contracts. SBA also stated it is only authorized to perform eligibility reviews in a bid protest situation, and contracting officers, not SBA, are responsible for taking appropriate action after a bid protest decision is made. The Associate Administrator maintained that SBA was under no legal obligation to create a protest process for the SDVOSB program, and that its only statutory obligation is to report on other agencies’ success in meeting SDVOSB contracting goals. In addition, SBA expressed that it was not obligated to institute any type of fraud prevention controls within the SDVOSB program. While we acknowledge that there are shared responsibilities between SBA and agency contracting officers when attempting to prevent fraud in the SDVOSB program, we do not agree that SBA does not have responsibility or authority to develop and implement a process to provide reasonable assurance that only eligible SDVOSB firms are awarded set aside and sole source SDVOSB contracts. Specifically, its statutory responsibilities date back to December 2003, when the Veterans Benefits Act of 2003 amended the Small Business Act to provide that “ules similar to the rules of paragraphs (5) and (6) of Section 8(m)” shall apply to the SDVOSB program. Indeed, in an interim final rule implementing that section of the act, SBA acknowledged that it is statutorily authorized to administer the SDVOSB program. Classified to section 637 of Title 15 of the United States Code, the provisions in section 8(m) of the Small Business Act specifically require the Administrator of SBA to establish procedures relating to the “filing, investigation, and disposition of any challenge of the eligibility of a small business concern … and the verification … of the accuracy of any certification made or information provided to the Administrator by a small business.” To implement these verification procedures, SBA is authorized to conduct program examinations, including random examinations, of any certification made or information provided to the Administrator. To carry out its verification responsibilities, SBA is authorized to obtain information from any federal agency or department that the Administrator determines is necessary. In the event that the Administrator determines that an entity has misrepresented its status, that entity is subject to certain penalties. Given this specific legislative authority and responsibility, we believe that, contrary to its assertion, SBA has an obligation to assist in development and implementation of a verification process for the SDVOSB program to provide reasonable assurance that sole source and set aside SDVOSB contracting opportunities are only provided to eligible SDVOSB firms. In response to our first recommendation, SBA questioned the efficacy of expanding the use of VA’s VetBiz verified database governmentwide to verify the eligibility of SDVOSB firms for the program because of the self- certification nature of the program. We believe that the expansion of VA’s verification process to all SDVOSB contractors attempting to bid on federal contracts would provide assurances that only eligible SDVOSB firms receive the benefits of the special contract opportunities established by the SDVOSB program. We believe this verification is especially important given that the current set of controls over the SDVOSB program consist primarily of self-certifications made by contractors, as SBA represented in their response to a draft of this report. In SBA’s other response to our first recommendation, SBA stated that it is the contracting officer’s responsibility to enforce or pursue suggested penalties for firms who knowingly misrepresent their status as an SDVOSB firm. As stated above, we agree that there is a shared responsibility for prevention, detection, and punishment of fraud and abuse in the program between agency contracting officers and the SBA. 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 date of this letter. We will then send copies of this report to interested congressional committees, the Administrator of SBA, the Secretary of VA, and other interested parties. The report will also be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-6722 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. To identify examples of firms that received Service-Disabled Veteran Owned Small Business (SDVOSB) contracts through fraudulent or abusive eligibility misrepresentations, we reviewed SDVOSB contract awards and protests filed with the Small Business Administration (SBA) since the programs inception in 2003. We also reviewed allegations of fraud and abuse sent to our fraud hotline, FraudNET. In addition, we posted inquiries on our Web page and on various veteran advocacy-groups’ Web pages and newsletters seeking information on fraud or abuse of the SDVOSB program. We received over 100 allegations of fraud and abuse in the SDVOSB program. From these sources, we selected 10 cases for further investigation based on a variety of factors, including facts and evidence provided in protests and allegations, whether a firm received multiple SDVOSB contracts, and whether a firm received other non- SDVOSB contracts. For the purposes of our investigation, we defined a case as one or more affiliated firms or joint ventures that obtained an SDVOSB contract. These cases include multiple firms owned by an individual or multiple firms affiliated through joint ventures and other types of partner agreements. To investigate these case studies, we interviewed firm owners and managers and reviewed relevant documentation, such as business filings and tax returns, to determine if SDVOSB eligibility requirements had been met. We also analyzed data from Federal Procurement Data System–Next Generation (FPDS-NG) for years 2003 through 2009 to identify SDVOSB contracts received by the firms since the program’s inception. Furthermore, we reviewed certifications made by firms, such as certifications about a firm’s size, SDVOSB status, and line of business, in the federal government’s Online Representations and Certifications Application (ORCA). To assess overall program vulnerabilities, we reviewed relevant laws and regulations governing the SDVOSB program. Our work was not designed to identify all firms that misrepresent themselves as SDVOSBs or commit fraudulent or abusive activity in the SDVOSB program. Our work also did not attempt to identify fraud and abuse in SDVOSB subcontracts. Our work focused on determining whether selected firms met program eligibility requirements. In addition, our 10 case-study examples cannot be projected to the overall population of SDVOSB firms. To determine whether the program has effective fraud-prevention controls in place, we interviewed agency officials from SBA, the Department of Veterans Affairs (VA), and various agency contracting officials about their responsibility over the program and controls currently in place to prevent, detect, and monitor fraud and abuse. We also reviewed information from the Federal Register—The President’s Executive Order, the Federal Acquisition Regulation (FAR), United States Code, and SBA guidance on government contracting programs to determine the extent to which SBA and awarding agencies are required to verify contractor eligibility for SDVOSB contracts. Furthermore, we compared current controls in the SDVOSB program to a fraud-prevention model developed by GAO and utilized in prior small business contracting investigations. In addition to the individual named above, Gary Bianchi, Bruce Causseaux, Randy Cole, Victoria De Leon, Ken Hill, John Ledford, Deanna Lee, Barbara Lewis, Vicki McClure, Jonathan Meyer, Andrew O’Connell, George Ogilvie, Gloria Proa, Barry Shillito, and Abby Volk also provided assistance on this report. | The Service-Disabled Veteran-Owned Small Business (SDVOSB) program is intended to provide federal contracting opportunities to qualified firms. In fiscal year 2007, the Small Business Administration (SBA) reported $4 billion in governmentwide sole source and set aside SDVOSB contract awards. Given the amount of federal contract dollars being awarded to SDVOSB firms, GAO was asked to determine (1) whether cases of fraud and abuse exist within the SDVOSB program, and (2) whether the program has effective fraud-prevention controls in place. To identify whether cases exist, GAO reviewed SDVOSB contract awards and protests since 2003, and complaints sent to our fraud hotline. GAO defined a case as one or more affiliated firms who were awarded one or more SDVOSB contracts. To assess fraud-prevention controls, GAO reviewed laws and regulations and conducted interviews with SBA and Department of Veterans Affairs (VA) officials. GAO did not attempt to project the extent of fraud and abuse in the program. GAO found that the SDVOSB program is vulnerable to fraud and abuse, which could result in legitimate service-disabled veterans' firms losing contracts to ineligible firms. The 10 case-study firms identified in this report received approximately $100 million from SDVOSB contracts through fraud or abuse of the program, or both. For example, contracts for Hurricane Katrina trailer maintenance were awarded to a firm whose owner was not a service-disabled veteran. GAO also found SDVOSB companies used as a pass-through for large, sometimes multinational corporations. In another case a full-time federal contract employee at MacDill Air Force Base set up a SDVOSB company that passed a $900,000 furniture contract on to a company where his wife worked, which passed the work to a furniture manufacturer that actually delivered and installed the furniture. GAO found that the government does not have effective fraud-prevention controls in place for the SDVOSB program. Specifically, SBA and agencies awarding SDVOSB contracts do not have processes in place to validate a firm's eligibility for the program prior to bid submission. SBA and contracting agencies also currently do not have a database of individuals that are service-disabled veterans, a key eligibility requirement for the program. According to VA, it is developing a database, called VetBiz, of validated SDVOSBs, but currently it is only used for contracting by the VA. SBA's bid-protest process is the only governmentwide control over the SDVOSB program. However, although ineligible firms have been identified through bid protests, firms found ineligible do not face real consequences, can be allowed to complete the contracts received, and are not suspended or debarred. |
FinCEN is a relatively small agency with a fiscal year 1997 budget of about $23 million and an onboard staffing level (as of December 1997) of 162 employees. FinCEN does not initiate or carry out any investigations on its own. Rather, by serving as a central source for financial intelligence information and analysis, FinCEN supports the investigative and prosecutive efforts of numerous law enforcement authorities. These include federal agencies, such as the Federal Bureau of Investigation (FBI), the Drug Enforcement Administration (DEA), IRS, and the Customs Service; state police departments and attorney general offices; local police departments and district attorney offices; and others, including applicable foreign authorities. In supporting these law enforcement entities, FinCEN administers the largest financial transaction reporting system in the world, which is based on recordkeeping and reporting requirements mandated or authorized under the BSA, as amended. To supplement the BSA-related financial database, FinCEN procures access to a variety of commercially maintained databases, such as Autotrack and Lexis/Nexis, which can be used to locate individuals, determine asset ownership, and establish links among individuals, businesses, and assets. Moreover, through specific written agreements, FinCEN can access the investigative-case databases of various federal law enforcement agencies (e.g., DEA and the Customs Service). Further, FinCEN maintains an internal database of the cases or requests it has supported and the related products it has generated. This internal database enables FinCEN to help law enforcement agencies coordinate their efforts. Appendix II contains additional information about the databases used by FinCEN. Using these financial, commercial, and law enforcement databases, FinCEN provides five principal types of support. Historically, tactical support in response to law enforcement requests for data and analysis has been a mainstay of FinCEN’s various products and services. Tactical products can be database extracts on a single subject or detailed, in-depth analyses of the financial aspects of major criminal organizations. According to a FinCEN official, routine requests for tactical support are handled on a first-come, first-served basis, with federal, state, and local requests treated equally. The official added that FinCEN can respond to tactical requests requiring immediate attention (e.g., terrorism cases) within 24 hours and sometimes as quickly as 2 to 3 hours. At times, FinCEN may also provide off-site support to investigative teams or task forces working complex cases. Further, FinCEN provides tactical support to assist other types of cases, including classified, terrorism, and grand-jury investigations. As the name implies, rather than focusing on individual cases, FinCEN’s strategic support is designed to provide federal and state law enforcement officials with intelligence analyses and reports on longer term or more broadly scoped topics. An example is the analysis of trends, patterns, and fluctuations in currency flows to and from Federal Reserve banks to determine any money-laundering implications. Also, as part of its strategic efforts, FinCEN has developed a “case lab” unit to assist law enforcement agencies in addressing large-scale money-laundering activity, such as that conducted by drug cartels. According to FinCEN’s Strategic Plan (1997-2002), the agency’s overriding objective over the next few years will be to construct a viable model for determining the magnitude of money laundering. FinCEN’s artificial intelligence support is designed to help identify subjects (i.e., individuals and businesses) possibly involved in money laundering and other types of financial crimes. This support relies on computerized technology designed to identify suspicious transactions by reviewing and correlating (i.e., grouping or linking) currency transaction reports required by the BSA. FinCEN has used this technology to self-generate investigative leads as well as to respond to specific requests. In the former instances, FinCEN’s policy is to forward its results to the appropriate law enforcement agency for consideration. A fourth type of support is on-site tactical self-help (called a “platform concept”), whereby FinCEN encourages and trains agents and analysts from federal law enforcement and regulatory agencies to access the BSA financial database and commercial databases (accessible at FinCEN) to conduct their own research and analysis. FinCEN provides office space and database access for these personnel, who use FinCEN resources on a full- or part-time basis and work only on cases for their respective agencies. Most platform users do not have direct access to law enforcement databases or suspicious activity reports. A FinCEN official explained that (1) interagency agreements usually prohibit platform users from accessing law enforcement databases and (2) most federal agencies that use suspicious activity reports have their own access to the reports. When requested, a FinCEN employee will check these databases for platform users. Finally, the fifth type of support is off-site tactical self-help (called “Project Gateway”)—a joint effort between FinCEN and the IRS Detroit Computing Center, which receives and processes financial information reported under the BSA (e.g., currency transaction reports). Using custom-designed software, designated state and local law enforcement officials have direct, on-line electronic access to BSA records, including suspicious activity reports. These designated officials also conduct Gateway queries for other law enforcement agencies in their state and can also request information from the Autotrack commercial database. According to a FinCEN official, Gateway users have direct access to suspicious activity reports primarily because state and local law enforcement agencies do not have their own access to the reports. Further, through Gateway, FinCEN can “alert” or notify one agency that another agency has or had an interest in the same investigative subject (individual or entity). Each state’s access to Gateway is free of charge (except for telephone charges). While the types of products and services offered by FinCEN have expanded, the volume of tactical, strategic, and artificial intelligence reports has decreased over the past several years. While the reasons for the decreases varied, one significant factor cited by FinCEN was that it assigned fewer staff to support these activities. Since 1995, law enforcement officials have increased their use of FinCEN’s platform concept and Project Gateway to conduct their own research and analysis. FinCEN has been providing tactical support to the law enforcement community since the agency was established in 1990. As figure 1 shows, the volume of law enforcement requests to FinCEN for tactical support increased significantly from calendar year 1991—the first full year of operation—to 1995. However, from calendar year 1995 to 1997, the volume of requests decreased by approximately 38 percent. According to a FinCEN official, one primary reason for the decrease in the number of tactical requests was that, in recent years, FinCEN stopped accepting certain types of requests—such as requests involving background checks for employment or security clearance purposes—that did not directly support law enforcement functions. For example, FinCEN stopped supporting certain IRS and U.S. Postal Inspection Service investigations in 1996. As a result, FinCEN’s 1997 workload was reduced by approximately 3,300 cases. The official told us that FinCEN’s expertise is not needed to conduct these types of inquiries and that, as a result, FinCEN has made efforts to encourage agencies to conduct these types of research on their own or by using FinCEN’s platform concept or Project Gateway, as applicable. The official told us that FinCEN stopped accepting certain types of requests to compensate for reductions in staff assigned to provide tactical support. As figure 2 shows, from October 1994 to October 1997, the total number of staff (federal and contractor) responding to requests for tactical investigative support decreased from 77 to 40. Of this total, the number of federal staff (i.e., FinCEN employees and detailees from other agencies) decreased from 53 to 19. According to the FinCEN official, although the agency’s overall staff levels have remained fairly constant over the years, many tactical staff have been reassigned to support FinCEN’s expanded mission, which includes (1) responsibility for promulgating BSA regulations and (2) a leadership role in international efforts to combat money laundering. The official also told us that several tactical staff were reassigned in March 1997 to support FinCEN’s new Office of Research and Analysis. According to FinCEN officials, FinCEN also began to contact requesters in 1995 to determine specifically what type of data and analysis was needed. These contacts included determining which databases had already been researched (outside of FinCEN), which databases FinCEN should research, and what type of report should be provided (e.g., a database extract or an analytical report). The officials told us that, before 1995, FinCEN’s tactical support staff would generally research all of the financial, commercial, and law enforcement databases the agency could access. Further, over the past 2 years, an increasing number of tactical reports consisted of database extracts versus reports that contained detailed analysis. According to FinCEN officials, the percentage of tactical products that contained detailed analysis decreased from approximately 25 percent in calendar year 1996 to about 10 percent during calendar year 1997. According to FinCEN’s Strategic Plan (1997-2002), the agency intends to provide better tactical support to its customers by increasing the number of FinCEN analysts capable of performing complex research and analysis. As with tactical support, FinCEN has been providing strategic support to the law enforcement community since 1990. As shown in figure 3, the volume of strategic reports issued by FinCEN has decreased from a high of 23 in 1992 to 1 in 1997. According to a FinCEN official, fewer strategic reports were generated in recent years because (1) FinCEN assigned fewer staff to support strategic projects and (2) the products often did not provide the type of information law enforcement officials needed to do their work. To increase its emphasis on strategic support and to improve the usefulness of strategic products, FinCEN created a new Office of Research and Analysis in March 1997. Although FinCEN initially planned to staff this office with 23 analysts, only 14 staff were on board as of November 1997. Before this reorganization, FinCEN’s Strategic Analysis Division had five to seven analysts performing strategic analysis. Additional perspectives about the usefulness of FinCEN’s strategic products and initiatives are discussed later in this report. Since March 1993, FinCEN has been using its artificial intelligence targeting system to help the law enforcement community identify subjects possibly involved in money laundering and other financial crimes. As shown in table 1, the volume of products generated by FinCEN from artificial intelligence analyses has decreased significantly over the past 2 fiscal years. FinCEN officials provided several reasons for the decrease in artificial intelligence products. First, they said the artificial intelligence system was redesigned for fiscal year 1996 to focus on more complex cases, which they defined by the number of subjects per case. FinCEN data indicated there was an average of 2.5 subjects per case in fiscal year 1995 versus an average of 16.2 subjects per case in fiscal year 1996. Second, they said that the majority of the artificial intelligence products generated in fiscal years 1993 to 1995 were self-initiated, and that FinCEN self-initiated very few artificial intelligence products in fiscal years 1996 and 1997, in part because federal law enforcement agencies reportedly did not take any action on many of the former products. Third, they said that FinCEN reduced the number of full-time analysts working on artificial intelligence cases from three in fiscal year 1995 to the equivalent of one-half full-time analyst in fiscal year 1997. In an effort to increase the number and usefulness of investigative leads and products generated, FinCEN assigned three full-time staff to support artificial intelligence cases in early fiscal year 1998. In an effort to expand the availability and use of its tactical support resources, FinCEN developed the platform concept in 1994, offering employees of federal law enforcement agencies space at FinCEN and access to BSA financial data and commercial databases so they could conduct their own research and analysis. As table 2 shows, law enforcement agencies have increased their use of platforms. As of April 1998, 51 personnel representing 31 agencies were using platforms on a full- or part-time basis at FinCEN. According to data provided by FinCEN, platform users supported 1,477 investigative cases during fiscal year 1997. These data show that the most frequent platform users during this period were the Defense Criminal Investigative Service; the Capitol Police; the Bureau of Alcohol, Tobacco and Firearms; and the Washington/Baltimore HIDTA. Also in 1994, FinCEN initiated Project Gateway to provide state and local law enforcement agencies with remote access to BSA financial data. In 1997, FinCEN expanded Gateway’s remote research capability by providing states with (1) access to suspicious activity reports to support ongoing investigations; (2) the capability to identify potential subjects (i.e., new leads) by proactively searching BSA records, including currency transaction reports and suspicious activity reports (generated within the users’ own state); and (3) access to information from one commercial database (i.e., Autotrack) via Gateway’s bulletin board system. As shown in figure 4, the states’ use of Gateway has steadily increased since 1995—the first full year when all 50 states had access. According to FinCEN data, the most frequent Gateway users during fiscal year 1997 were California, Illinois, Pennsylvania, and Texas. Wyoming was the only state that did not use Gateway during this period. According to FinCEN’s records, the 57,663 Gateway queries in fiscal year 1997 supported 3,327 law enforcement cases. Approximately 84 percent of the BSA reports reviewed during these queries were currency transaction reports. Also, 21 states made a total of 3,440 automated queries of Autotrack during fiscal year 1997. Further, the number of times FinCEN used Gateway to alert or notify one agency that another agency had an interest in the same investigative subject (individual or entity) increased from 356 in fiscal year 1996 to 920 in fiscal year 1997. Responses to the surveys we sent to officials from 31 federal agencies and 15 states indicated that FinCEN’s tactical products have been useful in identifying, developing, and prosecuting cases involving money laundering and other financial crimes. Also, FinCEN has taken steps to address concerns with and improve the usefulness of its strategic and artificial intelligence products, such as attempting to “partner” with the law enforcement community in developing these products. Further, according to the federal and state officials we interviewed, the platform concept and Project Gateway are excellent tools for helping agencies combat money laundering and other financial crimes. To assess the usefulness of FinCEN’s tactical support, we surveyed by mail a stratified, statistical sample of 352 officials from 31 federal agencies and a simple random sample of 95 officials from 15 states who requested tactical support from April 1996 through March 1997 and to whom FinCEN had responded before August 1997. Based on the results of these surveys, we estimated that 97 percent of all requesters from the 31 federal agencies found that, overall, all types of products they received (i.e., database extracts, analytical reports, and responses to expedited requests) were useful in supporting their investigations. Similarly, we estimated that 98 percent of the requesters from the 15 states found that, overall, the products they received were useful. The survey results indicated that FinCEN’s tactical products assisted law enforcement investigations in various ways. As shown in figure 5, we estimated that the majority of the requesters from the 31 federal agencies found that the tactical products (1) verified or confirmed information already known, (2) saved them time and money, (3) provided investigative leads that were previously unknown, or (4) identified assets that were previously unknown. We also estimated that the majority of the requesters from the 15 states found that the tactical products assisted their investigations in various ways (see app. IV for additional details on state responses). Additionally, on the basis of the survey responses, we estimated that 84 percent of the federal officials received products that responded to their requests in a complete and thorough manner. We estimated that another 14 percent found that some, but not all, of the products addressed their requests in a complete and thorough manner. Also, we estimated that 81 percent of the federal officials found the products to be “very” (29 percent) or “somewhat” (52 percent) timely, and an estimated 97 percent would “definitely” (78 percent) or “probably” (19 percent) request tactical support from FinCEN in the future. Although we estimated that 81 percent of the requesters from the 31 federal agencies found FinCEN’s tactical products timely, the most frequent comment or suggestion regarding how FinCEN’s tactical products could be improved concerned the timeliness of responses. We estimated that 17 percent of the federal officials who received tactical products would suggest that FinCEN should respond to requests in a more timely manner. Although the number of requests received by FinCEN decreased during fiscal year 1997 and FinCEN has taken steps to better focus the scope of each request, the average turnaround time—i.e., the number of calendar days from when a request is received at FinCEN to the day the product is mailed to the requester—for routine requests increased to 2 to 3 months during most of fiscal year 1997. According to a FinCEN official, the primary reason for this lengthy turnaround time was because many staff responding to tactical requests were reassigned in March 1997 to support FinCEN’s new Office of Research and Analysis. Consequently, the number of FinCEN staff supporting tactical requests decreased from 19 in October 1996 to as few as 7 during the summer of 1997 before increasing back to 19 in October 1997. The official told us the average turnaround time for routine requests was reduced to about 3 weeks in September 1997—about 6 months after the sample period used for our questionnaire—by authorizing overtime and temporarily having more staff do casework. He noted that FinCEN had 22 tactical staff on board as of February 1998, which should help prevent backlogs and adverse turnaround times in the future. He added that FinCEN has also authorized overtime to address any backlogs that may occur. According to a FinCEN official, the feedback FinCEN received from the law enforcement community indicated that many of the strategic reports FinCEN issued from 1990 to 1996 were of limited use to law enforcement agencies, regulators, and banking institutions. He noted that many law enforcement officials told FinCEN the reports were informative but that many of the reports were not effective or useful in supporting investigative efforts and, some of them did little more than repackage what law enforcement officials had previously reported to FinCEN. The official also told us that, in the past, FinCEN had not taken an active partnership role with law enforcement agencies, regulators, and financial institutions to help make the products more useful to them. In response to law enforcement’s observations regarding the usefulness of FinCEN’s strategic products, FinCEN reorganized and reallocated its resources in March 1997 to create a new Office of Research and Analysis. This office plans to generate products that help agencies improve their money-laundering detection and prevention programs, while providing case-specific support to the law enforcement and regulatory communities. For example, according to a FinCEN official, since mid-1997, FinCEN has analyzed suspicious activity reports and provided selected federal field offices with target lists of potential suspects. He added that this office also intends to take an active partnership role with law enforcement agencies, regulators, and financial institutions in developing future strategic products. To assess the usefulness of strategic products, we interviewed officials who received state-specific money-laundering threat assessment reports in 1996 or 1997—Georgia (April 1996), Louisiana (April 1996), and Florida (June 1997). Generally, FinCEN’s threat assessment reports focus on specific industries, businesses, financial entities, and geographic locations exhibiting unusual currency movements that may be indicative of money-laundering activity. According to officials from Georgia and Louisiana, the threat assessment reports FinCEN prepared for their states were informative but, at the time of our review, had resulted in limited or no investigative actions. However, according to a Louisiana state official, FinCEN’s 1996 report contributed to the state enacting comprehensive money-laundering legislation and expanding its statutory wiretap authority. The June 1997 South Florida Money Laundering Threat Assessment—a joint effort between FinCEN and the South Florida HIDTA Task Force—was the first partnership effort and first report issued by the Office of Research and Analysis. According to a HIDTA official in Florida, as of January 1998, this report had not led to any new investigations. However, he told us the report provides information that will help the law enforcement community in the region reallocate its resources. He added that the partnership meetings associated with the report have been useful in bringing together officials from the law enforcement, regulatory, and banking communities to discuss money-laundering issues. To assess the usefulness of FinCEN’s artificial intelligence products, we attempted to contact 24 law enforcement officials who, according to FinCEN’s records, received the 85 artificial intelligence reports FinCEN generated from April 1996 to March 1997. The 13 officials we eventually were able to contact received 51 (60 percent) of the 85 artificial intelligence products. The 51 products supported 15 separate cases. According to these officials, the information contained in FinCEN’s artificial intelligence products was useful in various ways. For example, in reference to the 15 cases, the products identified potential subjects that were previously unknown (9 cases), provided investigative leads that were previously unknown (11 cases), identified assets that were previously unknown (6 cases), and verified or confirmed information already known (12 cases). According to the 13 officials, the information contained in the artificial intelligence products led to five preliminary investigations, and three new cases were opened. One official told us the artificial intelligence analyses compiled by FinCEN provided several investigative leads, which indicated criminal activity involving people and/or businesses located nationally and internationally. Three of the officials told us they did not use the products at all. Overall, 12 of the 13 officials indicated they would definitely or probably request additional products in the future. In an effort to provide artificial intelligence products that are more useful to the relevant agencies, FinCEN is attempting to “partner” with the law enforcement community. For example, in November 1997, FinCEN analysts began working directly with agents from U.S. Customs Service field offices to help them generate, understand, and use artificial intelligence products. According to a FinCEN official, the agency intends to provide continuing support and updates to these agents. This initiative has not been in effect a sufficient period of time to assess its usefulness. As shown earlier in table 2, both the number of agencies using platforms and the number of cases supported increased significantly from 1995 to 1997. To assess the usefulness of FinCEN’s platform concept, we interviewed officials from three agencies that were among the top four user agencies in 1997—the Defense Criminal Investigative Service; the Bureau of Alcohol, Tobacco and Firearms; and the Washington/Baltimore HIDTA. According to FinCEN’s records, these agencies accounted for 971 (66 percent) of the 1,477 investigative cases that were supported by platforms in 1997. According to these officials, access to financial and commercial databases using FinCEN’s platforms is an important and useful tool in helping their respective agencies initiate cases and conduct investigations. For example, a Defense Criminal Investigative Service analyst told us she uses a platform to support every new case initiated by the agency and, at the request of field offices, prepares detailed research reports. The analyst commented that she would like FinCEN to provide access to additional sources of data, such as suspicious activity reports and law enforcement databases via platforms. Also, an official from the Washington/Baltimore HIDTA told us that use of platforms is the HIDTA’s primary means for obtaining commercial data. The official noted that having access to platforms has enabled analysts to respond to requests for information in a timely manner. According to a FinCEN official, providing agencies with access to financial and commercial data via platforms should allow FinCEN to focus its efforts on more complicated cases that require FinCEN’s expertise and analytical support. As shown earlier in figure 4, 49 states used the Gateway system in fiscal year 1997 to make a total of 57,663 queries for BSA financial data. To assess the usefulness of the Gateway system, we interviewed the state coordinator for each of the four states that made the most Gateway queries in fiscal year 1997—California, Illinois, Pennsylvania, and Texas. According FinCEN data, these states made 22,876 (or 40 percent) of the total 57,663 Gateway queries during this period. According to these officials, remote access to BSA financial data via the Gateway system is useful for helping their states combat money laundering and other financial crimes. The officials also told us Gateway’s expanded capabilities were useful, including (1) remote access to commercial data and (2) proactive searches of BSA financial records, including currency transaction reports and suspicious activity reports, to generate targets in their state for possible money laundering and other financial crimes investigations. In August 1997, FinCEN began providing additional agencies in some states with direct access to the Gateway system. According to FinCEN’s records, 310 state law enforcement officials had Gateway user accounts as of the end of fiscal year 1997. Also, selected law enforcement officials from DEA have been granted access to Gateway. According to a FinCEN official, other federal agencies can join Project Gateway if they agree to (1) identify the case file under which Gateway queries are run, (2) reasonably share case information with other agencies, and (3) execute appropriate legal agreements. He added that the case information is needed to help FinCEN assist Gateway users in coordinating their investigative efforts. According to a FinCEN official, in 1998, the agency intends to expand Gateway’s capabilities to include additional commercial databases and, when available, data on money services businesses. Our analysis of FinCEN’s records revealed that some federal field offices, states, and HIDTAs requested little or no tactical support from FinCEN during the period we reviewed, April 1996 to March 1997. To determine the reasons why this support was not requested, we surveyed the U.S. investigative units of 129 Treasury and Justice field offices and each of the 22 HIDTAs that had been designated as of December 1997. We also interviewed officials from 9 of the 10 states that, according to FinCEN’s records, made either one or no requests for FinCEN’s tactical support from April 1996 to March 1997. In summary, respondents from many of the federal field offices, states, and HIDTAs surveyed said they have in-house capabilities or use sources other than FinCEN for tactical support. Also, respondents from some federal field offices said that agents and investigators are not aware of the products and services offered by FinCEN. From our surveys and interviews, the most frequently mentioned reason why many of the federal field offices, states, and HIDTAs requested few, if any, tactical products from FinCEN was the availability and use of in-house capabilities and sources other than FinCEN for financial, commercial, and law enforcement data and analysis. Dissatisfaction with FinCEN’s tactical products was rarely cited as a reason for the limited use of FinCEN. Of the IRS, Customs, FBI, and DEA field offices that responded to our survey, 6 percent noted that they did not request FinCEN’s tactical support “over the past year.” An additional 42 percent noted that they requested tactical support 5 times or fewer during this period (see app. V, question 1). Table 3 shows the various reasons why FinCEN was not the primary source for financial, commercial, or law enforcement data or analysis for the federal field offices. Also, according to the survey responses, the IRS and Customs investigative field offices had direct access to BSA financial databases, while the FBI and DEA offices primarily used grand jury subpoenas to obtain financial data. Almost all of the field offices noted they had access to one or more commercial databases. Most of the offices also indicated they had access to a variety of sources for law enforcement information outside of FinCEN, such as the National Crime Information Center and the National Law Enforcement Telecommunications System. Also, several offices noted their office and/or agency had staff and other resources to provide analytical support for money laundering and other financial crime investigations. Several offices indicated that they had access to intelligence or investigative support centers (other than FinCEN) that provide financial, commercial, and/or law enforcement data and analysis. These sources include, for example, the FBI’s Savannah (Georgia) and Butte (Montana) Information Technology Centers, the South Florida Investigative Support Center (part of the South Florida HIDTA), the National Drug Intelligence Center (Johnstown, Pennsylvania), and the El Paso Intelligence Center (El Paso, Texas). In commenting on a draft of this report, Department of Justice officials noted that while many agencies have in-house capabilities or use sources other than FinCEN for financial, commercial, and law enforcement data and analysis, FinCEN still plays an important role in facilitating the sharing of financial information and is a leader in the financial database field. Officials we interviewed from the nine states that made either one or no requests for FinCEN’s tactical support from April 1996 to March 1997 cited several reasons for not requesting more support. These reasons include (1) the lack of authority to conduct investigations into money laundering; (2) the lack of resources to pursue financial crimes; and (3) the use of other sources of information, such as FinCEN’s Gateway system and direct access to commercial databases. Sixteen of the 22 HIDTAs surveyed responded to our questionnaire. Survey results showed that 4 of the 16 respondents were designated as HIDTAs in 1997 and had not performed the type of money laundering or financial crime investigations that FinCEN supports. Of the 12 HIDTAs that were performing such investigations, 8 noted that (1) the HIDTA had all or most of the capabilities it needed in-house or (2) it was easier to access data or get analytical support from other sources. Of these 10 respondents, 6 noted that other sources were more timely than FinCEN and 2 (of the 6) indicated that the HIDTA was not aware of the products and services provided by FinCEN. Our survey responses and interviews indicated another reason for the limited use of FinCEN’s tactical support. That is, many agents and investigators located in federal field offices were not aware of the products and services offered by FinCEN. For example, as shown in table 3, 28 (24 percent) of the 116 federal field offices that responded to our survey noted that their agents and investigators were not aware of FinCEN’s products and services. FinCEN officials told us the agency has informed federal and state officials about its products and services on several occasions. For example, in mid-1996, FinCEN initiated a three-phased approach to inform and obtain feedback from Treasury Department officials. The three phases were (1) telephone surveys; (2) on-site visits with U.S. Customs Service; Bureau of Alcohol, Tobacco and Firearms; and IRS field offices in six cities and the U.S. Customs Service in a seventh city; and (3) training on how to use FinCEN resources at events such as Special-Agent-in-Charge meetings, internal training, and new agent training. One Treasury Department component, the U.S. Secret Service, declined FinCEN’s offer to participate in the outreach program. FinCEN followed this effort with telephone or fax surveys to approximately 100 officials from other federal agencies. According to FinCEN’s records, the agency’s tactical staff also provided information about FinCEN at meetings, training events, or conferences 51 times in fiscal year 1996 and 48 times in fiscal year 1997. This included presentations to or meetings with state police departments, other intelligence centers (e.g., the El Paso Intelligence Center and the National Drug Intelligence Center), and federal agencies’ asset forfeiture personnel. Also, according to FinCEN’s records, from February to October 1997, FinCEN officials visited 24 states to brief state officials about FinCEN’s support. FinCEN drew several conclusions from its 1996 efforts to inform and obtain feedback from federal agency officials about its products and services. Specifically, FinCEN concluded that it should seriously consider (1) providing potential requesters with a one-page summary of FinCEN’s capabilities, missions, and programs and (2) advising potential customers about the capabilities of new or enhanced commercial and law enforcement databases. In March 1998, FinCEN updated its site on the Internet to include information on the types of support it provides to the law enforcement community and to offer viewers the opportunity to send comments or questions via electronic mail. Also, in his April 1, 1998, statement before the House Banking and Financial Services’ Subcommittee on General Oversight and Investigation, the Treasury Assistant Secretary (Enforcement) said that FinCEN will work to further communicate its capabilities to its potential customers. While FinCEN has taken several actions to better ensure that potential customers are aware of the availability of FinCEN’s various products and services, it has not developed written criteria or guidance specifying the types of cases that FinCEN can best support. According to a FinCEN official, tactical support is generally best suited for (1) cases that involve large criminal organizations, are of significance to the jurisdiction, or require expert financial analysis and (2) cases where support is not available from in-house sources (e.g., requests for BSA data). The official told us that for cases or investigations that do not require FinCEN’s expertise or analysis, other sources of data and analysis can be used, including FinCEN platform concept and Project Gateway. He also mentioned that FinCEN staff are available to train agencies to use their own resources to conduct research and analysis. The FinCEN official added that, to his knowledge, FinCEN has never turned down a request to support an ongoing law enforcement investigation that required FinCEN’s capabilities. FinCEN has established several controls to reduce the risk of unauthorized access to and use of sensitive information obtained via Project Gateway.As a primary set of controls, FinCEN has established policies and procedures that states are to follow in accessing and using Gateway information. However, FinCEN has not evaluated the states’ compliance with these controls. Although FinCEN has taken some steps to review Gateway queries, this review does not include a direct assessment of the states’ controls over Gateway information. FinCEN’s Gateway system provides designated state and local agency officials with direct, on-line access to sensitive BSA information. For example, these officials have direct access to currency transaction reports that reflect transactions with financial institutions that exceed $10,000. Gateway users also have direct access to suspicious activity reports that are filed by banks and other depository institutions when they know, suspect, or have reason to suspect that a crime has occurred or that a transaction is suspicious. Security management of the Gateway system is a joint effort between the IRS Detroit Computing Center and FinCEN. The Detroit Computing Center is responsible for ensuring that the host system that contains the BSA data is secured to the level required by the Treasury Department’s policy for systems that process sensitive data. The Center’s Project Gateway Users Guide specifies additional access controls to BSA information, including (1) password requirements and (2) disconnecting users from the Gateway host computer after 5 minutes of inactivity. The Center also records Gateway user activity and provides this information to FinCEN. FinCEN’s Gateway Security Plan specifies additional controls designed to ensure that BSA information and other sensitive data, including information and data transmitted to FinCEN and the Detroit Computing Center from the states, are safeguarded or protected appropriately by Gateway users. Among other things, this plan presents policies and procedures that designated state officials are to follow in (1) verifying requesters’ validity and identity, (2) determining that requests are made pursuant to bona fide criminal investigations or other authorized purposes, and (3) maintaining records of Gateway requests. A basic internal control objective for any management information system is to protect data and programs from unauthorized access, modification, and disclosure. Organizations can help protect their data by establishing controls to prevent unauthorized access and by monitoring the access activities of individuals to help identify any significant problems and deter individuals from inappropriate and unauthorized activities. According to our recent study of information security management best practices,evaluating the effectiveness of controls and preparing summary reports for management attention are important elements in ensuring that controls are operating as intended. FinCEN has not evaluated the states’ compliance with specified policies and procedures designed to control access to and use of information obtained through the Gateway system. The Gateway Security Plan contains provisions for FinCEN officials to inspect states’ records, including FinCEN staff visits to the states, to determine if the Gateway system and the BSA data have been misused. However, although Project Gateway has been operational since 1994, FinCEN had not inspected any states’ records, scheduled any FinCEN staff visits to the states, or developed any audit plans for on-site evaluations of the states’ compliance with applicable policies and procedures, as of May 1998. However, FinCEN has taken some steps—based on limited sampling and self-reporting questionnaires—to determine if selected Gateway cases were done for official purposes and were requested by authorized individuals. That is, in October 1997, FinCEN screened fiscal year 1997 user data recorded by the IRS Detroit Computing Center to identify cases that appeared to be irregular, such as those requested by agencies that do not usually conduct criminal investigations. In doing so, FinCEN identified 76 cases from 23 states that appeared to be irregular. To obtain more information about these 76 cases, and 98 additional cases that were randomly selected from 39 states, FinCEN distributed questionnaires to applicable state and local agency officials. Nine agencies did not respond to the questionnaires. According to FinCEN’s audit report dated May 15, 1998, the self-reporting questionnaires indicated that the Gateway cases sampled, for which responses were received, were made in connection with a criminal investigation and were requested by an authorized law enforcement official. However, the audit report indicated that 13 agencies did not follow the proper procedures for redissemination of Gateway information. According to a FinCEN official, while they proved useful, the self-reporting questionnaires do not constitute a direct assessment of state and local compliance with controls over Gateway information. FinCEN and IRS plan to increase security of the Gateway telecommunications network by January 1999. Even with these improvements, control over access to BSA information at state locations will still largely depend on the states’ verification that individual user requests for information have been properly authorized. Therefore, evaluating the states’ compliance with applicable policies and procedures will remain an important element in ensuring that controls are operating as intended. In an effort to enhance its investigative support, FinCEN is seeking approval from IRS to provide IRS Form 8300 information (Report of Cash Payments Over $10,000 Received in a Trade or Business) to the law enforcement community. Several federal and state law enforcement officials we interviewed also told us FinCEN could enhance its investigative assistance by providing access to selected information from these forms. Although IRS has taken steps to implement 1996 legislation authorizing the Secretary of the Treasury to disclose Form 8300 information to federal, state, and local agencies, several issues must still be resolved before FinCEN can obtain approval from IRS to disseminate this information. Section 6050I of the Internal Revenue Code, in general, requires any person engaged in a trade or business (other than financial institutions required to report under the BSA) who receives more than $10,000 in cash, in a single transaction or a series of related transactions, to file a report with the Secretary of the Treasury. The Secretary of the Treasury requires this report to be filed on an IRS Form 8300. The form provides a paper trail that can help identify assets acquired with illegal funds, as well as help identify a lifestyle that is not commensurate with an individual’s known sources of legitimate income. The Form 8300 is designed to identify cash transactions in excess of $10,000 between retail merchants (e.g., automobile dealers, boat dealers, furriers, etc.) and their customers, much like the BSA currency transaction report is designed to identify deposits, withdrawals, exchanges, or other payments in excess of $10,000 between financial institutions and their customers. The Form 8300 and currency transaction report provide very similar information (e.g., name, address, Social Security number, and amount of the transaction). The Form 8300 was originally created and is still used to assist IRS in identifying individuals who might be attempting to evade taxes. Given that the requirement for filing the Form 8300 is contained in the Internal Revenue Code, Form 8300 information is tax return information and, as such, is confidential and may not be disclosed to any persons or used in any manner not authorized by the Internal Revenue Code. Authorized disclosures of Form 8300 information are subject to the procedural and recordkeeping requirements of Internal Revenue Code section 6103. For example, section 6103(p)(4)(E) requires recipient agencies to file a report with the Secretary of the Treasury that describes the procedures established and utilized by the agency for ensuring the confidentiality of returns or return information. IRS requires that agencies requesting return information, such as Form 8300 information, file a “Safeguard Procedures Report,” and that the report be approved by IRS. In comparison, the currency transaction report and other BSA information are used to target large currency transactions that may be suspicious, support investigative cases, assist in tax examination and collection, and support other law enforcement functions. Under FinCEN’s authority and oversight, Treasury agencies (i.e., Customs Service; IRS; Secret Service; and the Bureau of Alcohol, Tobacco and Firearms) have direct, on-line access to BSA information. If they are jointly working a case, law enforcement agencies outside of Treasury can access this information from one of the Treasury agencies. For other law enforcement agencies, FinCEN is the official contact point within Treasury to request BSA information. Also, designated state and local officials have direct, on-line access to BSA information via Project Gateway. These officials conduct Gateway queries for other law enforcement agencies in the state. According to FinCEN, agencies may receive BSA information directly from FinCEN or via Project Gateway only after they have clearly specified the purpose of their request, and after the identity and authority of the requester have been confirmed by FinCEN or a designated state official. FinCEN regulations provide that BSA information shall be received in confidence and shall not be disclosed to any person except for official purposes relating to the investigation, proceeding, or matter in connection with the information. Although originally intended primarily to assist IRS for tax administration purposes, Form 8300 information is also used to support law enforcement investigations. The Anti-Drug Abuse Act of 1988 provided a special temporary rule permitting IRS to disclose these information returns to other federal agencies for the purpose of administering statutes not related to tax administration. The special rule, originally set to expire in 1990, was extended 2 years and then expired in 1992. Our earlier work addressed the usefulness of Form 8300 information. In 1991, for example, we reported on the usefulness of Form 8300 information in conducting investigations of tax evasion and other criminal activity, such as money laundering. We reported that law enforcement officials believed that Form 8300 information could be instrumental in tracing cash payments by drug traffickers and other criminals for luxury cars, jewelry, and other expensive items. In 1992, we reported that federal law enforcement officials regarded Form 8300 information as extremely useful and a critical complement to BSA reports. We noted that, in an attempt to obtain Form 8300 information, several states required that copies of the form also be filed with the state. We recommended to Congress that (1) the temporary and soon-to-expire authority of the Secretary of the Treasury to disclose Form 8300 information filed under section 6050I of the Internal Revenue Code be made permanent and (2) the Secretary of the Treasury be allowed to disclose these returns to state law enforcement agencies. The IRS supported this recommendation and noted that, if the disclosure provisions were amended, IRS would work closely with the Treasury Department to provide access to the states. In 1996, the act entitled the Taxpayer Bill of Rights 2 reinstated, on a permanent basis, the Secretary of the Treasury’s authority to disclose Form 8300 information to other federal agencies. The Secretary was further authorized to disclose Form 8300 information to state, local, and foreign agencies. The 1996 Act provided, in general, that any such disclosure is to be made on the same basis, and subject to the same conditions, as apply to disclosures of information on BSA currency transaction reports. However, the 1996 Act also required, in general, that such disclosures of Form 8300 information be subject to the disclosure and safeguard policies and guidelines under section 6103(p) of the Internal Revenue Code. Consequently, according to an IRS official, Form 8300 information must be controlled like other IRS tax return information. According to an IRS headquarters official, in May 1997, IRS initiated a process for federal, state, local, and non-U.S. law enforcement agencies and regulatory agencies to access Form 8300 information directly from IRS. The official told us that, before being permitted to obtain Form 8300 information, the requesting agency must file and IRS headquarters must approve a Safeguard Procedures Report that specifies how the agency plans to comply with applicable safeguard requirements. The IRS official added that, after an agency’s plan is approved, it can request Form 8300 information as needed from any IRS Criminal Investigation Division field office. The IRS official explained that Safeguard Procedures Reports are approved on an agency-by-agency basis. That is, one approved report covers all requests from the respective federal agency, such as the U.S. Customs Service or the FBI. A separate report is required for each state and local agency (e.g., police department and district attorney’s office). The official noted that, as of February 1998, five federal and two state law enforcement agencies had been approved to obtain Form 8300 information from IRS Criminal Investigation Division field offices. Although IRS has taken measures to provide Form 8300 information to law enforcement agencies, several issues must still be resolved before FinCEN can obtain approval from IRS to directly disseminate this information or provide it to state and local agencies via Project Gateway. Two days after the passage of the 1996 Act that authorized the Secretary of the Treasury to disclose Form 8300 information to other agencies, including law enforcement agencies, FinCEN issued a news release commenting, in part, substantially as follows: With the passage of this law, FinCEN anticipates being able to make the highly useful Form 8300 information available as part of its support to both federal and state law enforcement. Specifically, FinCEN anticipates being granted authority to (1) provide Form 8300 information quickly and easily to federal law enforcement agencies that do not have direct access to this information and (2) provide Form 8300 information directly on-line to state law enforcement through its Project Gateway. FinCEN and IRS officials began discussing FinCEN’s dissemination of Form 8300 information soon after passage of the 1996 Act. In June 1997, FinCEN and IRS officials met to discuss the difficulties IRS’ proposed operating rules for disseminating Form 8300 information (as outlined in the Safeguard Procedures Report) would create for FinCEN programs. According to a FinCEN official, this meeting was followed by a September 11, 1997, memorandum from FinCEN’s Director to the Acting Commissioner of IRS, in which FinCEN noted that the particular safeguard procedures identified as appropriate by IRS (1) were virtually impossible for law enforcement agencies to satisfy efficiently and (2) appear to subject Form 8300 information to the same safeguards as information generated by individual or corporate tax returns. The official noted that the memorandum proposed a high-level meeting to determine if the issues could be resolved. Although FinCEN has not yet been granted approval by IRS to disseminate Form 8300 information, an IRS administrative action regarding such dissemination is presently under consideration by Treasury. According to an IRS official, in October 1997, IRS proposed to Treasury that certain IRS implementing regulations be modified to allow FinCEN to act on behalf of the IRS Commissioner to disseminate Form 8300 information. The IRS official noted, however, that such dissemination would still be subject to IRS disclosure and safeguard policies and guidelines that implement section 6103 of the Internal Revenue Code. According to a Treasury official, Treasury plans to consider the IRS proposal in late 1998. Regarding Project Gateway, a FinCEN official called our attention to a September 22, 1997, memorandum from FinCEN’s Office of Legal Counsel to the IRS Office of Disclosure, in which FinCEN explained its position as to why Gateway’s existing security procedures (for electronic disclosure of BSA information to state authorities) could be read to satisfy most of the safeguard procedures IRS was requiring for disseminating Form 8300 information. According to the official, the memorandum noted that IRS procedures appeared to contemplate only manual dissemination and that Project Gateway was apparently not considered when the procedures were written by IRS. The official added that, in this memorandum, FinCEN requested that IRS accept a certification by FinCEN with respect to all recipients of electronically disseminated Form 8300 information rather than apply IRS procedures to each recipient of such information. At the time of our review, IRS had not issued a formal response to FinCEN’s September 22, 1997, memorandum. However, in March 1998, an IRS official told us that FinCEN would not be granted approval to use Project Gateway, as it currently operates, to provide state and local agencies with Form 8300 information. The official explained that (1) the current Gateway system does not meet Treasury Department requirements for systems that handle sensitive information and (2) IRS regulations do not allow for the type of redisclosures that would occur with Gateway. That is, authorized Gateway users would not be permitted to act as conduits or middlemen in providing Form 8300 information to other state and local agencies. The official added that, even without these barriers, IRS regulations would not allow FinCEN to certify safeguard procedures on behalf of all recipient agencies. Rather, each agency that requested Form 8300 information via Project Gateway would be required to file a Safeguard Procedures Report. In summary, there are several issues that must be resolved before FinCEN can disseminate Form 8300 information or provide it to state and local agencies via Project Gateway. At this point, it is not clear if these issues can be resolved administratively among FinCEN, IRS, and Treasury or if Congress may need to revisit these issues in the future. Over the years, FinCEN has faced a challenge of defining its support role in providing the law enforcement community with value-added products and services in a timely manner. In and of itself, this is a significant challenge, and given the existence of various intelligence and investigative support centers and other sources of information and financial analysis, it is likely to be a continuing challenge. Also, compounding this challenge, since its inception in 1990, FinCEN’s staffing levels have remained fairly constant, while its mission has expanded beyond its original law enforcement support role to include responsibility for promulgating BSA regulations and assuming a leadership position in international efforts to combat money laundering. Nonetheless, to FinCEN’s credit, the agency has expanded its law enforcement support role from providing tactical and strategic products to include use of an artificial intelligence system and implementation of self-help services (i.e., the platform concept and Project Gateway). However, due in part to reallocations of staff to other mission functions, the expansion of FinCEN’s line of products and services has, at times, experienced some growing pains. These include, for example, occasional backlogs and lengthy response times for routine tactical support requests and reductions in the number of strategic and artificial intelligence products generated. Similarly, the expansion or evolution of FinCEN’s line of products and services inherently entails some “role-definition” issues. To the extent feasible, for instance, FinCEN considers its expertise best used to support nonroutine cases or analytically intensive cases, which may include tactical and strategic as well as artificial intelligence support. In recent years, however, while users reported that all types of FinCEN’s tactical support have been useful, an increasing number of FinCEN’s tactical reports consisted of database extracts versus detailed analysis. And, the number of analytical products FinCEN generated from strategic and artificial intelligence analyses decreased due, in part, to users’ concerns about the usefulness of these products. To better focus its efforts and ensure usefulness, particularly regarding strategic and artificial intelligence products, FinCEN has begun various “partnering” arrangements with its customers. Also, to better ensure that its tactical staff are available to support traditional law enforcement needs, in 1995, FinCEN discontinued accepting requests for background and regulatory investigations. FinCEN is also taking steps to ensure that its tactical staff are used to support complex or significant rather than routine cases. However, FinCEN has not developed and disseminated general criteria or guidelines concerning the types of cases that FinCEN can best support and the most appropriate uses for FinCEN’s resources. We believe such guidance would help FinCEN better utilize its tactical resources. In a similar vein, while FinCEN had taken steps to inform the law enforcement community about its support, some federal law enforcement officials said they were not aware of the various products and services offered by FinCEN. (FinCEN has since taken additional steps to inform the law enforcement community about its products and services.) FinCEN’s efforts to promote self-help services have been well received by the users of those services we interviewed. They commented very favorably about the platform concept and Project Gateway. These comments are corroborated by statistics showing that use of these systems has steadily increased. In turn, however, the increased use of these systems underscores the importance of FinCEN’s controls to ensure that only authorized personnel access the systems and use them for legitimate purposes. Because FinCEN has not evaluated states’ compliance with Gateway security policies and procedures, it cannot be sure the controls are working as intended. Periodically evaluating the states’ compliance with these controls and preparing summary reports to management would help FinCEN identify improvements or deterioration in control effectiveness, reassess the related risks, and take appropriate action. FinCEN and IRS have been unable to resolve administrative issues related to FinCEN’s dissemination of IRS Form 8300 information. Law enforcement officials believe this information can be useful in tracing cash payments by drug traffickers and other criminals for luxury cars, jewelry, and other expensive items. We recognize the long-standing concerns regarding the protection of taxpayer information, although we note that the Form 8300 contains the same basic information as is contained in the currency transaction report, which is more readily available to law enforcement. IRS has initiated a process for law enforcement agencies to access Form 8300 information directly from IRS. However, regarding FinCEN’s dissemination of Form 8300 information, additional issues must still be resolved to address IRS’ and Congress’ concerns about protection of taxpayer information. In addressing these issues, consideration must also be given to the value of Form 8300 information to law enforcement efforts in reducing money laundering. It is not clear if these issues can be resolved administratively among FinCEN, IRS, and Treasury or if Congress may need to revisit these issues in the future. We recommend that the Secretary of the Treasury take action to identify and resolve any administrative issues related to FinCEN’s dissemination of Form 8300 information to the law enforcement community. If FinCEN is given approval to disseminate Form 8300 information, we recommend that, prior to such dissemination, the Secretary ensure that sufficient access and disclosure controls over FinCEN’s programs and systems are in place and operating as intended. That is, these controls should be sufficient to protect against unauthorized access to and disclosure of sensitive information. We recommend that the Acting Director, FinCEN incorporate into the agency’s communications with potential customers general criteria or guidance on the types of cases that FinCEN can best support and the most appropriate uses of FinCEN’s capabilities. At a minimum, for example, such criteria or guidance could be included in information on FinCEN’s site on the Internet. develop and implement a program for on-site evaluations of the states’ compliance with control policies and procedures related to Project Gateway. Such a program should include periodic testing of the controls and summary reports for management attention. We requested comments on a draft of this report from the Department of the Treasury, FinCEN, and the Department of Justice. On May 29, 1998, the Director of Treasury’s Office of Finance and Administration informed us, via telephone, that the Department declined to provide comments on the draft report or on the recommendation to the Secretary of the Treasury related to FinCEN’s dissemination of IRS Form 8300 information. In a letter dated May 20, 1998, FinCEN’s Acting Director provided us written comments (see app. VI). The Acting Director did not concur with our draft report’s recommendation that FinCEN incorporate into the agency’s communications with potential customers specific criteria or guidance on the types of cases that FinCEN can best support and the most appropriate uses of FinCEN’s capabilities. The Acting Director commented that specific guidelines are impractical because (1) cases differ widely in circumstance and detail and (2) guidelines may result in perceived limitations in the inherent flexibility of FinCEN’s products and services. Also, the Acting Director noted that a more effective and efficient way to communicate is through the generalized meetings and other outreach efforts that FinCEN conducts, although those efforts are already very ambitious for a small agency like FinCEN. The intent of our draft recommendation was not that FinCEN develop or communicate inflexible or rigid guidelines for its customers. Rather, given the availability of various other intelligence and investigative support centers that are alternate sources of financial, commercial, and law enforcement data and analysis, we believe that FinCEN’s capabilities would be most fully and appropriately utilized if the agency widely communicates generally applicable criteria or guidance on the types of cases that it can best support. For example, a FinCEN official told us that tactical support is generally best suited for (1) cases that involve large criminal organizations, are of significance to the jurisdiction, or require expert financial analysis and (2) cases where support is not available from in-house sources. In our opinion, this kind of general guidance could be more widely disseminated to the law enforcement community, at a minimum, by being included in information on FinCEN’s site on the Internet. As previously noted, FinCEN updated its Internet site in March 1998 to include information on the types of support it provides to the law enforcement community. However, the update did not include general criteria or guidance on the types of cases that FinCEN can best support or on the most appropriate uses of FinCEN’s capabilities. Accordingly, with some modifications to the language in this report for clarification purposes, we are still recommending that FinCEN better communicate to potential customers general criteria or guidance on the types of cases that it can best support and the most appropriate uses of its capabilities. On the other hand, the Acting Director concurred with our recommendation that FinCEN develop and implement a program for on-site evaluations of the states’ compliance with control policies and procedures related to Project Gateway. Toward this end, the Acting Director noted that FinCEN had recently (1) reported on an early-1998 audit of Gateway use and activity and (2) issued a comprehensive Gateway Coordinator’s Handbook, which presents up-to-date rules, procedures, formats, dissemination instructions, and warning notices. Also, the Acting Director noted that FinCEN is beginning to develop guidelines for FinCEN staff to use in reviewing the compliance of state coordinators with policies and procedures. In the near future, according to the Acting Director, FinCEN will (1) use these guidelines to conduct audits in selected states and (2) share audit results with the state coordinators to provide a lessons-learned approach. On May 8, 1998, we received written comments from Justice that indicated that the draft was reviewed by representatives of the Criminal Division, DEA, FBI, and the Executive Office for U.S. Attorneys. Generally, the Department concurred with the substance of the draft report. Justice provided technical comments and also made suggestions for possible expansion of our discussion related to various topics in the draft report. These technical comments and suggestions have been incorporated in this report where appropriate. We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate Banking, Housing, and Urban Affairs Committee; the Senate Finance Committee; the House Ways and Means Committee; the Subcommittee on Treasury, Postal Service, General Government, and Civil Service (Senate Appropriations Committee); and the Subcommittee on Treasury, Postal Service, and General Government (House Appropriations Committee); the Secretary of the Treasury; the Acting Director, FinCEN; the Director, Office of Management and Budget; the Attorney General; and other interested parties. Copies will also be made available to others upon request. The major contributors to this report are listed in appendix VII. If you or your staffs have any questions about this report, please contact me on (202) 512-8777. This report focuses on the Financial Crimes Enforcement Network’s (FinCEN) products and services in support of law enforcement. Specifically, this report discusses (1) trends in the types and quantities of products and services provided by FinCEN to the law enforcement community; (2) the extent to which FinCEN’s products and services have been considered useful by the law enforcement community in identifying, developing, or prosecuting money laundering and other financial crime cases; (3) the extent to which FinCEN evaluates the states’ compliance with applicable controls over access to and use of information when state law enforcement officials directly access FinCEN’s resources; and (4) FinCEN’s efforts to obtain approval from the Internal Revenue Service (IRS) to provide IRS Form 8300 information (Report of Cash Payments Over $10,000 Received in a Trade or Business) to the law enforcement community. To determine the trends in and usefulness of FinCEN’s products and services, we focused on five principal types of support provided by FinCEN: (1) tactical products in support of agencies’ ongoing investigations; (2) strategic products designed to address longer-term or more broadly scoped topics; (3) artificial intelligence products designed to provide investigative leads; (4) a “platform concept,” whereby federal agency officials can access databases and do their own research using FinCEN resources; and (5) “Project Gateway,” which provides state agencies with remote, on-line access to financial and some commercial data. The scope of our work did not include a review of the Suspicious Activity Reporting System, which is administered by FinCEN. To determine the trends in the types of support provided by FinCEN to the law enforcement community, we obtained a description of FinCEN’s primary products and services, including the date when each type of product or service first became available. Also, to obtain an understanding of the processes and purposes for each type of product or service, we interviewed officials of FinCEN’s component offices. To determine the trends in the quantities of support provided since 1990, including which agencies requested which types of support, we obtained and analyzed FinCEN workload documents and relevant information from FinCEN’s computerized databases. Also, to ascertain reasons for the trends in FinCEN’s support, we interviewed FinCEN officials, Treasury and Justice headquarters’ officials, long-term agency detailees to FinCEN, and state agency officials. FinCEN generates a variety of products and services to support many different agencies or organizations. Therefore, to the extent practical, we used mail surveys and in-person and telephone interviews to collect information on the usefulness of the full range of FinCEN’s support. This included support of money laundering and other financial crimes investigations as well as support of regulatory or background checks for employment, security clearance, and business or professional licensing purposes. We surveyed or interviewed officials from the principal federal law enforcement agencies within the Treasury Department (i.e., IRS; the Bureau of Alcohol, Tobacco and Firearms; the Customs Service; and the Secret Service); the principal federal law enforcement agencies within the Justice Department (i.e., the Federal Bureau of Investigation (FBI), the Marshals Service, the Drug Enforcement Administration (DEA), U.S. Attorney Offices, and the Immigration and Naturalization Service); other federal agencies that were high-volume requesters of FinCEN’s products and services, such as the Postal Inspection Service, the Department of Agriculture, the Air Force Office of Special Investigations, and the Naval Criminal Investigative Service (see table I.1 at the end of this app. for a complete list of the high-volume requesters we surveyed); and state requesters of FinCEN support. During our inquiries, we obtained case-specific information (if available and appropriate) as well as opinions, views, and anecdotal information from managers and agents of the applicable agencies and organizations. We focused on relatively recent support—that is, support generated since January 1996. We obtained opinions and views on support provided before January 1996 but could not provide a statistically valid or meaningful comparison of the usefulness of FinCEN today versus FinCEN in the past. We focused on requests for tactical products that FinCEN received or logged in during the 12-month period from April 1996 through March 1997 and responded to before August 1997. To obtain general or broad-based indications of the usefulness of FinCEN’s full range or types of tactical support, we surveyed by mail a stratified, statistical sample of 352 federal agency officials who requested various tactical work products (i.e., database extracts, analytical reports, and expedited reports). The 352 federal officials were selected from 2,379 officials in 31 agencies that, according to FinCEN’s records, made 4,409 (95 percent) of the 4,626 total federal requests for FinCEN’s tactical support during the 12-month period (see table I.1 at the end of this app.). We did not survey officials from the 34 agencies that made the remaining 217 (5 percent) federal tactical requests because of time constraints and the logistics involved in coordinating surveys with these agencies. We received usable responses from 251 (71 percent) of the 352 federal officials. The responses were weighted to represent the 2,379 federal officials who made the 4,409 requests for tactical support during the survey period. Unless otherwise noted, the estimates of percentages from this sample in the report have 95-percent confidence intervals of no more than plus or minus 10 percentage points. Also, we surveyed by mail a simple random sample of 95 state agency officials who requested FinCEN’s tactical support during the 12-month period. The 95 state officials were from 15 states that made 18 or more requests in the period. According to FinCEN’s records, these 15 states made 813 (75 percent) of the 1,077 total requests made through all state coordinators for FinCEN tactical support during the 12-month period (see table I.2 at the end of this app.). State coordinators were able to identify 504 requesters of FinCEN’s tactical support in these 15 states. We randomly selected 95 users for our survey. After making at least 2 attempts to contact nonrespondents by telephone, we received usable responses from 54 (57 percent) of the 95 state officials. The percentage estimates from this sample in the report have 95-percent confidence intervals of no more than plus or minus 13 percentage points and are projectable to all of the requesters in the 15 states. Further, to obtain additional perspectives on the usefulness of FinCEN’s tactical support, we conducted in-person or telephone interviews with (1) officials from the FBI and the Bureau of Alcohol, Tobacco and Firearms who were on detail to FinCEN at the time of our review and (2) senior FinCEN officials responsible for overseeing tactical support. In addition to these surveys and interviews, we determined why some federal and state agencies and offices submitted few if any requests for FinCEN’s tactical support. Based on our review of FinCEN’s records, we determined that many federal field offices, states, and High Intensity Drug Trafficking Areas (HIDTA) requested little or no tactical support from FinCEN during the period we reviewed, April 1996 through March 1997. To determine the reasons why: We surveyed by mail all U.S. field offices of the IRS (33 offices), the U.S. Customs Service (20 offices), the FBI (56 offices), and the DEA (20 offices) (see app. V for a copy of the questionnaire). Of the total 129 field offices, we received responses from 116 (90 percent). Also, we interviewed officials from 9 of the 10 states that, according to FinCEN’s records, made either one or no requests for FinCEN’s tactical support from April 1, 1996, through March 31, 1997. Further, we surveyed all 22 HIDTAs that had been designated by the Office of National Drug Control Policy at the time of our review to determine the extent to which FinCEN products are used to support their money laundering and other financial crimes investigations. We received responses from 16 HIDTAs. We did not project these responses to the 22 HIDTAs. In our mail surveys and interviews, we ascertained what other (non-FinCEN) sources of financial, commercial, and/or law enforcement information and analyses are used by the federal field offices, state agencies, and HIDTAs. Further, to determine how FinCEN informed the law enforcement community about the availability of FinCEN’s products and services, we (1) reviewed the results of FinCEN’s May 1996 outreach efforts, which were designed to obtain feedback from federal law enforcement agencies; (2) reviewed FinCEN’s records of participation at meetings, training events, and conferences at the federal and state levels; and (3) interviewed FinCEN officials. To determine the usefulness of FinCEN’s strategic support, we conducted telephone interviews with law enforcement officials who received or used three of the four strategic products FinCEN prepared from January 1996 through December 1997 (i.e., the Louisiana, Georgia, and South Florida money-laundering threat assessments). Also, we interviewed senior FinCEN officials about changes in strategic support, including how the newly formed Office of Research and Analysis was functioning. To determine the usefulness of FinCEN’s artificial intelligence products, we attempted to survey by mail all federal and state law enforcement officials identified in FinCEN’s database as having received artificial intelligence products from April 1996 through March 1997. First, we determined that FinCEN had provided 85 artificial intelligence products during this period. Next, we attempted to locate and survey the end user for each product. We identified and mailed a survey questionnaire to 13 officials who were end users for 51, or 60 percent, of the 85 products. If more than one product was associated with the same investigative effort, we requested that only one questionnaire be completed for the associated products. We received responses from all 13 officials. Further, we reviewed FinCEN data to determine the extent to which FinCEN self-initiated artificial intelligence products (versus products requested by law enforcement agencies). We also interviewed FinCEN officials to ascertain reasons for variations in the number of self-initiated products over the years, including the extent to which the self-initiated products were used by the law enforcement community. We conducted in-person or telephone interviews with officials from three agencies that, according to FinCEN officials, were frequent platform users—the Washington/Baltimore HIDTA; the Bureau of Alcohol, Tobacco and Firearms; and the Defense Criminal Investigative Service. According to FinCEN’s year-end records, the three agencies we contacted were among the four agencies that most frequently used platforms in 1997. The three agencies accounted for 971 (66 percent) of the 1,477 investigative cases that were supported by platforms in 1997. We asked these officials about their use of platforms, including the number and type of cases they support, the databases they access, and their views about the usefulness of the platform concept. We conducted telephone interviews with officials from the four states that made the most Gateway queries in fiscal year 1997—California, Illinois, Pennsylvania, and Texas. These 4 states made 22,876 (40 percent) of the total 57,663 Gateway queries in fiscal year 1997. We also interviewed officials from two states—Montana and Wyoming—that used Gateway fewer than 50 times in fiscal year 1997 to determine reasons for the low use. We interviewed FinCEN officials to determine future Gateway plans and to identify efforts to provide Gateway access for non-Treasury federal agencies. To determine how FinCEN controls access to and use of information obtained via Project Gateway, we (1) interviewed FinCEN officials and Gateway users and (2) reviewed FinCEN’s Gateway Security Plan (July 1996) and the IRS Detroit Computing Center’s Project Gateway Users Guide (May 1997). Also, we interviewed FinCEN officials to determine the extent to which FinCEN had evaluated the states’ compliance with applicable controls over access to and use of information obtained via Project Gateway. It was beyond the scope of our study to audit or test the controls or safeguards FinCEN maintains over Project Gateway. To determine the potential usefulness of IRS Form 8300 information for law enforcement purposes, we reviewed previous GAO reports and interviewed federal and state law enforcement officials. To determine what disclosure and safeguard requirements apply to the dissemination of Form 8300 information and Bank Secrecy Act data, we (1) reviewed applicable provisions in the 1996 act that authorized the use of Form 8300 information for law enforcement purposes, (2) interviewed IRS officials and reviewed applicable sections of the Internal Revenue Code, and (3) interviewed FinCEN officials and reviewed applicable documentation. Also, to determine how IRS currently makes Form 8300 information available to federal, state, local, and non-U.S. law enforcement agencies, we (1) interviewed IRS officials and (2) reviewed safeguard and reporting requirements contained in IRS’ guidance for completing a Safeguard Procedures Report. To determine the status of FinCEN’s efforts to obtain approval from IRS to provide IRS Form 8300 to the law enforcement community, we interviewed FinCEN, IRS, and Treasury Department officials. Total for Justice agencies we surveyed Bureau of Alcohol, Tobacco and Firearms Total for Treasury agencies we surveyed Other federal agencies we surveyed U.S. Postal Inspection Service Air Force Office of Special Investigations Department of Housing and Urban Development Office of the Secretary of the Air Force (continued) Department of Health and Human Services U.S. Probation and Parole Office Total for other federal agencies we surveyed Federal agencies we did not survey U.S. Army (other) Office of the Comptroller of the Currency National Aeronautics and Space Administration Office of Foreign Asset Control Total for federal agencies we did not survey (Table notes on next page) FinCEN’s information resources fall into four broad categories: financial, commercial, and law enforcement databases, and its own internal databases. The financial database consists of reports that are required to be filed under the Bank Secrecy Act (BSA). These reports can be retrieved from either the U.S. Customs Service’s computer center in Newington, Virginia, or the Internal Revenue Service’s (IRS) Detroit Computing Center. Both computer center systems are accessible on-line at FinCEN through either the Treasury Enforcement Communications System or the Currency and Banking Retrieval System. The financial database is available to bona fide entities for criminal, civil, regulatory, and foreign investigations. Table II.1 describes the various BSA reports used by FinCEN. Currency Transaction Report (IRS Form 4789) Filed by bank and nonbank financial institutions reflecting cash transactions of more than $10,000. The database contains reports since 1983. Filed by casinos reflecting cash transactions of more than $10,000. The database contains reports since 1985. Report of International Transportation of Currency or Monetary Instruments (U.S. Customs Service Form 4790) Filed by persons carrying currency or certain monetary instruments in aggregate amounts of more than $10,000 into or out of the United States. The database contains reports since 1989. Report of Foreign Bank and Financial Accounts (Treasury Department Form 90-22.1) Filed annually by U.S. persons with interest in, or signature authority over, bank securities or other financial accounts in a foreign country, which exceed $10,000 in total value at any time during a calendar year. The database contains reports since 1985. Suspicious Activity Report (Treasury Department Form 90-22.47) Filed by financial institutions which determine that some activity is suspicious.The database contains reports since April 1996 and some incomplete history files dating back to 1990. There are some restrictions on the release of Currency Transaction Reports, Currency Transaction Reports by Casinos, Reports of International Transportation of Currency or Monetary Instruments, or Reports of Foreign Bank and Financial Accounts. For example, FinCEN regulations provide that such information made available to other departments or agencies of the United States, any state or local government, or any foreign government shall be received in confidence and shall not be disclosed to any person except for official purposes relating to the investigation, proceeding, or matter in connection with the information. In addition, written approval must be obtained from the FinCEN Director prior to releasing BSA data to foreign governments. Suspicious Activity Reports are only researched and disseminated for designated user agencies and certain state agency officials. FinCEN procures access to a variety of commercial databases that are used to locate individuals, determine asset ownership, and establish links between individuals, businesses, and assets. These databases encompass a wide variety of demographic and census information, including corporate ownership, nationwide telephone directories, real estate purchases, and courthouse records. There are no restrictions on the release of commercial information to bona fide entities for criminal, civil, regulatory, and foreign investigations. Table II.2 describes the commercial databases FinCEN had access to as of February 1998. Provides on-line access to public records from selected states, with broad coverage of Florida and Texas (e.g., driver’s license number, motor vehicle registration, corporation filings, and real estate ownership) and less broad coverage of public records from New York, New Hampshire, Oregon, and Washington. Also available is a nationwide “National Dossier,” which compiles current and former addresses, telephone numbers, and a listing of neighbors. One of the nation’s large credit bureau services. FinCEN, by law, obtains only the “header” information from an individual’s credit report, which comprises current and former addresses, possibly a spouse’s name, and the month and year of birth. FinCEN does not obtain any information from the credit report relative to the credit history or employment history of an individual. Provides access to on-line public records that can assist in locating people and businesses, identifying and verifying assets, exposing and controlling fraud, and uncovering and verifying background information. Provides on-line access to names, dates of birth, addresses, phone numbers, and driver’s license information. (continued) A gateway to over 450 databases that provide access to millions of documents in the area of business news and industry analysis from full-text trade journals, newspapers, and news wires. Domestic and international company directories are also available, many of which include corporate financial statistics. Provides access to business information from millions of companies worldwide. For companies in the United States, a complete business information report is available, which includes a corporate history, financial data, banking relationships, public record filings, and biographical information on key officers. For international companies, directory information includes the names of up to 10 executives. All companies in the database are identified by a unique number, which allows a complete “corporate family tree” to be produced. One of the major providers of on-line public records, providing access to the corporation and limited partnership filings from most states; an asset locator that searches real property records (including tax assessor records and deed transfers) from over 30 states as well as nationwide Federal Aviation Administration aircraft and Coast Guard watercraft files; nationwide business bankruptcy filings; a nationwide people finder service; and an extensive file of liens and judgments from every state. One of the major providers of on-line public records with extensive files of real estate ownership and deed transfers, state corporation and limited partnership filings, personal and business bankruptcies, nationwide liens and judgments, a nationwide person and business locator file, and civil and criminal indices. The service also provides full-text access to more than 2,300 information sources from U.S. and overseas newspapers, magazines, journals, newsletters, wire services, and broadcast transcripts. A comprehensive company library provides numerous files of U.S. company reports, international company reports, bankruptcy filings, business biographical reports, and Securities and Exchange Commission filings. Provides biographical information on stock broker/dealer businesses and individuals. A set of five CD-ROM discs providing a nationwide telephone directory on both individuals and businesses. This database contains only listed telephone numbers. Through written agreements outlining the details of database access, dissemination authority, etc., FinCEN has access to some investigative databases maintained by other law enforcement agencies. FinCEN provides information from these law enforcement databases to bona fide entities for domestic criminal investigations. Several queries of Treasury Department’s system (see table II.3) are also available for domestic regulatory and foreign investigations. Table II.3 describes the law enforcement databases FinCEN had access to as of November 1997. The Treasury Enforcement Communications System is administered by the U.S. Customs Service on behalf of a consortium of over 25 federal agencies, for the purpose of providing a broad scope of information for law enforcement purposes. In addition to providing information on U.S. Treasury law enforcement investigations, it provides access to the National Crime Information Center, the National Law Enforcement Telecommunications Network, the Federal Aviation Administration’s Private Aircraft records, and U.S. Custom Service’s Automated Commercial Shippers record system of import/export declarations and related international shipping documents. The Narcotics and Dangerous Drugs Information System database contains information on Drug Enforcement Administration cases. U.S. Postal Inspection Service The Inspection Service Database Information System is a database of all current and closed Postal Inspection Service criminal cases. FinCEN uses its internal databases to index and track inquiries made on individuals and businesses. This includes the results of the intelligence reports prepared by FinCEN as well as information captured through FinCEN’s platform and Gateway programs. These databases enable FinCEN to “alert” or notify one agency that another agency has or had an interest in the same investigative subject, which can help the agencies coordinate their efforts. R. Eric Erdman, Evaluator-in-Charge Michael H. Harmond, Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the Financial Crimes Enforcement Network's (FinCEN) products and services in support of law enforcement, focusing on: (1) trends in the types and quantities of products and services provided by FinCEN to the law enforcement community; (2) the extent to which FinCEN's products and services have been considered useful by the law enforcement community in identifying, developing, or prosecuting money laundering and other financial crime cases; (3) the extent to which FinCEN evaluates the states' compliance with applicable controls over access to and use of information when state law enforcement officials directly access FinCEN's resources; and (4) FinCEN's efforts to provide Internal Revenue Service (IRS) Form 8300 information to the law enforcement community. GAO noted that: (1) FinCEN has expanded the types of products and services it provides to the law enforcement community; (2) in recent years, FinCEN has issued fewer tactical, strategic, and artificial intelligence products and has encouraged, trained, and increasingly relied on federal agencies to use the platform concept and state and local agencies to use Project Gateway to support cases that do not require FinCEN's expertise; (3) according to FinCEN, one significant reason for the decrease in the number of products issued was that its staffing levels have remained fairly constant over the years, while its overall mission has expanded to include: (a) responsibility for promulgating Bank Secrecy Act regulations; and (b) a leadership role in international efforts to combat money laundering; (4) respondents to surveys indicated that FinCEN's tactical products have been useful and assisted law enforcement investigations in ways not previously identified; (5) officials that had requested few or no tactical products from FinCEN generally did not indicate dissatisfaction with it; (6) some respondents were not aware of the various products and services offered, and FinCEN has neither developed nor widely disseminated general criteria or guidelines on when law enforcement officials should request its support; (7) according to federal and state officials, the platform concept and Project Gateway are useful tools for helping agencies combat money laundering and other financial crimes; (8) FinCEN data show that an increasing number of federal, state, and local agencies are using these self-help mechanisms to support their investigations; (9) while Project Gateway is designed to enhance the capabilities of state and local law enforcement agencies, this technological advancement increases the potential risk that sensitive information could be inappropriately accessed, used, or disclosed; (10) although FinCEN has established policies and procedures designed to limit access to and use of information obtained through the Gateway system, it has not evaluated the states' compliance with these controls; (11) in an effort to enhance its investigative support, FinCEN is seeking IRS approval to provide IRS Form 8300 information to law enforcement officials; and (12) however, several issues must still be resolved before FinCEN can obtain approval from IRS to disseminate this information. |
DOE’s missions encompass energy resources, scientific and technological development, environmental cleanup, and nuclear security. DOE established EM in 1989 to carry out the mission to clean up radioactive wastes, spent nuclear fuel, excess plutonium and uranium, contaminated facilities, and contaminated soil and groundwater that resulted from nuclear weapons production and government-sponsored nuclear energy research. NNSA, a separately organized agency within DOE, has primary responsibility for ensuring the safety, security, and reliability of the nation’s nuclear weapons stockpile, including life extension programs for multiple weapon types in the U.S. stockpile, for promoting nuclear nonproliferation, and for naval reactor programs. In fiscal year 2013, EM and NNSA received about $17 billion to support these programs and related activities, which is approximately 60 percent of DOE’s total budget. Figure 1 shows the fiscal year 2013 funding for EM, NNSA, and other DOE programs and activities. Contractors operate DOE sites and often conduct their work under management and operating (M&O) contracts. These contracts provide the contractor with discretion in carrying out the mission of the particular contract. Currently, DOE spends 90 percent of its annual budget on contracts, making it the largest non–Department of Defense contracting agency in the government. As we have reported in the past decade, DOE continues to face challenges managing its major projects and programs, which have incurred significant cost increases and schedule delays in several instances. Some recent examples include: As we reported earlier this month, NNSA estimates that the project to build the Uranium Processing Facility (UPF) at the Y-12 National Security Complex in Oak Ridge, Tennessee, will cost between five and seven times more than previously thought and will be completed over a decade behind schedule. NNSA estimated in 2004 that the UPF would cost from $600 million to $1.1 billion to construct and would start operating in 2012. As of June 2012, estimates were revised to a cost range from $4.2 billion to $6.5 billion and a 2023 date for the start of operations. In June 2012, the Deputy Secretary of Energy approved the latter cost range and schedule and deferred significant portions of the original project scope. Two months later, the UPF contractor concluded that UPF’s roof would have to be raised 13 feet and that the start of construction would be further delayed, resulting in approximately $540 million in additional costs. As we reported, these problems occurred because the contractor did not adequately manage and integrate the design work subcontracted to four other contractors. Given these additional costs and DOE’s stated plan to pay for these additional costs from its contingency fund, it is unclear if the cost range estimate approved in June 2012 remains valid. In March 2013, we reported preliminary observations from our ongoing review of NNSA’s Plutonium Disposition Program that highlight the need for continued efforts by DOE to improve contract and project management. We reported DOE is currently forecasting an increase in the total project cost for the MOX Fuel Fabrication Facility at the Savannah River Site in South Carolina from $4.9 billion to $7.7 billion and a delay in the start of operations from October 2016 to November 2019. According to NNSA officials and the contractor for the MOX facility, inadequately designed critical system components, such as the gloveboxes to be used for handling plutonium and the infrastructure needed to support these gloveboxes, are among the primary reasons for the proposed cost increase and schedule delay. The performance baseline for the MOX facility was set several years before NNSA issued guidance in 2012 to set cost and schedule baselines only after design work is 90 percent complete. As part of our ongoing review of NNSA’s Plutonium Disposition Program, we are evaluating whether such guidance would have been useful for NNSA to apply to the MOX facility, as well as the potential impact this guidance might have had on mitigating cost increases and schedule delays. In December 2012, we reported that the estimated cost to construct the Waste Treatment and Immobilization Plant in Hanford, Washington, had tripled to $12.3 billion since its inception in 2000 and that the scheduled completion date had slipped by nearly a decade to 2019. We reported that DOE’s incentives and management controls were inadequate for ensuring effective project management, and DOE had in some instances prematurely rewarded the contractor for resolving technical issues and completing work. DOE generally agreed with the several recommendations we made to improve Waste Treatment and Immobilization Plant projects and contract management. In May 2013, we reported that significant technical challenges at the Waste Treatment Plant remained unresolved, contributing to uncertainty as to whether the project will operate safely and effectively. We also reported in December 2012 on progress by EM and NNSA in managing nonmajor projects (i.e., those costing less than $750 million). We found that of the 71 nonmajor projects that EM and NNSA completed or had under way from fiscal years 2008 to 2012, 21 met or are expected to meet their performance targets for scope, cost, and completion date. However, 23 projects did not meet or were not expected to meet one or more of those three performance targets. We also noted that, for 27 projects, many had insufficiently documented performance targets for scope, cost, or completion date, which prevented us from determining whether they met their performance targets. As a result, we recommended, among other things, that EM and NNSA clearly define, document, and track the scope, cost, and completion date targets for each of their nonmajor projects. EM and NNSA agreed with our recommendations. As we noted in our February 2013 high-risk update, we have shifted our focus to major contracts and projects, but we will continue to monitor the performance of nonmajor projects. In April 2010, we reported that weak management by DOE and NNSA had allowed the cost, schedule, and scope of ignition-related activities at the National Ignition Facility to increase substantially. We reported that, since 2005, ignition-related costs have increased by around 25 percent—from $1.6 billion in 2005 to over $2 billion in 2010—and that the planned completion date for these activities had slipped from the end of fiscal year 2011 to the end of fiscal year 2012 or beyond. We made several recommendations to address program management weaknesses—which NNSA agreed with—and we are currently monitoring their implementation. Ten years earlier, in August 2000, we had reported that poor management and oversight of the National Ignition Facility construction project at Lawrence Livermore National Laboratory had increased the facility’s cost by $1 billion and delayed its scheduled completion date by 6 years. In March 2009, we reported that NNSA and the Department of Defense had not effectively managed cost, schedule, and technical risks for the B61 nuclear bomb and the W76 nuclear warhead refurbishments. For the B61 life extension program, NNSA was only able to stay on schedule by significantly reducing the number of weapons undergoing refurbishment and abandoning some refurbishment objectives. We made a number of recommendations to improve the management of the nuclear weapons refurbishment process. NNSA agreed with these recommendations, and we are monitoring their implementation. We are currently assessing DOE cost estimating policies and practices and plan to issue a report based on this work later this year. DOE’s actions to improve project management appear promising, but their impact on meeting cost and schedule targets may not be clear. Because all ongoing major projects have been in construction for several years, neither EM nor NNSA has a major project that can yet demonstrate the impact of DOE’s recent reforms. As we testified before this Subcommittee in March 2013, reviews of the July 2012 security breach at the Y-12 National Security Complex identified numerous, long-standing, and systemic security issues across the nuclear security enterprise, and significant safety problems remain at DOE sites that have not been fully addressed. Some examples from our recent work include: With regard to security, as we testified in March 2013, investigations of the security breach at the Y-12 National Security Complex performed by NNSA, the DOE Office of Inspector General, and the DOE Office of Independent Oversight found problems with NNSA’s and its contractors’ performance, including problems with the complex’s physical security systems, such as alarms, and the training and response of the heavily armed guards supplied by NNSA’s protective force contractor. In addition, both a NNSA Security Task Force and an independent panel convened at the request of the Secretary of Energy and composed of three former executives from federal agencies and the private sector found systemic security issues across the nuclear security enterprise. Both the Secretary’s panel and the NNSA Security Task Force’s leader found deficiencies in DOE’s security culture and oversight, with some of these being closely matched to issues we identified a decade earlier. DOE took a number of actions in response to the security breach and the findings of the panel and task force. These actions included, among other things, immediate actions to repair security equipment, as well as longer-term actions that aim to improve NNSA and DOE oversight of security. As we testified in March 2013, in assessing DOE’s actions regarding security and NNSA’s new security oversight process, a central question will be whether they lead to sustained improvements in security at the Y-12 National Security Complex and across the nuclear security enterprise. We have ongoing work assessing DOE security reforms and plan to issue a report based on this work later this year. With regard to safety, in September 2012 we testified before this Subcommittee about NNSA management weaknesses that have contributed to persistent safety problems at NNSA sites, including lax attitudes toward safety procedures, inadequacies in identifying and addressing safety programs with appropriate corrective actions, and inadequate oversight by NNSA site offices. We stated in our testimony that in March 2010, in an effort to address safety problems across the nuclear security enterprise, the Secretary of Energy announced a reform effort aimed at modifying DOE’s oversight approach in order to “provide contractors with the flexibility to tailor and implement safety and security programs without excessive federal oversight or overly prescriptive departmental requirements.” As we noted in the testimony, DOE’s safety reforms did not fully address continuing safety concerns and, in fact, may have actually weakened independent oversight. We noted, for example, that DOE’s Office of Independent Oversight staff must coordinate its assessment activities with NNSA site office management to maximize the use of resources, raising concerns about whether Office of Independent Oversight staff would be sufficiently independent from site office management. In our April 2012 report, we recommended that DOE analyze the costs and benefits of its safety reform effort and identify how the effort will help address safety concerns. DOE agreed with our recommendations. Moreover, since our September 2012 testimony, DOE’s Office of Independent Oversight has raised concerns about ongoing safety issues, including reluctance by workers at NNSA’s Pantex Plant to raise safety problems for fear of retaliation and a perception that cost took priority over safety, as well as inadequate controls to protect workers or the public in the case of earthquake, fires, or radiation exposures at the Y-12 National Security Complex. In addition, a March 2013 independent evaluation of safety culture at DOE’s Office of Health, Safety, and Security (HSS)—which generally provides policy direction and independent oversight of safety and security at DOE sites—found that HSS staff raised concerns that the shift in recent years toward a more collaborative oversight relationship with site management had weakened HSS’s effectiveness in providing independent oversight and enforcement. For more than a decade, we have reported that DOE has not produced reliable enterprise-wide management data needed to, among other things, prepare its budget requests, identify the costs of its activities and ensure the validity of its cost estimates. Some recent examples include: In June 2013, we reported that NNSA’s M&O contractors differ in how they classify and allocate indirect costs at NNSA laboratories. Although different approaches are allowed by Cost Accounting Standards, these differences limit NNSA’s ability to assess cost data and meaningfully compare cost management performance across laboratories, potentially impeding NNSA’s efforts to oversee M&O contractors’ costs. This work built on the report we issued in June 2010, in which we found that NNSA could not accurately identify the total costs to operate and maintain weapons facilities and infrastructure because of differences among contractors’ accounting practices. We concluded that, without the ability to consistently identify program costs, NNSA did not have the ability to adequately justify future presidential budget requests and risked being unable to identify both the return on investment of planned budget increases and opportunities for cost savings. As a result, we recommended that NNSA require M&O contractors report to NNSA annually on the total costs (i.e., both direct and indirect costs) to operate and maintain weapons facilities and infrastructure. In July 2012, we reported that NNSA did not comply with DOE’s order that defines budget formulation because the agency believed the order expired in 2003 and no longer applied to NNSA budget activities. DOE’s order on budget formulation outlines the requirements for the department’s annual budget formulation process, including that budget requests shall be based on cost estimates that have been thoroughly reviewed and deemed reasonable. However, we found that NNSA is guided by its own policy for its planning, programming, budgeting, and evaluation (PPBE) process and its associated activities, and found significant deficiencies in NNSA’s implementation of the process. For example, we found that NNSA did not have a thorough, documented process for assessing the validity of its budget estimates prior to their inclusion in the President’s budget submission to Congress, thereby limiting the reliability and credibility of the budget submission, but rather conducted informal, undocumented reviews of contractor-submitted budget estimates. In addition, we found that NNSA’s annual budget validation review process occurred too late in the budget cycle to inform agency or congressional budget development or appropriations decisions. As a result, we made a number of recommendations to DOE and NNSA to improve the budget review process. The agencies agreed with most of these recommendations. In January 2012, we reported that costs for contractor-provided support functions at NNSA and DOE Office of Science sites—such as procuring goods, managing human resources, and maintaining facilities—were not fully known for fiscal years 2007 through 2011 because DOE changed its data collection approach beginning in 2010 to improve its data and, as a result, did not have complete and comparable cost data for all years. We reported that the data for fiscal year 2011 were more complete but that changes to DOE’s definitions for support functions made it difficult to compare costs across all years. We recommended several actions to streamline contractor-provided support functions at NNSA and DOE sites. NNSA and DOE agreed with these recommendations. In conclusion, while DOE’s management challenges are significant, we have noted in our recent work areas of progress. We have made numerous recommendations in our reports to address challenges such as those identified in this testimony, and DOE has agreed with and implemented most of them. In addition, our work has recognized steps that DOE has taken to address these challenges. For example, in the most recent update of our high-risk series in February 2013, we narrowed the focus of the high-risk designation of DOE’s contract management to EM’s and NNSA’s major contracts and projects. We did so to acknowledge progress made in managing EM’s and NNSA’s nonmajor projects, noting that DOE continued to demonstrate strong commitment and top leadership support for improving contract and project management in EM and NNSA. We also noted that DOE had taken steps to enhance oversight, such as requiring peer reviews and independent cost estimates for projects with values of more than $100 million, as well as to improve the accuracy and consistency of data in DOE’s central repository for project data. Over the past several years, management challenges such as those discussed here have prompted some to call for removing NNSA from DOE and either move it to another department or establish it as an independent agency. However, as we have previously stated for the record, it is our view that few, if any, of NNSA’s management challenges stem from the organizational relationship between NNSA and DOE. As the new Secretary of Energy considers needed reforms in these areas, we note that DOE’s management of projects and programs, security and safety, and enterprise-wide data must improve—regardless of the department’s structure. We will continue to monitor DOE’s implementation of actions to resolve its long-standing management challenges, including actions that we have recommended to facilitate the resolution of these challenges. Chairman Murphy, Ranking Member DeGette, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions you may have at this time. If you or your staff have any questions about this testimony, please contact me at (202) 512-3841 or [email protected]. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony are Jonathan Gill, Assistant Director, and Rob Grace, Nancy Kintner-Meyer, Michelle Munn, Cheryl Peterson, Jeff Rueckhaus, Rebecca Shea, and Kiki Theodoropoulos. The following is a selection of GAO’s recent work assessing the Department of Energy’s management efforts. National Nuclear Security Administration: Laboratories’ Indirect Cost Management Has Improved, but Additional Opportunities Exist, GAO-13-534 (Washington, D.C.: June 28, 2013). Department of Energy: Observations on Project and Program Cost Estimating in NNSA and the Office of Environmental Management, GAO-13-510T (Washington, D.C.: May 8, 2013). Modernizing the Nuclear Security Enterprise: Observations on DOE’s and NNSA’s Efforts to Enhance Oversight of Security, Safety, and Project and Contract Management, GAO-13-482T (Washington, D.C.: Mar. 13, 2013). High-Risk Series: An Update, GAO-13-283 (Washington, D.C.: February 2013). Recovery Act: Most DOE Cleanup Projects Are Complete, but Project Management Guidance Could Be Strengthened, GAO-13-23 (Washington, D.C.: Oct. 15, 2012). Department of Energy: Better Information Needed to Determine If Nonmajor Projects Meet Performance Targets, GAO-13-129 (Washington, D.C.: Dec. 19, 2012). Hanford Waste Treatment Plant: DOE Needs to Take Action to Resolve Technical and Management Challenges, GAO-13-38 (Washington, D.C.: Dec. 19, 2012). Modernizing the Nuclear Security Enterprise: Observations on the National Nuclear Security Administration’s Oversight of Safety, Security, and Project Management, GAO-12-912T (Washington, D.C.: Sept. 12, 2012). Modernizing the Nuclear Security Enterprise: Observations on the Organization and Management of the National Nuclear Security Administration, GAO-12-867T (Washington, D.C.: June 27, 2012). Modernizing the Nuclear Security Enterprise: NNSA’s Reviews of Budget Estimates and Decisions on Resource Trade-offs Need Strengthening, GAO-12-806 (Washington, D.C.: July 31, 2012). Spent Nuclear Fuel: Accumulating Quantities at Commercial Reactors Present Storage and Other Challenges, GAO-12-797 (Washington, D.C.: Aug. 15, 2012). Nuclear Safety: DOE Needs to Determine the Costs and Benefits of Its Safety Reform Effort, GAO-12-347 (Washington, D.C.: Apr. 20, 2012). Modernizing the Nuclear Security Enterprise: New Plutonium Research Facility at Los Alamos May Not Meet All Mission Needs, GAO-12-337 (Washington, D.C.: Mar. 26, 2012). Department of Energy: Additional Opportunities Exist to Streamline Support Functions at NNSA and Office of Science Sites, GAO-12-255 (Washington, D.C.: Jan. 31, 2012). Nuclear Fuel Cycle Options: DOE Needs to Enhance Planning for Technology Assessment and Collaboration with Industry and Other Countries, GAO-12-70 (Washington, D.C.: Oct. 17, 2011). High-Risk Series: An Update, GAO-11-278 (Washington, D.C.: February 2011). Commercial Nuclear Waste: Effects of a Termination of the Yucca Mountain Repository Program and Lessons Learned, GAO-11-229 (Washington, D.C.: Apr. 8, 2011). Nuclear Weapons: National Nuclear Security Administration’s Plans for Its Uranium Processing Facility Should Better Reflect Funding Estimates and Technology Readiness, GAO-11-103 (Washington, D.C.: Nov. 19, 2010). Recovery Act: Most DOE Cleanup Projects Appear to Be Meeting Cost and Schedule Targets, but Assessing Impact of Spending Remains a Challenge, GAO-10-784 (Washington, D.C.: July 29, 2010). Nuclear Weapons: Actions Needed to Identify Total Costs of Weapons Complex Infrastructure and Research and Production Capabilities, GAO-10-582 (Washington, D.C.: June 21, 2010). Department of Energy: Actions Needed to Develop High-Quality Cost Estimates for Construction and Environmental Cleanup Projects, GAO-10-199 (Washington, D.C.: Jan. 14, 2010). Nuclear Weapons: Actions Needed to Identify Total Costs of Weapons Complex Infrastructure and Research and Production Capabilities, GAO-10-582 (Washington, D.C.: June 21, 2010). Nuclear Waste Management: Key Attributes, Challenges, and Costs for the Yucca Mountain Repository and Two Potential Alternatives, GAO-10-48 (Washington, D.C.: Nov. 4, 2009). Information Security: Actions Needed to Better Manage, Protect, and Sustain Improvements to Los Alamos National Laboratory’s Classified Computer Network, GAO-10-28 (Washington, D.C.: Oct. 14, 2009). Nuclear Security: Better Oversight Needed to Ensure That Security Improvements at Lawrence Livermore National Laboratory Are Fully Implemented and Sustained, GAO-09-321 (Washington, D.C.: Mar. 16, 2009). Nuclear Weapons: NNSA and DOD Need to More Effectively Manage the Stockpile Life Extension Program, GAO-09-385 (Washington, D.C.: Mar. 2, 2009). Nuclear and Worker Safety: Actions Needed to Determine the Effectiveness of Safety Improvement Efforts at NNSA’s Weapons Laboratories, GAO-08-73 (Washington, D.C.: Oct. 31, 2007). Nuclear Safety: Department of Energy Needs to Strengthen Its Independent Oversight of Nuclear Facilities and Operations, GAO-09-61 (Washington, D.C.: Oct. 23, 2008). National Nuclear Security Administration: Additional Actions Needed to Improve Management of the Nation’s Nuclear Programs, GAO-07-36 (Washington, D.C.: Jan.19, 2007). 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. | DOE missions encompass energy resources, scientific and technological development, environmental cleanup, and nuclear security. Management of major projects and contracts within EM and NNSA, a separately organized agency within DOE, remain on GAO's list of areas at high risk of waste, fraud, abuse, and mismanagement, where they have been listed since 1990. Progress has been made, but GAO continues to identify management problems related to cost and schedule overruns on major environmental cleanup and nuclear projects and safety problems at DOE sites that have not been fully addressed. This testimony discusses DOE's management challenges in (1) managing major projects and programs, (2) managing security and safety at DOE sites, and (3) producing reliable enterprise-wide information, including budget and cost data. Over the past decade, GAO has made numerous recommendations in its reports to address challenges such as those identified in this testimony. DOE agreed with most of them and is taking steps toward implementing them. GAO's work has also recognized some of the steps that DOE has taken to address these challenges. For example, in the most recent update of GAO's high-risk series, GAO narrowed the focus of the high-risk designation of DOE's contract management to EM's and NNSA's major contracts and projects (i.e., those costing $750 million or more). GAO will continue to monitor DOE's implementation of actions to resolve long-standing management challenges, including actions taken in response to GAO's recommendations. As GAO has reported over the last decade, the Department of Energys (DOE) management of major projects and programs, security and safety at DOE sites, and reliable enterprise-wide management information, including budget and cost data, are among the most persistent management challenges the department faces. Challenges managing major projects and programs . The Office of Environmental Management (EM) and the National Nuclear Security Administration (NNSA) continue to face challenges managing major projects and programs, which have incurred significant cost increases and schedule delays. For example, GAO reported in July 2013 that the cost estimate range for a project to construct a modern Uranium Processing Facility (UPF) at DOEs Y-12 National Security Complex in Oak Ridge, Tennessee, had increased five- to seven-fold to up to $6.5 billion since the projects inception in 2004. Furthermore, the most recent cost estimate range may no longer be valid after the contractor reported in August 2012 that the UPFs roof would have to be raised 13 feet. GAO is currently assessing DOE cost estimating policies and practices and plans to issue a report based on this work later this year. DOE's actions to improve project management appear promising, but their impact on meeting cost and schedule targets may not be clear. Because all ongoing major projects have been in construction for several years, neither EM nor NNSA has a major project that can yet demonstrate the impact of DOE's recent reforms. Challenges managing security and safety . Reports about the July 2012 security breach at the Y-12 National Security Complex identified numerous, long-standing and systemic security issues across the nuclear security enterprise and significant safety problems at DOE sites that have not been fully addressed. A NNSA Security Task Force and an independent panel convened at the request of the Secretary of Energy also found systemic security issues across the nuclear security enterprise, and found deficiencies in DOEs security culture and oversight, which closely matched issues GAO identified a decade earlier. GAO has ongoing work assessing DOE security reforms and plans to issue a report based on this work later this year. GAO has also found that DOE management weaknesses have contributed to persistent safety problems at NNSA sites. Challenges in producing reliable enterprise-wide management information . GAO has reported that DOE does not have reliable enterprise-wide management data needed to, among other things, prepare its budget requests, identify the costs of its activities, and ensure the validity of its cost estimates. For example, in June 2013, GAO reported that while different approaches are allowed by Cost Accounting Standards, NNSAs management and operations contractors differ in how they classify and allocate indirect costs at NNSA laboratories, which limits NNSAs ability to assess cost data and meaningfully compare cost management performance across laboratories. In addition, GAO reported in June 2010 that NNSA could not accurately identify the total costs to operate and maintain weapons facilities and infrastructure because of differences among contractors accounting practices. GAO is currently monitoring DOEs ongoing efforts to improve its capability to produce reliable enterprise-wide information. |
FEMA created the Grant Programs Directorate on April 1, 2007, in accordance with the Post-Katrina Emergency Management Reform Act (Post-Katrina Act), to consolidate the management of emergency preparedness grants, including the UASI grants. The Grant Programs Directorate’s subject-matter experts are to provide on-site programmatic monitoring and technical assistance to grantees, while analyzing, evaluating, and ensuring accountability and program effectiveness. Similarly, FEMA created the National Preparedness Directorate to carry out key elements of the national preparedness system, in coordination with other federal, state, local, tribal, nonprofit, and private-sector organizations. The Directorate includes the National Integration Center and the Office of Preparedness Policy, Planning, and Analysis. The Office of Preparedness Policy, Planning, and Analysis is responsible for developing tools and measures for assessing national preparedness nationwide. Since its inception in fiscal year 2003, the purpose of the UASI program has been to provide federal assistance to build and sustain regional preparedness capabilities necessary to prevent, protect, respond to, and recover from acts of terrorism in the nation’s highest risk urban areas, such as information gathering, search and rescue, and citizen evacuation. To administer the UASI program, FEMA estimates the risk relative to selected urban areas, considering threat, vulnerability, and consequences. On the basis of this analysis, it ranks the UASI areas and identifies urban areas as eligible to apply for UASI funding. DHS and FEMA have increased the number of regions receiving UASI grant funds from the original 7 areas identified for funding by DHS in 2003 which received $96.5 million, to 62 areas designated by FEMA that received $798.6 million in funding in 2009, as shown in table 1. As required by the 9/11 Act, FEMA changed the definition it used to identify the UASI regions included in its risk analysis model. Specifically, FEMA used this risk analysis model to determine its 2008 UASI grant allocations and changed the definition of UASI regions included in the model from one that includes a 10-mile radius around an urban area’s center city boundary to Metropolitan Statistical Areas (MSAs) as defined by the Census Bureau. In July 2008, we reported on the effect of this change on FEMA’s risk analysis model and risk-based allocation methodology for determining risk and distributing UASI grant funds and found the methodology reasonable. In addition, although the 9/11 Act did not specify the intent of the change to MSAs, we concluded that using MSAs provided a more standardized and generally accepted approach to defining an urban area. FEMA did not require UASI grantees to change the number of jurisdictions participating in the governance of the UASI region as a result of this change, but recommended in grant guidance that UASI regions expand their efforts to involve regional preparedness partners (for example, contiguous jurisdictions, port authorities, rail and transit authorities, campus law enforcement, and state agencies) in their program activities. GAO, Homeland Security: DHS Risk-Based Grant Methodology Is Reasonable, But Current Version’s Measure Of Vulnerability Is Limited, GAO-08-852 (Washington, D.C.: June 27, 2008). collectively responsible for coordinating development and implementation of the projects and programs being conducted with UASI grant funds. Each UASI region is to develop a charter or other form of standard operating procedures that addresses such issues as membership, governance structure, voting rights, grant management and administration responsibilities, and funding allocation method. The charter must also outline how decisions made in UASI meetings for that region will be documented and shared with UASI members. FEMA requires each UASI region to create its own regional working group, which FEMA’s grant guidance refers to as an urban area working group. UASI grant guidance requires that membership of a region must include representation from the jurisdictions and response disciplines that comprise the region as defined by the urban area’s working group. Beginning in fiscal year 2008, UASI grant guidance recommended to urban areas that they consider for UASI working group membership those counties within which the cities included in the UASI region reside, contiguous jurisdictions, and jurisdictions within the region’s MSA. Each year FEMA issues UASI grant guidance that describes the priorities and requirements for the annual grant cycle. FEMA requires each UASI region to develop and submit a strategic plan that outlines the region’s common goals, objectives, and steps for implementation of projects and programs to enhance regional preparedness. This strategy, known as the Urban Area Homeland Security Strategy, is intended to provide each UASI region with direction for enhancing regional capabilities. UASI regions must use their strategy as the basis for requesting funds, and FEMA’s grant guidance states that there must be a clear correlation between the goals, objectives, and priorities identified in the Urban Area Homeland Security Strategy and UASI program activities. Once FEMA allocates grant funds, UASI regions are responsible for coordinating development and implementation of preparedness projects under the grant program. After funds are awarded, grantees are required to report every 6 months on progress as part of the regular grant reporting process. Performance data submitted through grant reporting are to be reviewed and validated through program monitoring by FEMA. In December 2003, the President issued Homeland Security Presidential Directive-8 (HSPD-8), which called on the Secretary of Homeland Security to carry out and coordinate preparedness activities with public, private, and nonprofit organizations involved in such activities, and directed that DHS establish measurable readiness priorities and targets. In addition, the Post-Katrina Act requires FEMA to develop specific, flexible, and measurable guidelines to define risk-based preparedness (i.e., target) capabilities and to establish preparedness priorities that reflect an appropriate balance between the relative risks and resources associated with all hazards. DHS published the National Preparedness Guidelines in September 2007. Specifically, the purposes of the Guidelines are to: organize and synchronize national—including federal, state, local, tribal, and territorial—efforts to strengthen national preparedness; guide national investments in national preparedness; incorporate lessons learned from past disasters into national preparedness priorities; facilitate a capability-based and risk-based investment planning process; and establish readiness metrics to measure progress and a system for assessing the nation’s overall preparedness capability to respond to major events, especially those involving acts of terrorism. The Guidelines describe eight national priorities that are intended to guide preparedness efforts, as presented in table 2. The National Preparedness Guidelines also define 37 specific preparedness capabilities that communities, the private sector, and all levels of government should collectively possess in order to respond effectively to disasters. These preparedness capabilities cover a broad range of activities to prevent, protect against, respond to, and recover from man-made or natural disasters, and include such things as information gathering, search and rescue, citizen evacuation, and structural damages assessment. A complete list of the 37 preparedness capabilities is provided in appendix 1. FEMA requires grant recipients to demonstrate how their progress in meeting these priorities is supported by projects to develop specific preparedness capabilities. According to FEMA, with its focus on enhancing regional preparedness through the collaborative efforts of multiple jurisdictions throughout urban areas, the UASI program directly supports the national priority to expand regional collaboration. In March 2008 we testified that, although FEMA has taken some steps to establish goals, gather information, and measure progress, its monitoring of homeland security grant expenditures did not provide a means to measure the achievement of desired program outcomes. We further reported that FEMA’s efforts did not provide information on the effectiveness of those funds in improving the nation’s capabilities or reducing risk. To address these concerns, FEMA is developing two new systems to gather data on preparedness capabilities. Specifically, as we reported in December 2008 and April 2009, respectively, FEMA is developing a Cost- to-Capability (C2C) initiative and a Comprehensive Assessment System. In December 2008, we reported that to help state and local stakeholders make better investment decisions for preparedness, FEMA’s Grant Programs Directorate is developing the C2C initiative to help assess a jurisdiction’s capabilities. However, according to FEMA officials, the C2C results—as designed—would not directly measure preparedness, and grantees’ use of the C2C tool will not be mandatory. In April 2009, we reported that FEMA is developing a comprehensive assessment system in response to a Post-Katrina Act requirement to assess the nation’s capabilities and overall preparedness for preventing, responding to, and recovering from natural and man-made disasters. We reported that FEMA faces methodological and coordination challenges in developing and completing its proposed Comprehensive Assessment System and reporting on its results. Among other things, we recommended that FEMA enhance its project management plan to include milestone dates, an assessment of risk, and related mitigation strategies for comprehensively collecting and reporting on disparate information sources, developing quantifiable metrics for preparedness capabilities that are to be used to collect and report preparedness information, and reporting on the results of preparedness assessments to help inform homeland security resource allocation decisions. FEMA agreed with our recommendations. In prior reviews, we examined effective regional coordination in emergency preparedness efforts and collaboration among federal agencies to identify common approaches and practices. For example, in September 2004 we reviewed coordination practices in various metropolitan areas to identify regional programs with lessons learned that could be applied in the National Capital Region and elsewhere and identified four factors that enhance regional coordination efforts—a collaborative regional organization, flexibility in the membership and geographic area, a strategic plan with measurable goals and objectives, and funding at a regional level. (See table 3). In 2005, we examined challenges that federal agencies face in coordinating their efforts and identified key practices that can enhance and sustain their collaborative efforts by among other things: defining and articulating a common outcome(s); establishing mutually reinforcing or joint strategies to achieve the outcome; identifying and addressing needs by leveraging resources; achieving mutual agreement(s) on agency roles and responsibilities; establishing compatible policies, procedures, and other means to operate developing mechanisms to monitor, evaluate, and report the results of collaborative efforts; and reinforcing agency accountability for collaborative efforts through agency plans and reports. In March 2000, we reported that agencies can encounter a range of barriers when they attempt to collaborate. These include such challenges as missions that are not mutually reinforcing or that may even conflict, agencies’ concerns about protecting jurisdiction over missions and control over resources, and incompatible procedures, processes, data, and computer systems—making reaching a consensus on strategies and priorities difficult. In September 2004, we also reported that the short history of regional collaboration for homeland security is characterized by attempts of federal, state, and local governments to overcome a fragmented federal grant system and local jurisdictional barriers to assess needs, fill gaps, and plan for effective prevention and emergency response. In July 2002, the President issued the National Strategy for Homeland Security, which emphasized a shared responsibility for security involving close cooperation among all levels of government. To enhance emergency preparedness, the strategy called for systems that avoid duplication and increase collaboration to better align public and private resources for homeland security. We have consistently called for the development of a national, rather than purely federal, strategy that involves partners from all levels, including federal, state, and local organizations. For example, in testimony given in 2003, we highlighted multiple barriers to addressing one basic area of preparedness—interoperable communications systems— including the lack of effective, collaborative, interdisciplinary, and intergovernmental planning. In another study of bioterrorism preparedness, we reported that although progress had been made in local planning, regional planning involving multiple municipalities, counties, or jurisdictions in neighboring states lagged. We found that the autonomy of local jurisdictions and competing priorities within and among them can make regional coordination difficult and that efforts that seek to overcome these challenges to coordinate regionally must take into account the different operational structures and civic traditions of states and municipalities. FEMA uses two grant administration tools—the Grant Reporting Tool and the Grant Monitoring Tool—to gather information on projects funded and progress made by UASI grantees to expand regional collaboration and to report on UASI program performance. However, FEMA has not assessed how UASI regions’ collaboration efforts have helped build regional preparedness capabilities. FEMA uses two grant administration tools to gather information on projects funded and progress made by UASI grantees; and the agency used this information to help produce the first Federal Preparedness Report in January 2009, which provided an overall assessment of the nation’s preparedness to prevent, protect, respond to, and recover from natural and man-made disasters. UASI region officials use FEMA’s Grant Reporting Tool to, among other things, report on project funding plans and collect and record grant expenditures over the life of grant projects. FEMA program analysts use another system, the Grant Monitoring Tool, to record the results of their monitoring visits at each UASI region once every 2 years. FEMA also used information from the Grant Monitoring Tool to report on UASI program performance in OMB’s 2008 Program Assessment Rating Tool (PART). Grantees use FEMA’s Grant Reporting Tool to report twice a year on planned and actual grant obligations and progress made on grant projects. According to annual grant guidance, recipients must account for all grant funds and the funds must be linked to one or more projects that support specific goals and objectives in a state’s homeland security strategy and the corresponding urban area’s security strategy. The Grant Reporting Tool is updated by the grantee primarily with the dollar amounts associated with specific grant projects, national priorities associated with each project, and the preparedness capabilities recipients believe will be enhanced by each proposed project. The Grant Reporting Tool also contains data on the funds allocated to specific categories of activities— planning, organization, equipment, training, and exercises. For each project, UASI grantees are to identify at least one of the national priorities to be addressed by the project as well as the primary capability to be developed. However, they can also identify additional national priorities and capabilities they intend to improve as a result of the proposed project. We analyzed data from FEMA’s Grant Reporting Tool from fiscal year 2006 through fiscal year 2008 to determine the types of preparedness capabilities that UASI regions associated with their projects that supported the National Priority to Expand Regional Collaboration. Of the 2,847 UASI grant projects funded under the UASI program during this time period, we reviewed all those projects that supported the National Priority to Expand Regional Collaboration—a total of 446 such projects. Of these 446 projects, 303 projects funded a single preparedness capability. (The remaining 143 projects funded multiple capabilities.) In terms of funding, of the 37 preparedness capabilities, these projects primarily sought to develop six: (1) Planning, (2) Communications, (3) Intelligence and Information Sharing and Dissemination, (4) Emergency Operations Center Management, (5) Counter-Terror Investigation and Law Enforcement, and (6) Chemical/Biological/Radiological/Nuclear and/or Explosive (CBRNE) Detection (See fig. 1). For example, one UASI project to expand regional collaboration through the planning capability was intended to “develop/enhance plans, procedures, and protocols.” According to the project description, the specific activities the UASI region planned to fund included conducting a business impact threat assessment that will drive the development of plans to ensure continuity of operations for critical information technology infrastructure and applications. Another project— to provide funding to purchase interoperable systems and establish an emergency operations center— was intended to expand regional collaboration through the communications preparedness capability. According to FEMA officials, the agency used data from the Grant Reporting Tool to publish the first Federal Preparedness Report in January 2009. In summarizing the achievement of the UASI grant program, the report noted that 64 percent of UASI grant recipients reported progress in implementing their UASI strategies’ program goals and objectives. The report assessed the achievement of the National Priority to Expand Regional Collaboration in terms of the funding allocated to this priority— noting that states and urban areas had allocated nearly $1.1 billion in homeland security grant funds from fiscal year 2004 to fiscal year 2007 to projects that were intended to improve regional collaboration. FEMA also reported that states and UASI regions have supported regional preparedness through “plans, initiatives, and other programs.” FEMA uses the Grant Monitoring Tool primarily to record the results of program analysts’ visits to UASI regions. On a 2-year cycle, FEMA officials visit each UASI region to interview officials and use the system to document their observations regarding grant activities. The Grant Monitoring Tool contains a series of questions about UASI regions’ progress in achieving their goals and objectives as well as national priorities, and FEMA program analysts are to discuss the priorities with grantees to measure their progress in implementing each national priority. FEMA uses data from this tool to report on the overall performance of the UASI program in OMB’s Program Assessment Rating Tool (PART). In 2008, FEMA measured the UASI program’s overall performance against three long-term measures as reported by UASI officials: percent of significant progress made toward implementation of the percent of grantees reporting significant progress toward the goals and objectives identified in their state homeland security strategies—67 percent; and percent of analyzed capabilities performed acceptably in exercises—79 percent. While executive, departmental, and agency guidance all direct FEMA to assess how regional collaboration builds national preparedness capabilities, FEMA has not yet established measures to do so. Specifically: Homeland Security Presidential Directive 8 requires that the national preparedness policy establish measurable priorities (such as the national priority to expand regional collaboration) and targets and include metrics that support the national preparedness goal, including standards for preparedness assessments and a system for assessing the nation’s overall preparedness. DHS’s National Preparedness Guidelines, the national preparedness policy, state that regional collaboration is critical to national preparedness, identify the need to expand regional collaboration as a national priority, and establish the need to develop measurable capability objectives, assess current levels of capabilities, and find ways to close any gaps. FEMA’s UASI grant guidance identifies the need to tie together the established priorities and objectives of the National Preparedness Guidelines, including the national priority to expand regional collaboration, with efforts to establish preparedness capabilities, conduct capability assessments, and make adjustments to better ensure that the national investment yields measurable improvements in the nation’s preparedness. Moreover, leading management practices recognize the importance of establishing performance measures in achieving results. When designed effectively, performance measures help managers (1) determine how well a program is performing, (2) identify gaps in performance, and (3) determine where to focus resources to improve results. However, FEMA has no measures in place to assess the extent to which the funds appropriated by Congress—approximately $5 billion for the UASI program since 2003—have achieved the goal to build regional preparedness through collaboration efforts. The National Preparedness Guidelines state that, because major events often have regional impact, it is vital to enhance collaborative efforts by federal, state, local, tribal, and territorial entities to communicate and coordinate with one another, the private sector, nongovernmental organizations, and individual citizens. However, the Guidelines do not identify any means of assessing regional collaboration outputs and activities, or the connection between regional collaboration activities and the achievement of regional preparedness capabilities. In addition, none of FEMA’s other strategies, guidance, and policies—such as FEMA’s Grant Programs Directorate Strategy for 2009-2011 and FEMA’s agencywide strategy for 2008-2013—provide output or outcome measures to assess the effect of UASI regions’ collaborative efforts on preparedness capabilities. FEMA’s Federal Preparedness Report acknowledges this limitation, citing a lack of specific targets that define how or whether national priorities— including the National Priority to Expand Regional Collaboration—are achieved. The report does not identify or specifically discuss the effects of collaborative efforts or how they contributed to improvements in regional preparedness capabilities associated with UASI grant program investments. In gathering data from states, FEMA directed states to describe their current capability under the National Priority to Expand Regional Collaboration, but this was limited to a general description of factors related to collaboration. While these factors are related to states’ and urban areas’ efforts to enhance regional collaboration, they do not provide a means to assess how regional collaboration activities help build preparedness capabilities. In accordance with the Post-Katrina Act, FEMA has an effort underway to establish a comprehensive assessment system to assess the nation’s capabilities and overall preparedness for preventing, responding to, and recovering from natural and man-made disasters. As part of this effort, FEMA is to collect information on state capability levels and report on federal preparedness to Congress, including the results of the Comprehensive Assessment System. Moreover, FEMA is currently working to develop measurable targets related to each of the 37 preparedness capabilities. While we previously reported challenges FEMA faces in developing and implementing the comprehensive assessment system, FEMA could build upon its current efforts to assess overall preparedness by developing and including measures related to the collaboration efforts of UASI regions and their effect on building regional preparedness. FEMA officials cited the National Preparedness Guidelines, which note that the challenge for government officials is to determine the best way to build capabilities for bolstering preparedness and achieving the guidelines, and that the “best way” to do so will vary across the nation. According to the Guidelines, the results of national preparedness assessments will be used to refine strategies and update the national priorities, and FEMA officials said that the agency is considering updating the National Preparedness Guidelines in 2010. FEMA officials stated that their current efforts to develop measurable preparedness capabilities will determine progress in building preparedness, but officials said that there are no program plans to develop measures to assess how UASI collaborative efforts build preparedness. We recognize the challenges associated with establishing a single set of measures related to collaboration activities for the UASI program, such as deciding how information and data from different sources will be used to inform any such measures, and coordinating with numerous federal, state, and local stakeholders during this process. However, developing measures to assess how UASI regions’ collaborative efforts enhance regional preparedness capabilities could provide FEMA with more meaningful information on the national return on investment for the approximately $5 billion in grant expenditures for regional collaboration through the UASI program to date. UASI program officials described program features that support regional collaboration, many of which reflect practices we have identified that can enhance and sustain collaboration. UASI officials also described a number of continuing challenges they faced in their efforts to expand regional collaboration, which mirror collaboration challenges we identified in earlier work examining coordination among federal agencies. In addition, some UASI regions reported changes in membership planned or undertaken in response to FEMA’s use of metropolitan statistical areas to assess risk, as called for in the 9/11 Act. Certain UASI program features reflect practices we have identified that can enhance and sustain collaboration. For example, the UASI program requires that each UASI region develop and maintain a strategy and define its membership and governance structure. The program requirements also include the need for written charters and mutual aid agreements between local governments and agencies, as well as biannual reporting—the types of practices we have reported that agencies perform to enhance and sustain their collaborative efforts, as summarized in table 4. Monitoring, evaluating, and reporting the results of collaborative efforts—one of the leading practices we identified—could be strengthened if FEMA develops measures to assess how UASI regions’ collaborative efforts enhance regional preparedness capabilities. Additionally, in our survey of UASI participants and during our site visits, UASI officials described various program features that they said greatly or somewhat helped support regional collaboration, and their responses generally reflect factors related to organization, flexibility, planning, and funding that we have found support effective regional collaboration in preparedness efforts. The results of our survey can be found in appendix II. Collaborative regional organization: In September 2004, we reported that a collaborative regional organization enhances preparedness and includes representation from many different jurisdictions and disciplines. Moreover, our prior work on key practices to enhance and sustain collaboration identified the establishment of mutually reinforcing or joint strategies and the mutual agreement of roles and responsibilities as important elements. In the UASI program, mutual aid agreements are one way jurisdictions and agencies within UASI regions define organizational roles and responsibilities during those times when one locality needs the resources of nearby localities. Of the 49 UASI regions we surveyed, 46 said they have active mutual aid agreements, of which 38 identified that such an agreement either “greatly helps” or “somewhat helps” measure regional capability-building. Mutual aid agreements promote collaboration across governments or agencies when they explicitly identify how certain regional response efforts are to be accomplished and by whom. In addition, 39 UASI regions stated that agreements such as charters and bylaws are a UASI-wide program feature, of which 26 said that this either “greatly helps” or “somewhat helps” measure regional capability-building (15 and 11 respectively). Officials in all six UASI regions we visited said that their UASI regional organization included representation from many jurisdictions and disciplines. UASI region officials in our site visits stated that they rely on subcommittees within their organization to develop proposed projects for their grant application. These subcommittees, for example, can be organized based on a particular project (e.g., communications, exercises, and training, etc.) or based on a response discipline (e.g., all fire departments) across the urban area. According to UASI officials, grant project proposals are then provided to the voting officials of the UASI region for approval. This structured approach helps subcommittee officials focus on operational planning while UASI officials can focus on strategic planning, according to UASI officials from 2 sites we visited. Flexibility in membership and geographic area: In our prior work, we reported that when the membership and geographic area of the regional organization is flexible it fosters interjurisdictional coordination and enhances regional preparedness. Further, we reported addressing needs by leveraging resources as a leading practice for effective collaboration. Officials from three UASI regions we visited in California—Los Angeles/Long Beach, Anaheim/Santa Ana, and Riverside—described a long-standing tradition of flexibility in working among response disciplines, leveraging the expertise of diverse members such as fire and public health departments across jurisdictions to prepare and respond to actual events such as frequent wildfires and periodic earthquakes. Officials from jurisdictions in these three UASI regions used this expertise to develop and refine California’s incident management system, which became the foundation for the National Incident Management System (NIMS). UASI region officials in Miami and Ft. Lauderdale, Florida said that NIMS, in turn, has been very useful for expanding regional collaboration as the system integrates first responders under a commonly understood incident command structure. Similarly, all 49 UASI regions we surveyed reported that they use NIMS compliance for first responders to build regional capabilities. Training and exercise activities can be developed to provide flexible opportunities to bring in as many or as few multidisciplinary and multijurisdictional stakeholders within the region, as needed, to learn and test organizational preparedness responsibilities. All UASI regions we visited identified training and exercises as key activities that help bring together jurisdictions and first responders. In addition, 44 of the 49 UASI regions we surveyed reported that their UASI-wide training and exercises are an activity they use regionwide that builds regional capabilities. Strategic planning: Our prior work found that planning activities can enhance regional preparedness and collaboration. All but one of the 49 UASI regions we surveyed identified their strategic planning activities as building their urban areas’ regional capabilities. In addition, officials at all six of the UASI regions we visited said the annual UASI grant planning process required by FEMA enhances regional collaboration because the process establishes an annual, organized effort to identify a region’s needs based on its strategic plans and preparedness capabilities. UASI region officials said that FEMA requires UASI regions to develop and submit their Urban Area Homeland Security Strategy—along with the UASI region’s grant program proposals—as the basis for requesting funds. The evaluation of needs and identification of gaps in capabilities are important steps for UASI regions in their development of a homeland security strategy and annual grant proposals. Regional funding: Our 2004 report found that funding regional organizations provides incentives for collaborative planning activities to enhance preparedness regionwide. A number of UASI regions have used the grant program as a means to consolidate administrative functions and procurement activities regionally. For example, 42 of 49 UASI regions we surveyed said that they use UASI-wide cost-sharing activities across jurisdictions—such as purchasing larger quantities of equipment at lower overall costs in order to take advantage of economies of scale. Also, 33 UASI regions said that they work with their state to take advantage of economies of scale. Leveraging federal funds across grant programs is another collaboration activity that 44 UASI regions reported in our survey. One example where DHS grant funds—UASI and State Homeland Security Grant funds—are leveraged to build regional capabilities is in Florida, where the Miami and Fort Lauderdale UASI programs are both in the same state-designated region for security planning purposes. According to officials, both UASI regions work with the state to coordinate the sources of project funding. Miami or Fort Lauderdale UASI regions pool a part of their funds each year to make them available for their state-designated security region’s needs, regardless of whether the jurisdiction in need is the Miami or Fort Lauderdale UASI region. For example, the Fort Lauderdale UASI region provided a portion of its UASI funding to support training for a local government within the Miami UASI region area. In addition to the positive impact of a variety of program features on regional collaboration described above, UASI officials also described a number of continuing challenges they faced to expand regional collaboration reflecting those challenges we previously identified that federal agencies may encounter when they attempt regional collaboration. These challenges include conflicting missions, concerns regarding jurisdiction and control over resources, and incompatible processes or systems that can make reaching a consensus on strategies and priorities difficult. Specifically: Conflicting missions: As we reported in 2000, one challenge concerns missions that are not mutually reinforcing or that may even conflict, making reaching a consensus on strategies and priorities difficult. As part of our survey, we posed a series of possible challenges, based in part on our prior work, which may occur between UASI regions’ goals and objectives and the goals and objectives of FEMA and other related federal programs. In response, 30 of the 46 surveyed UASI regions reported that “changing federal homeland security goals and objectives” presented a regional challenge for their urban area. Of these, 28 UASI regions cited this as a challenge that “greatly” or “somewhat” impairs regional collaboration (4 and 24 respectively). In addition, 19 UASI regions identified “unclear federal homeland security goals and objectives” as a regional challenge, with 18 of these UASI regions saying that this “greatly” or “somewhat” impairs regional collaboration (5 and 13 respectively). According to the National Preparedness Guidelines, FEMA is committed to working with its homeland security partners in updating and maintaining the Guidelines and related documents as part of a unified National Preparedness System, which should help ensure coordinated strategies, plans, procedures, policies, training, and capabilities at all levels of government. For example, in January 2009, FEMA reported the results of its discussions with state and local emergency management and homeland security agencies from 20 states (that included 15 UASI regions), finding the most significant challenges the agencies identified to be “balancing the varied, and often competing, interests (ie. missions, goals and objectives) from the full spectrum of stakeholders on the design and management of preparedness programs.” The report notes that these challenges are common to the management and coordination of homeland security preparedness initiatives but that the resulting recommendations will help to overcome those challenges, noting, for example, that “efforts are already underway in updating policy, and coordinating preparedness assistance.” Moreover, as FEMA implements the recommendations from our report on the National Preparedness System to improve development of policies and plans, national capability assessments, and strategic planning—all of which contain preparedness goals and objectives—should help better align local, state, regional, and federal missions. Jurisdictional concerns: Another significant barrier to collaboration our prior work identified related to concerns about protecting jurisdiction over federal missions. Our survey found, for example, that 22 UASI regions identified the lack of written authority and agreements as a regional challenge. Eighteen of these UASI regions cited this as a challenge that “greatly” or “somewhat impairs” regional collaboration (4 and 14 respectively). However, 31 UASI regions said that “difficulty in reaching consensus in decision making among jurisdictions” was not a challenge that they face within their region. Further, 36 UASI regions said that “difficulty in reaching consensus in decision making among response disciplines (e.g. police, fire, EMS, etc.)” was not a challenge within their urban area; although 13 of 49 UASI regions said this was a challenge, none of these 13 UASI regions said this challenge greatly impairs regional collaboration, 10 regions said this challenge somewhat impairs regional collaboration, while the remaining 3 cited no impairment. Although our survey found some UASI regions facing challenges over jurisdiction, fewer UASI regions reported issues related to control and access to resources within the region. The Grant Programs Directorate’s Cost-to-Capability initiative, currently under development, is intended to help FEMA and localities better target their use of federal grant funds and enable comparisons across jurisdictions in evaluating grant proposals, which should help UASI regions in their efforts to reach consensus in decision making among jurisdictions. Incompatible systems: Another barrier to effective collaboration, which we reported in 2000, is the lack of consistent data collected and shared by different agencies, which prevents the federal government from achieving interagency goals and objectives. For a UASI region, this collaboration barrier can occur as a part of its efforts to establish or sustain fusion centers. As we reported in 2007, almost all states and several local governments have established or are in the process of establishing fusion centers to collaborate and share information across federal, state, and local governments and agencies and address gaps in information sharing. Our survey found, for example, that intelligence sharing activities are a part of 41 UASI regions; while the remaining 8 UASI regions reported that they are in the process of building this capability. In addition, 34 UASI regions reported no regional challenges related to sharing intelligence. Of those 14 UASI regions we surveyed that cited conflicts about intelligence sharing as a regional challenge, 13 reported that this either greatly or somewhat impaired regional collaboration (5 and 8 respectively; 1 response was “don’t know”). As we stated in the 2007 report, DHS, recognizing the importance of fusion centers in information sharing, has efforts under way to address challenges fusion center officials identified in establishing and operating their centers. DHS concurred with our recommendation that the federal government should determine its long- term fusion center role and whether it expects to provide resources to centers to help ensure their sustainability, and said it was reviewing strategies to sustain fusion centers as part of the work plan of the National Fusion Center Coordination Group. In September 2008, officials in DHS’s Office of Intelligence and Analysis reported that DHS has committed to dedicating resources to support and develop the state and local fusion center network and will continue to deploy personnel and resources to centers to augment their capabilities. Specifically, officials reported that DHS continues to provide personnel to certain fusion centers, has augmented training and technical assistance efforts, and has provided additional centers with networks and systems for information sharing. In December 2008, DHS issued additional guidance for interaction with fusion centers. While these efforts address DHS’s efforts to define its role in fusion centers, the efforts are ongoing and specific questions regarding the timing and amount of these resources have yet to be determined. Similarly, interoperable communications has been both a common need across all urban areas, and a long-standing barrier. According to FEMA, interoperable communications is the ability of public safety agencies (police, fire, EMS) and service agencies (public works, transportation, hospitals, etc.) to talk within and across agencies and jurisdictions via radio and associated communications systems. According to FEMA, it is essential that public safety agencies have the intra-agency operability they need, and that they build its systems toward interoperability. Of the 49 UASI regions we surveyed, 27 UASI regions reported that interoperable communications between first responders present a regional challenge within their UASI region, with 21 of these regions reporting that this “greatly” or “somewhat” impairs regional collaboration (6 and 15 respectively). However, 6 of the 27 UASI regions said it does not impair regional collaboration. FEMA’s Federal Preparedness Report reported on the extent that urban areas were achieving interoperable communications. In 2007 DHS assessed which of these regions were in one of four stages of implementation—“Early” through “Advanced.” DHS has several programs designed to help build national interoperable communications capabilities in varying stages of implementation. In response to our survey and at all 6 of the UASI regions we visited, officials described their views of what constituted effective regional collaboration and how they assess their collaborative efforts. Many UASI regions identified program activities and processes that helped them build regional capabilities and assess their performance as a region. For example, according to our survey: Thirty-seven UASI regions said a needs assessment or analysis of gaps in preparedness capabilities is a UASI-wide program feature. All 37 UASI regions said that this either “greatly helps” or “somewhat helps” measure regional capability-building (27 and 10 respectively). In addition, 35 of these 37 UASI regions also said that this feature either “greatly helps” or “somewhat helps” them measure regional performance (24 and 11 respectively). Thirty-one UASI regions identified operational planning as an activity they use to build regional collaboration. Sixteen UASI regions said that their regional operations plan greatly or somewhat helps measure regional performance (8 and 8 respectively). Thirty-six UASI regions identified tactical planning as a regional activity they use to build regional collaboration. Thirty-nine UASI regions reported that they have a UASI-wide exercise plan. Thirty-six of these said that this exercise plan either “greatly helps” or “somewhat helps” measure regional capability-building (24 and 12 respectively), and 37 of these 39 UASI regions said that this feature either “greatly helps” or “somewhat helps” them measure regional performance (25 and 12 respectively). A provision within the 9/11 Act required FEMA to perform a risk assessment for the 100 largest MSAs by population, beginning in fiscal year 2008. In response, FEMA’s fiscal year 2008 grant program guidance stated that, while UASI officials were not required to expand or contract existing urban area participation to conform to MSAs, UASI regions were encouraged to involve regional preparedness partners (for example, contiguous jurisdictions, mutual aid partners, port authorities, rail and transit authorities, campus law enforcement, and state agencies) in their 2008 UASI program activities. Of the 49 UASI regions we surveyed, 27 said that there were jurisdictions within the MSA that were not part of their UASI region; the remaining 22 UASI regions responded that their UASI included all jurisdictions within the MSA. In our survey, 27 UASI regions had jurisdictions within the MSA that were not part of their UASI region, and we asked them to describe the actions, if any, they planned to take or had taken in response to FEMA’s use of MSAs for its risk calculations. UASI officials’ responses to the grant guidance varied. Of the 27 UASI regions that said there were jurisdictions within the MSA that weren’t part of their UASI region: Twenty-two said that they either had taken or had plans to take some action(s) in response to FEMA’s risk calculation change; 5 UASI regions said they had not taken and did not plan to take any of the actions cited (e,g., initiating a dialogue and assessing the need to include new jurisdictions) to expand their membership. Seventeen UASI regions reported that they already assessed and evaluated the need to include new jurisdictions and 3 UASI regions said they plan to do this, while 7 UASI regions said they had no plans to assess and evaluate the need to include new jurisdictions. Twelve UASI regions said they have already initiated dialogue to collaborate with new jurisdictions and 3 UASI regions have reported that they plan to do this, while 12 UASI regions said they had no plans to initiate dialog with new jurisdictions. Seven UASI regions reported that they have already included new jurisdictions in advisory committees and 4 UASI regions reported that they plan to do this, while 16 UASI regions said they have no plans to include any new jurisdictions in advisory committees. Six UASI regions reported that they have plans to increase the number of jurisdictions in their UASI region urban area working group and 1 UASI region reported that it had already done so, while 20 UASI regions said they have no plans to do this. In a follow-up question to these 27 UASI regions, we asked whether there were specific reasons why some jurisdictions are not included in their UASI region, e.g., because other jurisdictions were not a possible provider of prevention, medical surge, resources, or evacuation capabilities. Overall, 11 of the 27 UASI regions reported at least one of the possible issues we posed within our survey as a reason why some jurisdictions were not part of their UASI region. Specifically, 5 UASI regions reported that excluding a jurisdiction was due to that outside jurisdiction’s lack of capacity to provide, for example, first responder support or medical surge capabilities, and 4 UASI regions reported excluding a jurisdiction because that jurisdiction was not a provider of support for recovery efforts or evacuation efforts. Two UASI regions also cited the lack of mutual aid agreements as a reason for not including a new jurisdiction. UASI officials from 14 regions provided additional comments stating that the reason why additional jurisdictions were not included in the UASI region was that their UASI region was either part of an existing state-defined region developed for strategic planning and response purposes, or their UASI region’s composition was based on existing regional bodies such as councils of governments or regional planning commissions. Another common reason cited by officials in 10 UASI regions who provided additional comments was that these other jurisdictions were remote and not adjacent to the urban area, and lacking in population or critical infrastructure. Natural and man-made disasters often have a regional impact, affecting multiple jurisdictions; therefore it is vital to ensure that federal, state, local, tribal, and territorial entities collaborate effectively in the protection, prevention of, response to, and recovery from a disaster. The UASI program is intended to enhance regional preparedness through expanded regional collaboration. However, FEMA currently has no measures to determine the impact of the UASI regions’ collaborative efforts on regional preparedness. With such measures, FEMA would be better positioned to determine the national return on investment for the more than $5 billion awarded in UASI grant funds to date. We recommend that the FEMA Administrator develop and implement measures to assess how regional collaboration efforts funded by UASI grants build preparedness capabilities. We requested comments on a draft of this report from FEMA. FEMA did not provide official written comments to include in our report. However, in e-mails received June 26, 2009, the DHS liaison stated that FEMA concurred with our recommendation and will work toward addressing it. DHS also provided technical comments which we incorporated into our report, as appropriate. We are providing copies of this report to interested congressional committees, the FEMA Administrator, and the Secretary of Homeland Security. This 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) 512-8757 or e-mail at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. As we noted in 2005, Department of Homeland Security (DHS) developed the National Preparedness Guidelines to comply with HSPD-8. The National Preparedness Guidelines are intended to generally define “how well” all levels of governments and first responders are to prepare for all- hazards, through a capabilities-based preparedness planning process based on common tools and processes of preparedness including the Target Capabilities List. The purpose of this approach is to provide capabilities suitable for a wide range of threats and hazards. According to DHS, the Target Capabilities List is a comprehensive catalog of capabilities to perform homeland security missions. In July 2005, we reported that the application of this capabilities-based preparedness process involves three stages: (1) defining target levels of capability, (2) achieving target levels of capability, and (3) assessing preparedness. As of September 2007, the list identified 37 capabilities needed to perform critical tasks across all events—prevention, protection, response, and recovery. The Target Capabilities List also provides guidance on each specific preparedness capability and levels of capability that federal, state, local, and tribal first responders will be expected to develop and maintain. In the absence of objective measures to determine the impact of the Urban Area Security Initiative (UASI) regions’ collaboration efforts on regional preparedness, we surveyed UASI regions to solicit officials’ views on the impact of program activities on regional collaboration and challenges they faced to support regional collaboration. We surveyed by telephone all 49 UASI regions that were recipients of UASI grant funding in fiscal years 2008 and in at least one fiscal year prior to 2008. We based our survey questions in part on our prior work including best practices for collaboration, factors that support regional collaboration, and challenges to interagency coordination. Our questions were designed to collect information on (1) activities that are incorporated into the UASI regions’ collaboration efforts and those features that help UASI regions measure their regional capability-building and performance, (2) whether UASI regions face certain regional challenges and if so, whether those challenges impair the efficiency and effectiveness of their regional collaboration and preparedness efforts, and (3) whether respondents have or plan to make changes in response to FEMA’s change to Metropolitan Statistical Areas (MSAs) for risk calculation. We conducted pretests by telephone with representatives of 3 UASI regions to refine our questions, develop new questions, clarify any ambiguous portions of the questionnaire, and identify any potentially biased questions. We obtained a 100 percent response rate to our telephone survey. Because our survey included all 49 UASI regions that received grant funding as described above, there are no sampling errors. The information below represents responses provided by UASI regions to our close-ended survey questions. Q1. Are any of the following activities a part of, or in progress of being a part of, your UASI area? (Check one box each row.) Q2. Does your UASI area face any of the following regional challenges? Q3. How much, if at all, does this regional challenge impair the effectiveness of regional collaboration in your preparedness efforts? UASI? impairs regional collaboration? “Yes” Q4. Are there are any jurisdictions within your MSA that are not a part of the UASI area? Yes 27 No 22 If “No,” go to question 8. Q5. In response to FEMA’s change to MSAs for risk calculation, has your UASI area done, have plans to do, or have no plans to do any of the following with the jurisdictions in your geographic area? (Check one box in each row.) Have no plans to do this a. Assess/Evaluate need to include new jurisdictions b. Initiate dialogue with new jurisdictions d. Solicit proposals from new jurisdictions f. Increase the number of jurisdictions in Urban Area Working Group (UAWG) (e.g, your Executive or Steering committee) Q6. Is each of the statements listed below a reason why there are some jurisdictions that are not part of your UASI area? Q7. (For each item in Q6 with a “Yes,” ask:) Does your UASI intend to enter into this kind of relationship with all, some, or none of these jurisdictions? Reason why not part of UASI area? Intend to enter relationship? If “Yes” b. Not a part of prevention activities (e.g., fusion center/information sharing; see TCL) c. Not a provider of emergency response support (see TCL) d. Not a provider of surge capabilities (e.g., first responders, medical surge; see TCL) e. Not a provider of resource capabilities f. Not a part of interoperable communications system g. Not a provider of support for recovery or evacuation efforts (see TCL) Q8. In addition to your UASI’s Homeland Security Strategy, does your UASI possess the following program features? Q9. (For each item in Q8 with a “Yes”, ask:) How much, if at all, does this program feature help your UASI measure its regional capability-building? Q10. (For each item in Q8 with a “Yes”, ask:) How much, if at all, does each of the following program features help your UASI measure its performance? How much helps measure regional capability-building? regional performance? “Yes” Q11. Does your UASI area use any of the following activities to build regional capabilities? Q12. (For each item in Q11 with a “Yes,” ask:) Has your UASI area defined performance measures for this activity? Builds regional capabilities? measures? If “Yes” In addition to the contact named above, Chris Keisling (Assistant Director), John Vocino (Analyst-in-Charge), Orlando Copeland, Perry Lusk, Adam Vogt, Linda Miller, David Alexander, Grant Mallie, and Tracey King made key contributions to this report. | From fiscal year 2003 through fiscal year 2009, the Department of Homeland Security (DHS) allocated about $5 billion for the Urban Area Security Initiative (UASI) grant program to enhance regional preparedness capabilities in the nation's highest risk urban areas (UASI regions). The Federal Emergency Management Agency (FEMA) administers this program. The Implementing Recommendations of the 9/11 Commission Act of 2007 (9/11 Act) required FEMA to change the size of the geographical areas used to assess UASI regions' risk. The conference report accompanying the Consolidated Appropriations Act for fiscal year 2008 directed GAO to assess FEMA's efforts to build regional preparedness through the UASI program, and determine how the 9/11 Act change affected UASI regions. This report addresses (1) the extent to which FEMA assesses how UASI regions' collaborative efforts build preparedness capabilities, and (2) how UASI officials described their collaboration efforts and changes resulting from the 9/11 Act. GAO surveyed all 49 UASI regions that received funding prior to the 9/11 Act change, and visited 6 regions selected based on factors such as length of participation. GAO also reviewed FEMA's grant guidance and monitoring systems. Although FEMA has gathered and summarized data on UASI regions' funding for specific projects and related preparedness priorities and capabilities, it does not have measures to assess how UASI regions' collaborative efforts have built preparedness capabilities. An executive directive, Departmental policy, and agency guidance all require that preparedness priorities and capabilities be measurable so that FEMA can determine current capabilities, gaps, and assess national resource needs. To report on the performance of the UASI program, FEMA has gathered data on UASI regions' funding for projects and the goals and objectives those projects support, including the National Priority to Expand Regional Collaboration. However, FEMA's assessments do not provide a means to measure the effect UASI regions' projects have on building regional preparedness capabilities--the goal of the UASI program. FEMA acknowledged a lack of specific measures that define how or whether national priorities--including expanding regional collaboration--are achieved. In the absence of measures, FEMA directed states to describe their collaborative activities. However, these state activities do not provide a means to assess how regional collaboration activities help build preparedness capabilities. FEMA has an effort underway to establish a comprehensive assessment system to appraise the nation's preparedness capabilities. FEMA could build upon its current efforts to assess overall preparedness by developing and including measures related to the collaboration efforts of UASI regions and their effect on building regional preparedness. This could provide FEMA with more meaningful information on the return on investment of the $5 billion it has allocated to the UASI program to date. UASI officials described program activities that they said greatly or somewhat helped support regional collaboration, reflecting factors GAO identified that can enhance and sustain collaboration, and also described a variety of actions taken in response to the 9/11 Act change to assess risk. Regarding program activities that support regional collaboration, of the 49 UASI regions GAO surveyed, 46 said they have active mutual aid agreements in part to share resources among jurisdictions, and 44 described training and exercises as activities they use to build regional preparedness capabilities. Some UASI regions reported changes in membership in response to FEMA's change in the size of the geographical areas used to assess UASI regions' risk. For example, of the 49 regions GAO surveyed, 27 reported that additional jurisdictions were included within the geographical area FEMA used to assess risk that were not included in the region's membership. However, 17 of these regions reported that they had assessed and evaluated the need to include these new jurisdictions in their membership and 3 UASI regions said they plans to do this, while 7 UASI regions said they had no plans to do this. |
Madam Chairman and Members of the Subcommittee: We are pleased to be here today to participate in the Subcommittee’s inquiry into the Internal Revenue Service’s (IRS) financial condition for 1996, the status of the 1996 filing season, and the administration’s fiscal year 1997 budget request for IRS. Our statement is based on work we have been doing for the Subcommittee and our past reviews of filing season activities, Tax Systems Modernization (TSM), and compliance initiatives. July 1995 report. Although IRS has initiated actions in response to these weaknesses, those efforts provide little assurance that the weaknesses will be corrected in the near term. As a result, we believe that additional investments in TSM are at risk. The largest program increase in IRS’ fiscal year 1997 budget request is $359 million for certain compliance programs. Our past work on compliance initiatives identified several problem areas, including (1) IRS’ inability to fully implement past initiatives, (2) the inaccuracy of IRS’ tracking of the revenue from such initiatives, and (3) the focus of past collection initiatives on hiring revenue officers instead of more productive collection staff. Although IRS has taken some actions to address our concerns, some issues remain, particularly in terms of the reliability of IRS’ data. IRS’ fiscal year 1996 appropriation was $7.3 billion. That amount was about $860 million less than the President requested for fiscal year 1996 and about $160 million less than IRS’ fiscal year 1995 appropriation. In June 1995, anticipating possible reductions from the amount the President had requested for fiscal year 1996, IRS began taking steps to reduce its staffing levels. On June 30, 1995, IRS announced a hiring freeze. Earlier in 1995, IRS had announced an early-out program without incentives for employees affected by its district office and regional office consolidations. After enactment of its final appropriation, IRS reopened the early-out program through February 3, 1996, and made it available to all employees. About 1,690 staff retired as a result of this program. implement a RIF for fiscal year 1996, the cost would have exceed the savings. As of March 1, 1996, according to IRS officials, IRS had about $140 million in unfunded mandatory nonlabor costs for fiscal year 1996. Some of those unfunded costs were for telecommunications, postage, and rent. IRS officials said that they are hoping to resolve these unfunded costs without having to resort to furloughs. Part of the $140 million shortfall stems from lower user-fee receipts than expected. IRS’ fiscal year 1996 appropriation assumed a receipt of $119 million from user fees. IRS now expects to receive from $60 to $70 million in such fees for fiscal year 1996. As noted earlier, IRS’ actions to reduce labor costs involved steps directed at seasonal and nonpermanent staff. Most of IRS’ seasonal and non-permanent staff (1) help process tax returns during the filing season, (2) assist taxpayers either at walk-in offices or over the telephone, and (3) work in compliance programs that do not require face-to-face interaction with taxpayers. IRS officials told us that in deciding which areas to cut, IRS wanted to ensure that it could process tax returns and issue refunds in a timely manner. As a result, most of IRS’ staffing cuts affected its compliance programs, with some cuts in the taxpayer service area. According to IRS officials, the two compliance programs that employ the largest number of seasonal and term staff are (1) the Document Matching program, through which IRS identifies taxpayers that either underreport their income or do not file required tax returns, and (2) the Automated Collection System (ACS), through which IRS staff try to contact delinquent taxpayers or nonfilers by telephone and resolve the delinquency. Because IRS’ cost-cutting measures for fiscal year 1996 focused on seasonal and nonpermanent staff, these two programs were significantly affected. Through the Document Matching program, IRS matches income reported on tax returns with information provided by third parties, such as wage information from employers and interest and dividend information from financial institutions. Those matches are to identify taxpayers that underreported their income (underreporters) and those that did not file required tax returns (nonfilers). According to IRS, it spent about 1,950 staff years on underreporter activities in fiscal year 1995 and closed 4.1 million cases with recommended tax assessments of $1.7 billion. Because of staff reductions, IRS estimates that it will spend about 1,300 staff years on underreporter activities in 1996—about a 33-percent reduction—and close about 1.5 million fewer cases. IRS estimates that its assessments from closed cases will be $1.4 billion, $300 million less than in 1995. IRS’ matching program also identifies taxpayers who have not claimed refunds to which they are entitled. In fiscal year 1995, IRS issued $120 million in refunds through that program. IRS expects that amount to drop to $95 million in 1996 because of staff reductions. Also under the Document Matching program, IRS creates returns for nonfilers using information documents provided by third parties. According to IRS, it spent about 600 staff years on that effort in fiscal year 1995, closed about 810,000 cases, and assessed $1.9 billion. Because of staff reductions, IRS estimates that it will spend about 370 staff years on this effort in fiscal year 1996—about a 38-percent reduction—and close about 180,000 fewer cases. IRS estimates that assessments from closed cases will be $1.3 billion, $650 million less than in 1995. Once a tax delinquency or delinquent return is identified, IRS uses a three-stage process to collect the tax or secure the return. In the first stage, taxpayers are mailed a series of notices. If the case is not resolved at this point and meets certain criteria, it is transferred to ACS. At this stage, IRS staff in call sites contact the taxpayer or nonfiler by telephone. If the case remains unresolved at this point and meets certain criteria, it is transferred to a revenue officer, who is to visit the taxpayer or nonfiler or take other steps to secure the delinquent return and/or collect the delinquent tax. Because of various factors discussed in the appendix, ACS had a significant number of seasonal, term, and other than full-time permanent staff at the end of fiscal year 1995—66 percent more than it had at the end of fiscal year 1994. As a result, ACS was targeted for a significant staff reduction when IRS decided to reduce the number of hours for seasonal staff and not extend appointments for term employees. other compliance staff to ACS. These details are to remain in effect for at least 1 year. IRS officials said that they plan to revisit this agreement with the union once IRS knows its budget situation for fiscal year 1997. On the basis of our past filing season reviews, we had several questions going into the 1996 filing season: How will IRS’ staffing reductions for fiscal year 1996 affect its ability to process returns and assist taxpayers? Will last year’s drop in the number of electronic filings be reversed? What can taxpayers expect in the way of refund delays in 1996? Will the steady decline in the accessibility of IRS’ telephone assistance over the past several years continue? Has the performance of IRS’ Service Center Recognition/Image Processing System (SCRIPS) improved? As discussed below, preliminary information addressing these questions indicates that, in certain key respects, the 1996 filing season is progressing more smoothly than did the 1995 season. As also discussed below, however, there are still several concerns that we will be monitoring during our continuing assessment of filing season activities. Specifically, (1) although telephone accessibility is up, it is still very low; (2) IRS closed many walk-in sites this year that had provided assistance to taxpayers in the past; and (3) SCRIPS is still not meeting its original expectations. In deciding where to make the staffing cuts for fiscal year 1996, IRS wanted to make sure it had enough staff to do its most critical functions—process returns and issue refunds—in a timely manner. Available data indicate that IRS has been successful in that regard. As of March 15, 1996, IRS’ 10 service centers had processed 71 percent of the paper individual income tax returns they had received (the same percent as last year), and the centers were processing that workload in about the same cycle time as last year (within an average of 8 to 13 days, depending on the type of individual income tax return filed). were unable to verify whether the refund cycle time has changed because the data we use to track refund timeliness were not available at the time we prepared this statement. Although IRS has apparently been able to process returns and issue refunds this year without any significant problems, staffing cuts in other areas could be affecting its ability to serve taxpayers and identify questionable refund claims. In the taxpayer service area, IRS closed 93 walk-in assistance sites, reduced the operating hours of some of the 442 sites that remained open, and eliminated free electronic filing at 195 of the sites. According to IRS, the closed sites were selected on the basis of their historical volume of work and their proximity to other walk-in sites. As an indication of the effect of these closures and cutbacks, IRS data show that walk-in sites served about 1.7 million taxpayers from January 1 through March 9, 1996—about 16 percent fewer taxpayers than were served at the same time last year. Walk-in sites provide various free services, including copies of the more commonly used forms and publications, help in preparing returns, and answers to tax law questions. There are other ways taxpayers can obtain those services free, although maybe not as easily. Taxpayers needing forms and publications, for example, might find them at their local library or can get them by calling IRS’ toll-free forms-ordering number. Our reviews of past filing seasons showed that taxpayers were generally able to get through to IRS when they called the forms-ordering number, and the forms distribution centers did a good job accurately filling orders. However, according to IRS, it will generally take from 7 to 15 workdays to receive what you order, if it is in stock. Taxpayers with access to a computer can download forms from Internet or the FedWorld computer bulletin board. Forms are also available on CD-ROM and through IRS’ “fax on demand” service. Taxpayers who need help preparing their returns and do not want to pay for that help might be able to take advantage of the tax preparation services offered at sites around the country that are part of the Volunteer Income Tax Assistance and Tax Counseling for the Elderly programs. which has prerecorded information on about 150 topics. As of March 16, 1996, the number of tax law calls to TeleTax had increased by about 10 percent over last year (4.5 million this year compared with 4.1 million last year). Still another option for free assistance is IRS’ World Wide Web site on the Internet. Among other things, IRS’ site includes copies of forms, information similar to that on TeleTax, and some interactive scenarios that taxpayers can use to help them answer some commonly asked questions. IRS reported on March 18, 1996, that its World Wide Web site had been accessed more than 25 million times since January 8, 1996. IRS’ primary program for detecting questionable refund claims also absorbed staffing cuts in 1996. According to IRS data, the 10 service centers have been allocated a total of about 379 full-time equivalents for that program in fiscal year 1996 compared with 551 full-time equivalents in 1995—a decrease of 31 percent. IRS officials told us that, because of the staff reduction, program procedures were changed in an attempt to better target the staffs’ efforts. We do not know the initial impact of these changes because we have not yet seen any statistics on the number of questionable refund claims detected in 1996. In an attempt to recoup most of those staff reductions, IRS’ budget request for fiscal year 1997 includes $21 million and 230 full-time equivalent positions for the questionable refund detection program. That request is part of the revenue protection initiative discussed later. As of March 15, 1996, the number of individual income tax returns filed in ways other than the traditional paper format has increased substantially compared to the same time last year. That is true even though the overall number of returns filed as of March 15 was down slightly from last year. As shown in table 1, most of the growth in alternative filings is due to 1040PC and TeleFile. Growth in the use of 1040PC is due, in part, to the largest user rejoining the program after dropping out in 1995. The growth in TeleFile is due primarily to its expanded availability. It is now available nationwide; it was only available to taxpayers in 10 states in 1995. IRS’ budget request for fiscal year 1997 includes $7 million to allow expansion of TeleFile to other forms and taxpayers. Although IRS has made substantial progress in expanding the use of TeleFile and further expansion seems logical, it is important to note that only about 12 percent of the more than 20 million 1040EZ taxpayers who IRS estimated would be eligible to use the system in 1996 had actually used it as of March 15. In past reports, we have discussed the benefits of TeleFile to taxpayers (e.g., reduced filing time, fewer errors, and quicker refunds) and the presumed benefit to IRS in reduced processing costs. In addition to expanding TeleFile, it seems that IRS could increase participation in the program by (1) determining why many currently eligible users are not participating and (2) taking steps to address any identified barriers to their fuller participation. alleviating impediments, such as the program’s cost, that inhibit those groups from participating. Last year, IRS took several steps in an attempt to better ensure that persons were entitled to the refunds, dependents, and Earned Income Credits they were claiming. The most visible of those efforts involved the delay of millions of refunds to allow IRS time to verify SSNs and do compliance checks. Although those efforts appeared to have had a significant deterrent effect (e.g., preliminary information indicates that 1.9 million fewer dependents were claimed in 1995 than were in 1994), they were not without problems. IRS (1) identified many more missing, invalid, and duplicate SSNs than it was able to pursue and ended up releasing the refunds without resolving the problems and (2) delayed millions of refunds for taxpayers whose returns had valid SSNs to check for duplicate SSNs but ended up releasing those refunds after several weeks without doing the checks. Many taxpayers and practitioners were surprised that IRS delayed some refunds even if all of the SSNs on the return were good. They were also upset that IRS split some refunds—issuing part of the refund and delaying the rest—but only honored a taxpayer’s direct deposit request for the first part of the refund. As we noted in our report to the Subcommittee on the 1995 filing season, IRS identified fewer fraudulent returns during the first 9 months of 1995 than it did during the same period in 1994, and the percentage of fraudulent refunds it stopped before issuance declined. Neither we nor IRS know whether those decreases were due to a decline in the incidence of fraud or a decline in the effectiveness of IRS’ detection efforts. The Director of IRS’ Office of Refund Fraud expressed the belief that there were fewer fraudulent returns to be identified in 1995. He opined that the additional controls IRS implemented in 1995 and knowledge of those actions had deterred persons from filing fraudulent returns. refunds to delay this year—trying to focus its resources on the most egregious cases and minimize the burden on honest taxpayers. Statistics on the number of notices sent to taxpayers in 1996 concerning SSN problems and refund delays indicate that IRS is indeed delaying fewer refunds. As of March 9, 1996, IRS had mailed about 56-percent fewer refund-delay notices than at the same time last year. Another indicator that fewer refunds are being delayed in 1996 is the decrease in the number of “where is my refund” calls to IRS. Taxpayers wanting to know the status of their refunds can call TeleTax and get information through the use of an interactive telephone menu. This filing season, as of March 16, 1996, IRS reported receiving 26.5 million such calls—a decrease of about 15 percent from the 31.0 million it reported receiving as of the same time last year. For the past several years, taxpayers have had difficulty reaching IRS by telephone. As we reported to the Subcommittee in December 1995, IRS data showed that (1) an estimated 46.9 million callers made 236 million call attempts to IRS for tax assistance between January 1 and April 15, 1995 and (2) IRS was able to respond to only 19.2 million of those attempts—an accessibility rate of 8 percent. Accessibility has improved this year, although it is still low. IRS data for January 1 through March 9, 1996, showed 63.3 million call attempts, of which 12.7 million were answered—an accessibility rate of about 20 percent. As of the same time last year, IRS reported receiving about 107 million call attempts, of which 11.7 million were answered—an accessibility rate of about 11 percent. As the data indicate, a major reason for the improved accessibility is the significant drop in call attempts. IRS attributed that drop to (1) fewer refund delay notices being issued, as discussed earlier; (2) a slippage in the number of returns filed; and (3) IRS efforts to publicize other information sources, such as Internet. process Forms 1040EZ. As a result, IRS had to redirect more of the Form 1040EZ processing workload to its manual data entry system. After the 1995 filing season, IRS identified hardware and software upgrades that would be needed to correct the SCRIPS performance problems. IRS made some of those changes for the 1996 filing season. Our discussions with IRS officials and our review of processing rate data indicate that SCRIPS’ performance has improved in 1996. Specifically, SCRIPS is processing at faster rates in three of the five centers and operating with less system downtime in all five centers. However, the two centers that stopped using SCRIPS to process Forms 1040EZ last year are experiencing slower processing rates than those of last year. Despite the improved performance, SCRIPS is far from the level of performance IRS had originally expected. For example, IRS originally planned to be processing all Forms 1040EZ on SCRIPS by 1996; it now expects to process about 50 percent of the Forms 1040EZ received in 1996 on SCRIPS. The remaining forms are being processed through IRS’ manual data entry system. Although IRS made changes to SCRIPS and performance has improved, we are concerned that IRS did not establish more specific performance expectations for SCRIPS this filing season. IRS specified volume expectations by form type, but it did not establish expectations for improvements in processing rates or reductions in system down time that should result from the enhancements made for the 1996 filing season. Without those expectations, it will be difficult for IRS to determine which enhancements were cost beneficial. We are currently reviewing SCRIPS and plan to report our results later this year. TSM, which began in 1986, is key to IRS’ vision of a virtually paper-free work environment in which taxpayer account updates are rapid and taxpayer information is readily available to IRS employees to respond to taxpayer inquiries. IRS’ fiscal year 1997 request for TSM is $850 million, a $155 million increase from IRS’ proposed operating level for fiscal year 1996. We continue to believe that TSM is a high risk and are concerned about how effectively IRS can use the requested funds until it corrects some fundamental technical and managerial weaknesses. IRS’ progress in responding to the recommendations we made in a July 1995 report on TSM. Many of our recommendations were intended to correct critical IRS management and technical weaknesses by December 31, 1995. Without these corrections, IRS will not have the sound management and technical practices it needs to successfully meet TSM objectives in a cost effective and expeditious manner. A recent National Research Council report on TSM had a similar message. The Council’s recommendations parallel the recommendations we made involving IRS’ (1) business strategy to reduce reliance on paper, (2) strategic information management practices, (3) software development capabilities, (4) technical infrastructures, and (5) organizational controls. In our March 14, 1996, testimony before the Subcommittee on Treasury, Postal Service and General Government, House Committee on Appropriations, we assessed IRS’ progress in responding to our recommendations. Because IRS’ progress report on implementing our recommendations was not finalized, our assessment was based on several follow-up meetings with IRS officials and a review of various planning documents. According to the Deputy Secretary of the Treasury, the Department is currently reviewing IRS’ progress report and plans to submit it to Congress “as soon as possible.” IRS has initiated a number of activities and made some progress in addressing our recommendations to improve management of information systems; enhance its software development capability; and better define, perform, and manage TSM’s technical activities. However, none of these steps, either individually or in the aggregate, has fully satisfied any of our recommendations. 1996. However, the information provided raises additional concerns. In this regard, IRS is requesting an additional $29 million for Cyberfile, an electronic filing system. Earlier this week, we testified that Cyberfile is a poorly developed system that does not adequately address the security requirements needed to protect taxpayer data. In every year but one from 1990 through 1995, Congress has appropriated IRS funds for various compliance initiatives aimed at increasing IRS’ enforcement staff with the expectation that the increase would produce more revenue. For fiscal year 1995, Congress appropriated $405 million for compliance initiatives. In estimating the revenue that would be generated from those initiatives—$9.2 billion—IRS assumed that Congress would continue to provide $405 million for the additional staffing over the next 4 years. However, Congress did not provide the second-year funding installment for fiscal year 1996. more accurate picture of IRS’ total compliance program. IRS revised its tracking approach for fiscal year 1995. Although IRS revised its tracking approach, we cannot yet comment on the accuracy of the revenue figures in IRS’ tracking reports. Until recently, IRS had to estimate the amount of revenue derived from its compliance efforts because it was unable to track actual revenue—regardless of whether it was generated from compliance initiative staff or base staff. For the last several years, IRS has been implementing an Enforcement Revenue Information System (ERIS) that is intended to report the actual revenue from various compliance programs. In the past, we have discussed concerns about the reliability of ERIS data, and IRS has been working to resolve those problems. We plan to test the reliability of ERIS data as part of our audit of IRS’ fiscal year 1996 financial statements. Although we generally supported the fiscal year 1995 compliance initiatives, we did not support hiring more revenue officers. For several years, we have encouraged IRS to shift its collection focus from revenue officers, who generally collect delinquent taxes through face-to-face contact with taxpayers, to more productive processes like ACS, that emphasize early telephone contact. Although IRS subsequently reduced the number of revenue officers for that initiative, it still planned to hire about 750 in fiscal year 1995. As noted earlier, IRS is now diverting some revenue officers —who are paid at higher rates than ACS staff—to ACS to mitigate the impact of ACS staffing reductions. The $359 million included in IRS’ fiscal year budget request for the revenue protection initiatives is expected to fund 3,820 additional compliance staff. According to IRS, most of those staff are for areas, such as ACS and Document Matching, that were significantly affected by fiscal year 1996 staffing cuts. the lion’s share of IRS enforcement efforts, they also represent, on the margin, the least efficient use of IRS resources.” According to IRS officials, these staff reductions will be achieved through attrition. Thus, one effect of the increases and decreases in IRS’ compliance staffing for fiscal year 1997, if IRS’ budget request is approved and is implemented as IRS has described, would be to alter the mix of that staffing. IRS would have fewer revenue officers, for example, and more ACS staff—the kind of mix that we have advocated in the past. In conclusion, although IRS has made some changes, there are certain questions that remain appropriate in discussing the revenue protection initiatives: (1) will IRS spend the additional funds for additional compliance staff? (2) does IRS have reliable data on the revenue generated by its enforcement activities? and (3) will IRS be able to achieve the new staffing mix? That concludes my statement. We welcome any questions that you may have. Factors surrounding IRS’ organizational and business restructuring led to ACS having a large number of seasonal, term and other than full-time permanent staff at the end of fiscal year 1995. As a result, ACS was targeted for a significant staff reduction given IRS’ cost-cutting approach for fiscal year 1996. IRS’ customer service vision calls for combining into 23 customer service sites the work of at least 70 organizational units that employ staff who do not have face-to-face interactions with taxpayers. These centers are to employ staff who will work primarily by telephone to assist taxpayers, collect delinquent taxes, and adjust taxpayer accounts. As part of this consolidation, IRS is to close 10 of its 20 ACS sites. After IRS announced which 10 sites would be closed, two things happened. First, ACS employees who could find other positions left ACS. Some of these employees were hired for revenue officer positions that became available as part of the fiscal year 1995 compliance initiatives. Second, the 10 ACS sites that were scheduled to close could hire only term and seasonal staff, according to an IRS official. Therefore, at the end of fiscal year 1995, ACS had 448 seasonal, term, and other than full-time permanent staff—66 percent higher than the number at the end of fiscal year 1994. 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 examined the Internal Revenue Service's (IRS) financial condition, focusing on the: (1) status of the 1996 filing season; and (2) IRS fiscal year (FY) 1997 budget request. GAO found that: (1) the FY 1996 appropriation for IRS was $7.3 billion, $860 million less than the President requested and $160 million less than the FY 1995 IRS appropriation; (2) to mitigate the funding shortfall, IRS initiated a hiring freeze and reduced its travel and overtime costs, cash awards, hours for seasonal staff, and nonpermanent staff; (3) IRS is delaying fewer refunds in 1996 and validating taxpayers' social security numbers and earned income credit claims; (4) taxpayers are having an easier time contacting IRS by telephone, with the accessibility rate increasing 9 percent over 1995; (5) IRS is requesting a budget increase of $647 million for FY 1997 to develop certain compliance initiatives and correct weaknesses in the Tax Systems Modernization Program (TSM); and (6) IRS is having problems ensuring data accuracy for revenue generated by its enforcement activities and correcting TSM managerial and technical weaknesses. |
Signed into law on May 9, 2014, the DATA Act expanded on previous federal transparency legislation by requiring the disclosure of federal agency expenditures and linking agency spending information to federal program activities so that both policymakers and the public can more effectively track federal spending. The DATA Act requires government- wide reporting on a greater variety of federal funds, such as budget and financial information, as well as tracking of these funds at multiple points in the federal spending lifecycle. To improve the quality of these data, the act requires that agency-reported award and financial information comply with new data standards established by OMB and Treasury. These standards specify the items to be reported under the DATA Act and define and describe what is to be included in each element with the aim of ensuring that information will be consistent and comparable. The act identifies OMB and Treasury as the two agencies responsible for leading government-wide implementation. Two key components of ensuring the accuracy, completeness, and consistency of federal spending data are OMB releasing policy guidance and Treasury developing technical guidance for the agency submissions and publication of the data required under the act. Toward that end, OMB has taken a number of steps to help agencies meet their reporting requirements, including establishing 57 standardized data element definitions for reporting federal spending information, issuing guidance to operationalize selected standards and clarify agency reporting requirements, and meeting with agencies to assess their readiness to meet the reporting requirements under the act. Specific actions include the following: In May 2015, OMB issued initial guidance to federal agencies on reporting requirements pursuant to the Federal Funding Accountability and Transparency Act (FFATA) as well as the new requirements that agencies must employ pursuant to the DATA Act. The guidance also directs agencies to (1) implement data definition standards for collecting and reporting agency-level and award-level data by May 9, 2017; (2) implement a standard data exchange format for providing data to Treasury to be displayed on USASpending.gov or a successor site; and (3) link agency financial systems with award systems by continuing to use specified unique identification numbers for financial assistance awards and contracts. In May 2016, OMB released guidance on reporting financial and award information required under the act. This guidance addresses (1) reporting financial and award level data, (2) linking agency award and financial systems using a unique award identifier, and (3) assuring that data submitted to Treasury for publication on USASpending.gov are sufficiently valid and reliable. In November 2016, OMB issued additional guidance in response to questions and concerns reported by agencies. This guidance specifies DATA Act reporting responsibilities for intragovernmental transactions, explains how to report financial assistance awards with personally identifiable information, and clarifies the senior accountable official (SAO) assurance process over the data submitted to the DATA Act broker, a system to standardize data formatting and assist reporting agencies in validating their data prior to submission. The May and November 2016 guidance also directs agency SAOs to leverage existing data quality and management controls established in statute, regulations, or federal policy when submitting their assurance over the data. In addition to issuing policy guidance to help agencies meet their reporting requirements under the act, OMB’s Controller and Treasury’s Fiscal Assistant Secretary conducted a series of meetings with CFO Act agencies to obtain information on any challenges that could impede effective implementation and assess agencies’ readiness to report required spending data in May 2017. Treasury also led efforts to develop the technical guidance and reporting systems to facilitate agency reporting. In April 2016, Treasury released the DATA Act Information Model Schema (DAIMS), or schema version 1.0, which provides information on how to standardize the way financial assistance awards, contracts and other financial and non-financial data will be collected and reported under the DATA Act. A key component of the reporting framework laid out in the schema is the DATA Act broker. According to Treasury guidance documents, agencies are expected to submit three files sourced from their financial management systems to the broker. The broker is also expected to extract award and sub-award information from existing award reporting systems that currently supply award data (covering federal assistance including grants and loans, as well as procurements) to USASpending.gov. These award reporting systems—including the Federal Procurement Data System-Next Generation (FPDS-NG), System for Award Management (SAM), the Award Submission Portal (ASP), and the FFATA Subaward Reporting System (FSRS)—compile information submitted by agencies and award recipients to report, among other things, procurement and financial assistance award information required under FFATA. A more detailed discussion of the broker and the agency file submission process can be found in our August 2016 correspondence. In addition to developing the schema version 1.0 and the broker, Treasury also issued an implementation playbook that outlines 8 steps and a recommended timeline for agency implementation, and hosted multiple meetings, including weekly office hour calls and monthly technical workshops, to help agencies prepare and test their data for submission to the broker. To help improve the quality of the data, the act also requires agencies’ IGs and GAO to assess and report on the completeness, timeliness, quality, and accuracy of spending data submitted by federal agencies. The first IG reports were due to Congress in November 2016. However, agencies are not required to submit spending data in compliance with the act until May 2017. As a result, the IGs did not report on the spending data in November 2016. The Council of the Inspectors General on Integrity and Efficiency (CIGIE) developed an approach to address what it describes as the IG reporting date anomaly and maintain early IG engagement with the agencies. CIGIE encouraged but did not require the IGs to undertake assessments of their respective agencies’ readiness to submit spending data in accordance with DATA Act requirements and delayed issuance of the mandated audit reports to November 2017. The Federal Audit Executive Council DATA Act Working Group—established by CIGIE to assist the IG community in understanding and meeting its DATA Act oversight requirements—issued the DATA Act Readiness Review Guide (version 2.0) on June 2, 2016, to guide IGs in conducting their readiness reviews. According to the review guide, the main objectives of the IG readiness reviews are to assess whether an agency’s DATA Act implementation plan or process is “on track to meet the requirements of the DATA Act,” and to provide, as needed, recommendations or suggestions on how to improve the agency’s likelihood of compliance with the requirements of the DATA Act. As of February 2017, 22 of the 24 CFO Act agencies had issued annual financial reports for fiscal year 2016 and 19 of the 22 CFO Act agencies’ auditors reported material weaknesses and/or significant deficiencies in internal control over financial reporting in their audit reports that may affect the quality of information reported under the DATA Act. In addition, as of February 2017, 20 of the 24 CFO Act agencies’ IGs had issued readiness review reports. Of these, 16 IGs identified a range of issues and challenges which may affect agencies’ abilities to produce quality data for submission to Treasury as part of the DATA Act reporting requirements. Further, 9 of the 22 CFO Act agencies’ auditors reported agencies’ financial management systems did not substantially comply with Section 803(a) of FFMIA, which may limit an agency’s ability to provide reliable and timely financial information for managing day-to-day operations and to produce reliable financial statements, maintain effective internal control, and comply with legal and regulatory requirements, including the DATA Act. Our analysis of material weaknesses, significant deficiencies, and other challenges reported in agency annual financial reports and agency IGs’ DATA Act readiness reviews identified data quality issues and challenges in three broad areas that increase the risk agencies may not be able to report complete, timely, and accurate data as required under the DATA Act by May 2017. These issues and challenges relate to internal controls over financial reporting and financial management operations, properly recorded and reconciled accounting balances and transactions, and other issues related to the proper use of accounting practices in accordance with U.S. generally accepted accounting principles. Fourteen of the 22 CFO Act agencies’ auditor’s reports noted material weaknesses and significant deficiencies, and 14 of the 20 IG readiness reviews reported issues or challenges related to accounting and financial management. See appendix III for a list of agencies that had deficiencies in this area. According to some of the auditor’s reports, issues in this area could result in misstatements in budgetary balances, obligations, and undelivered orders—which are part of the information to be posted on USASpending.gov. Some examples include the following: One agency’s auditor reported a material weakness in controls over financial management related to the maintenance of accounting records, recording obligations at the transaction level, and accounting and internal controls over obligations and undelivered orders. The auditor also reported a significant deficiency related to ineffective monitoring and reviewing, and inappropriate certification as to the validity of obligation balances, which resulted in invalid obligations remaining open. According to the auditor, these deficiencies restrict the availability of funding authority, and increase the risk of misstating obligation balances as of year-end. These types of issues increase the risk that quarterly obligation amounts reported by agencies under DATA Act requirements may be inaccurate or incomplete. Another agency’s IG readiness review reported that the various layers of data validation and reconciliation involved in the agency’s DATA Act implementation are complex and require coordination with each reporting bureau. According to the agency’s IG, the complexities of performing reconciliations of reported data to source systems presents a challenge to the agency’s ability to ensure the quality and validity of data reported. This set of issues included longstanding challenges with disparate or antiquated financial management systems that affect financial reporting. These challenges include system infrastructure and integration issues such as systems that do not consolidate transaction level financial data or do not capture required data elements such as award identifiers used to link financial and non-financial data. Five of the 22 CFO Act agencies’ auditors’ reports noted material weaknesses and significant deficiencies, and 14 of the 20 IG readiness reviews reported issues or challenges related to financial management systems. See appendix III for a list of agencies that had deficiencies in this area. According to the auditors’ reports, issues in this area may cause ineffective application of controls used to identify and resolve differences in financial information with source systems to help ensure complete, accurate, and timely financial information for DATA Act reporting. Also, according to the IG readiness reviews, issues with agency financial management systems resulted in test file submissions being rejected by the DATA Act broker due to validation errors. Only data that have passed the broker validation and been approved by the SAO is included in USASpending.gov. Data that have not passed the broker validation will not be included, therefore increasing the risk of incomplete or misleading information. Some examples include the following: One agency’s annual financial audit report stated that the agency had not enabled the full functionality of its accounting systems to capture all budgetary accounting events and to automate budgetary reporting procedures. As a result, the agency made numerous manual adjustments related to budgetary resources amounts that were not supported and not properly recorded to the correct general ledger accounts. According to the auditor, manual adjustments increase the risk (1) that budgetary adjustments were unsupported or inconsistently recorded, and (2) of the likelihood of errors in the financial statements. These deficiencies increase the risk that budgetary information that will be submitted to USASpending.gov may be incomplete and inaccurate. Another agency’s IG readiness review reported that the agency faced challenges due to legacy and current financial systems using different technologies and data elements. Limited resources, such as lack of financial resources and human capital necessary to implement the act’s requirements, was also cited as a challenge. The IG also reported that the agency had been unable to resolve data quality issues that have impeded the complete and accurate reporting of departmental contract, grant, loan, and other financial assistance awards in USASpending.gov. Finally, according to the auditor’s reports, 9 of the 22 CFO Act agencies’ auditors reported agencies’ financial management systems did not substantially comply with 1 or more of the 3 requirements found in section 803(a) of FFMIA. Section 803(a) of FFMIA requires: (1) federal financial management systems requirements; (2) applicable federal accounting standards; and (3) the U.S. Standard General Ledger (USSGL) at the transaction level. Eight of 22 agencies did not comply with federal financial management system requirements, which consist of reliable financial reporting; effective, efficient, and cost effective financial operations; safeguarding resources; and internal controls over financial reporting and financial system security. Four of 22 agencies did not comply with federal accounting standards, which provide guidance to improve federal financial reporting and are essential for public accountability and the effective and efficient functioning of government. Five of 22 agencies did not comply with the USSGL at the transaction level which means that each time an approved transaction is recorded in the financial management system it will generate the appropriate general ledger accounts for posting the transaction in accordance with the rules defined in USSGL guidance. By not implementing effective internal controls over financial management systems and not adequately implementing requirements in section 803(a) of FFMIA, agencies will be challenged to provide consistent financial and non-financial information across component entities and functions, which increases the risk that agencies may not be able to submit quality data for DATA Act reporting. The third area consists of issues involving security over information technology (IT) systems; improper access controls to limit users to systems and functions needed for their work; and system configurations such as outdated system software, patch management, and lack of compliance with internal policies. Issues involving IT security and ineffective controls could limit management’s ability to provide assurance over the completeness and accuracy of recorded transactions. Eighteen of the 22 CFO Act agencies’ auditors’ reports noted material weaknesses and significant deficiencies related to IT security and controls. See appendix III for a list of agencies that had deficiencies in this area. The IG readiness reviews, which primarily focused on other steps taken by agencies to implement the DATA Act, did not specifically mention challenges or issues related to IT security and controls. According to the auditors’ reports, issues in this area increase the risk that unauthorized and/or inappropriate changes made either accidentally or intentionally to financial IT systems may go undetected by management, increasing the risk of misstatement due to fraud and disruption of critical financial operations, as well as increasing the risk that the reliability and integrity of agencies’ data could be compromised and adversely affect the agencies’ ability to provide complete, accurate, and timely information for DATA Act reporting. One example iss the following: One agency’s annual financial audit report stated that controls over access to programs and data and audit logs were not designed properly, consistently implemented, or fully effective. The auditor found that database and operating system patches were not documented, authorized or tested prior to implementation into the production environment, a complete and accurate listing of operating system patches could not be generated, and a feeder system was configured incorrectly to assign incorrect invoice acceptance date data, among other things. According to the auditor, these deficiencies increase the risk that unscrupulous, unauthorized, or inappropriate activity could be performed and not detected, which could lead to a compromise and/or security risk to the confidentiality, integrity, and availability of the data and systems. These issues also increase the risk that financial and non-financial information that will be submitted to USASpending.gov may be incomplete, inaccurate, and untimely. We have previously reported weaknesses, issues, and other challenges in key DATA Act award systems which increase the risk that the data that will be submitted to USASpending.gov may not be complete, accurate, and timely. The DATA Act broker is expected to extract award and sub- award information related to federal spending, such as federal assistance—including grants, loans, and procurements—directly from four award systems. The four award systems and related issues that we have previously identified are described below. Unlike the data submitted by agencies directly from their financial systems to the DATA Act broker, the award and sub-award information extracted from these four systems are not subject to any validations in the broker. Since 1978, FPDS-NG has been the primary government-wide central repository for procurement data, and feeds certain data to USASpending.gov—a searchable database of information on federal contracts and other government assistance such as grants and cooperative agreements. Individuals and entities awarded contracts over the micro-purchase threshold must submit detailed contract information to FPDS-NG. FPDS-NG includes information about the product or service, agency and vendor information, contract start and expiration dates, and location of contract performance, among other elements. According to Treasury officials, the DATA Act broker will extract procurement award and awardee information such as award description, amount, and awardee unique identifier from FPDS-NG to be reported on USASpending.gov. In our past work, we found that FPDS-NG often contains inaccurate or incomplete data as agencies do not always input or document required information. For example, in September 2016, our review of the Department of Veterans Affairs (VA) contracting policies and procedures found that total obligations balances reflected in VA’s subsidiary accounting records did not match what was recorded in FPDS-NG. We also identified inaccurate data in FPDS-NG such as misclassified 8(a) firms and incorrect obligations balances in our March 2016 review of the Small Business Administration’s (SBA) 8(a) Business Development Program. Further, our prior work on FPDS-NG also found data limitations with the system’s inability to identify more than one type of service purchased for each contract action. According to some of the IG reports we reviewed, these data quality issues were the result of human error, the lack of departmental internal controls to reasonably assure required procurement information is properly recorded in departmental systems and FPDS-NG, and limitations with the FPDS-NG functionality such as the inability to change incorrect data identified in FPDS-NG. These issues increase the risk that data reported from FPDS-NG to the Treasury data store will not be complete, accurate, and timely. SAM is the primary U.S. government repository for prospective federal awardee and federal awardee information, and the centralized Government system for certain contracts and grants. All entities that wish to do business with the government are to maintain an active registration in SAM unless exempt. As part of this registration, awardees register a name, unique identifier, address, and executive compensation information—all of which are required DATA Act standardized data elements. SAM also populates the entity name and address (street, city, state, congressional district, ZIP Code, and country) in FPDS-NG and certain executive compensation and other sub-awardee information is prepopulated from SAM to FSRS prior to the prime awardee’s reporting. We have previously identified data limitations with SAM that may affect DATA Act reporting. For example, in January 2017, we found that SAM did not contain information on lessors that listed physical or mailing addresses in China. Our work also found that certain information disclosed in SAM is not validated. If the addresses for foreign awardees are not recorded in SAM, then they will not be displayed in USASpending.gov for access by the public, resulting in incomplete and inaccurate awardee data for DATA Act reporting. We further noted that prior to November 1, 2014, the General Services Administration (GSA) was not required to collect certain information from lessors through SAM, such as the parent, subsidiary, or successor entities to the lessor. In addition, our June 2014 review of USASpending.gov found that ZIP Code information for awardees—which is provided by SAM—was one of the data elements that were significantly inconsistent with information in agency records. In that report, we recommended clarified guidance on agency maintenance of authoritative records adequate to verify the accuracy of required data reported for use by USASpending.gov to improve the completeness and accuracy of data submissions. Although some progress has been made by the related agencies, the recommendations related to this report remain unresolved. These data limitations increase the risk that federal agencies may not submit quality awardee data for DATA Act reporting. ASP is the system used by federal agencies to report financial assistance data (e.g., grants) to USASpending.gov. According to Treasury, the DATA Act broker will extract financial assistance award information from the ASP—including awardee unique identifier, award characteristics, awards amount, awardee legal identify name, and address for financial assistance—all of which are required by the DATA Act to be reported. In December 2016, we reported that the DATA Act broker will not validate the accuracy of data extracted from the ASP and that according to Treasury officials ASP does apply some validation checks to the data submitted by federal agencies. In addition, ASP rejects individual records that fail 10 percent of the validation requirements. ASP also rejects entire file submissions if more than 10 percent of the records in the file submission fail validation checks. However, ASP partially accepts the file submission if less than 10 percent of the records in a file submission fail validation checks. The effectiveness of this validation process to prevent the submission of erroneous records raises concerns regarding the quality of awardee data that can be submitted for DATA Act reporting. FSRS allows prime grant award and prime contract recipients to report sub-award activity including executive compensation, and provides data on first-tier sub-awards reported by prime recipients. FSRS was created as a result of FFATA and became active in July 2010. Prime awardees must register and report sub-award information for first-tier sub-awardees, including award and entity information, such as Data Universal Numbering System (DUNS) identification numbers. FSRS contains the small business status of some subcontractors, but only for limited types of small businesses. The sub-awardee provides all of the information required for reporting to the prime awardee. This includes sub-awardee entity information, sub-awardee unique identifier, and relevant executive compensation data, if applicable. These are also DATA Act standardized data elements required to be reported. In June 2014, we reported that we could not verify the subcontract data in FSRS as agencies frequently do not maintain the records necessary to verify the information reported by the awardees. We also found inconsistencies in the reporting of 20 of 21 data elements caused by errors in data entry, missing data, or lack of clear guidance. In our report, we recommended clarified guidance on agency maintenance of authoritative records adequate to verify the accuracy of required data reported for use by USASpending.gov. Our recommendation on this issue remains unresolved. These issues increase the risk that federal agencies may not submit complete, accurate, and timely sub-award data for DATA Act reporting. As agencies prepare to submit required financial and award information in May 2017, they have identified a number of reporting challenges that will affect the quality of data posted on USASpending.gov. Both OMB and Treasury acknowledged that these challenges are unlikely to be resolved before the first statutory deadline when data are collected in compliance with the act. Included in these challenges is how agencies are to report certain intragovernmental transactions that result from financial activities between federal government agencies. Specifically, in order to properly present the financial balances and activities of the federal government, the reciprocating balances and activities between the agencies should be offset and result in a zero balance. Reconciling intragovernmental transactions for financial reporting purposes is a longstanding and government-wide challenge. Federal accounting standards, laws, regulations, and policies govern the accounting, reporting, and business rules for each of the categories and subcategories of intragovernmental transactions. Our annual audits of the U.S. government’s consolidated financial statements have identified the federal government’s inability to adequately account for and reconcile intragovernmental activity and balances between federal entities as an impediment that has prevented us from rendering an opinion on the federal government’s accrual-based consolidated financial statements for many years. Our most recent audit found that the amount of unmatched funds from intragovernmental transactions amounted to hundreds of billions of dollars. In response to our previous recommendations, Treasury has continued to actively work with federal agencies and improve its processes to resolve intragovernmental transactions. However, the guidance OMB developed on how agencies are to report intragovernmental transactions does not appear to leverage the existing processes that Treasury has put in place to resolve on a quarterly basis the differences in intragovernmental transactions between federal agencies. Treasury has implemented a new initiative for identifying and monitoring systemic root causes of intragovernmental differences, in addition to other enhancements to its processes for reporting various aspects of agencies intragovernmental differences between agencies, including the composition of the differences by agency and category of intragovernmental transaction. USDA officials (one of our case example agencies) expressed concern about OMB’s guidance on intragovernmental transactions. Specifically, they told us that without a standard approach for reporting intragovernmental transactions—meaning whether the funding or awarding agency reports them—it is not appropriate for a funding agency to certify award data maintained in an awarding agency’s systems, a DATA Act reporting method allowed after the first data submission. HHS officials (our other case example agency) also expressed concern, and told us that although they will be prepared to report in a manner consistent with the current OMB guidance, they believe that OMB should revisit the guidance because it differs from other reporting requirements. Treasury officials told us that they are aware of these challenges, but they do not expect that these issues will be resolved before the May 2017 reporting deadline. These officials also told us that efforts to address longstanding challenges related to reporting intragovernmental transactions are under way, and that they plan to communicate data quality limitations to the public on USASpending.gov. The officials could not provide us with specifics on how they would communicate the limitations but indicated that it would likely be part of the SAO assurance process. OMB officials told us in January 2017 that they are unaware of any outstanding issues on this topic that would require an OMB policy response, and therefore OMB has no plans to issue additional implementation guidance at this time. Another reporting challenge identified by agencies involves missing or incorrect ZIP+4 information. OMB guidance requires agencies to validate federal assistance recipient information, including the recipient’s address and ZIP code, against the information in the System for Award Management (SAM) before they submit it to the DATA Act broker. This guidance requires agencies to ensure that award-level data in their systems for financial assistance recipients matches the recipients’ information in SAM. Consistent with OMB guidance, financial assistance recipients are required to register in SAM prior to submitting an application for an award, and OMB staff told us recipients are also required to provide accurate information as part of the terms and conditions of their award agreements. However, according to agency officials, because SAM does not enforce the use of ZIP+4 and agencies’ eligibility procedures may not flag incorrect or missing ZIP+4 information, some recipient records are incomplete or incorrect. In addition, some rural communities do not have ZIP+4 because the U.S. Postal Service (USPS) only assigns 5-digit ZIP codes in those areas. As a result of the requirement that ZIP+4 information be consistent with the USPS address database, Treasury officials told us some agencies are unable to validate their financial assistance award information in the DATA Act broker. For example, USDA officials told us in January 2017 that instituting the ZIP+4 validation rule in the broker as a fatal error rather than just a warning would cause a large number of their financial assistance records to fail and ultimately not be included in data that are displayed on USASpending.gov. In February 2017, Treasury implemented the ZIP+4 validation rule as a fatal error. Treasury officials told us that this was done in an effort to enforce existing requirements and improve data quality. Treasury officials said that they examined the scope and seriousness of the problem and determined that it is not significant enough at this time to warrant the policy change that would be required to address it prior to May 2017. According to a Treasury analysis, SAM records that are missing ZIP+4 information represent about 1 percent of the total dollar value of all the awards in SAM. In addition, according to Treasury, SAM records that are missing ZIP+4 because the address has not been assigned a ZIP+4 by USPS represent less than 0.5 percent of the total dollar value of all the awards in SAM. Treasury officials acknowledged that missing or invalid ZIP+4 information is a longstanding data quality issue with agency records, but believe that it is one best addressed at the agency level. In March 2017, Treasury officials told us that although they planned to continue to enforce the ZIP+4 requirement through the DATA Act broker, they were developing a workaround for agencies encountering problems. Agencies have also reported challenges linking their financial and award data using the unique award identifier. OMB guidance requires agencies to link their agency financial and award data using the unique award identifier. As our work in 2016 showed, agencies continue to report challenges related to integrating their financial and award systems to report under the DATA Act. Some agencies, according to OMB staff, are unable to record unique award identifiers in their financial systems, and may not be able to link financial and award data. This linkage should help policymakers and the public track spending more effectively—one of the objectives of the DATA Act. HHS and USDA officials reported in their DATA Act implementation plan updates and confirmed with us that they are using short-term solutions to link their financial and award data to generate and submit a required file by May 2017. They both confirmed they will link their financial and award systems with the unique award identifier when they implement long-term system solutions. OMB staff told us that five agencies—the Departments of Defense, Housing and Urban Development, the Interior, and Veterans Affairs, and the Environmental Protection Agency—indicated that they will not fully meet the May 2017 reporting requirements, in part because some of their components have been unable to record unique award identifiers in their financial systems. OMB staff told us that these agencies would be able to report some data, but not all of the award financial information required for agency submissions. Treasury officials told us that they are aware of this issue and have structured the broker so that after providing a warning it will accept agency data submissions, even if they contain significant gaps. OMB staff and Treasury officials told us they are creating a mechanism in the broker that will allow agencies to explain reporting anomalies in their data displayed on USASpending.gov. According to Treasury officials, the broker will include a text box for agencies to explain any reporting anomalies related to the data they are submitting and certifying before it is displayed on USASpending.gov. In addition, OMB staff told us they plan to provide agencies with standard language to explain certain reporting discrepancies, such as data that are not aligned as a result of the time it takes between when an agency completes a transaction and when it is recorded in its financial system. OMB staff explained that the purpose of the text boxes is not to provide qualifications about data quality, but to communicate what they believe are legitimate data discrepancies that could be perceived as data quality issues by the public. One of the purposes of the DATA Act is to provide consistent, reliable, and searchable government-wide spending data that are displayed accurately for taxpayers and policymakers on USASpending.gov (or a successor system). Longstanding issues related to agency financial information, systems and internal controls, and reporting challenges related to agency DATA Act report submissions underscore the need for OMB to address our open recommendation to provide additional guidance to address potential clarity, consistency, or data quality issues and for OMB to implement a process for communicating data quality limitations to the public. Information Quality Act (IQA) standards specify that data should have full, accurate, and transparent documentation where appropriate and should identify and disclose data quality issues. Similarly, OMB’s Policies for Federal Agency Public Websites and Digital Services requires that agencies be transparent about the quality of the information that they disseminate and take reasonable steps where practicable to inform users about the quality of disseminated content. We will continue to monitor the implementation of the DATA Act and how OMB, Treasury, and agencies communicate reporting anomalies and data quality limitations. Another area of risk to data quality is the agency senior accountable official (SAO) assurance process that leverages assurance processes of existing source systems with known data quality challenges. OMB guidance directs agency SAOs to leverage existing processes when providing assurances over required data submissions. However, during this review we have identified a number of concerns related to the effectiveness of some of these processes. OMB guidance directs agencies to match the procurement award data generated in the broker with data in the agency procurement award systems. The guidance also directs agencies to leverage the assurances provided in their annual Federal Procurement Data System- Next Generation (FPDS-NG) Data Verification and Validation reports submitted to OMB. Despite the requirement for agencies to conduct annual verification and validation reviews of the data contained in FPDS- NG, our prior work found that some award data reported on USASpending.gov contained information that was not fully consistent with agency records or was unverifiable due to gaps in agency records. OMB guidance also directs agencies to match financial assistance award data generated in the broker against data in their financial assistance award management systems for all award-level data and in SAM for prime awardee information (i.e., subrecipient executive compensation data). Although OMB guidance directs agencies to leverage existing assurance processes for other file submissions, there is no certification or assurance processes for the financial data submitted to the ASP. OMB guidance specifies that OMB is reviewing opportunities to enhance assurances over these data. However, as of March 2017, OMB has not established a timetable for this activity, so it is unclear whether new procedures will be in place in time for agencies to leverage these assurances for their May 2017 report submissions. GSA has posted on its website an assurance statement that provides assurance that the risk to federal agency operations, data, and assets resulting from the operation of the common controls of SAM and FSRS information systems are acceptable and meet all the security controls required for DATA Act reporting. According to OMB staff, agencies can rely on data from SAM and FSRS for DATA Act reporting. However, our review of the assurance statement posted on GSA’s website found that the statement focuses on security controls rather than data quality and appears to apply specifically to procurement management. The extent to which this assurance statement will be used by SAOs to provide assurances over the quality of the data for both procurement and financial assistance award information is uncertain. We will continue to monitor this issue moving forward. HHS officials told us they are still assessing the GSA assurance statement and its alignment to HHS’s overarching SAO certification. Since the requirements for SAM and FSRS are driven by both the FAR and Title 2 of the Code of Federal Regulations, officials said that HHS is interested in having GSA confirm that the assurance statement covers both procurement and financial assistance. OMB staff told us that agencies should leverage this assurance when certifying their data from these source systems. OMB staff also noted that the agencies are ultimately responsible for the quality of their data submissions. Furthermore, these staff stated that the quality of the information reported directly by awardees to SAM and FSRS is the responsibility of the awardee in accordance with the terms and conditions of their award agreements. The extent to which the GSA assurance statement regarding data integrity in SAM and FSRS will be used by agency SAOs when assuring the quality of their data submissions for May 2017 is unclear since some SAOs were still in the process of making that determination in March 2017. We will revisit this issue after May 2017 once agencies have made their determinations and will examine potential effects for data quality. OMB staff explained that the intent of OMB guidance on the SAO assurance process is to hold agency SAOs accountable for the reliability and validity of the data they submit. As discussed in OMB guidance, the SAO assurance process is also intended to leverage existing controls, processes, and procedures outlined in existing policies, regulations, and statutes, such as the internal control requirements outlined in OMB Circular A-123. However, questions regarding these assurance processes raise concerns about whether they will be effective in preventing or detecting data quality issues. They also increase the risk that SAO assurances over agency data quality will be unreliable. OMB staff told us that they are aware of these issues and are still finalizing the SAO assurance process, which they expect to do in time for the May 2017 reporting deadline. Accordingly, we are not making a recommendation at this time but will assess the quality of the assurance process in our future work. OMB has taken some actions to improve its data governance framework, but efforts to establish a fully functioning data governance structure are at an early stage with many specifics yet to be worked out. In July 2015, we reported that OMB and Treasury had begun standardizing data elements, but had not established a clear set of institutionalized policies and processes for enforcing data standards or adjudicating necessary changes to existing standards. Establishing a formal framework for providing data governance throughout the lifecycle of developing and implementing standards is key for ensuring that the integrity of data standards is maintained over time. In that report, we recommended that OMB, in collaboration with Treasury, establish a set of clear policies and procedures for developing and maintaining data standards that are consistent with leading practices. OMB and Treasury generally agreed with our recommendation. However, the recommendation remains open. In September 2016, OMB established a Data Standards Committee to focus on clarifying existing data element definitions and identifying the need for new standards. OMB approved a charter for this committee in November 2016. According to the charter, the committee will make recommendations on these topics to OMB, the DATA Act Executive Steering Committee, and federal communities such as the Chief Acquisition Officers Council and the Chief Information Officers Council. The charter states that the committee is an advisory body that is not responsible for approving or operationalizing the data standards. The committee’s membership includes representatives of OMB, Treasury, GSA’s Integrated Award Environment Program Management Office, and federal communities and councils representing various areas of responsibility and expertise. OMB staff told us that the Data Standards Committee will be solely focused on maintaining and updating data standards, including standards used by federal communities but not specifically required under the DATA Act. According to OMB staff, the Data Standards Committee has held several meetings and plans to produce operating procedures to guide its work but has not yet done so. OMB staff told us that although the committee has reviewed specific data standards, the committee has not made any recommendations regarding these standards, nor has it produced a work plan or timetable for addressing known challenges related to any data standards. While these staff also said that the committee has begun to develop processes and procedures to guide its reviews of data standards, no details or documentation were available beyond the six-page charter. Although the charter states that the committee will seek to promote transparency by making information on the topics of its proceedings and resulting outcomes available to the public, it has not yet done so. As we have previously reported, one component of good data governance involves establishing a process for consulting with and obtaining agreement from stakeholders, including non-federal stakeholders potentially affected by changes in data standards. Moreover, standards for internal control in the federal government state that management should communicate quality information to external parties so that these parties can help the entity achieve its objectives and address related risks. The DATA Act requires that OMB and Treasury consult with public and private stakeholders in establishing data standards. The charter states that the committee is to make publicly available both the topics of its proceedings and the resulting outcomes. Doing so could allow public and private stakeholders not represented on the committee to provide better informed opinions on new data standards or revisions. Without publicly available information about the committee, these stakeholders may not be able to direct their input toward standards that are under review. OMB staff told us that the committee has not kept records and therefore has no information about its proceedings available to release. Keeping records of the Data Standards Committee’s activities and releasing them publicly could facilitate consultation with stakeholders. Actions beyond recordkeeping and public release of information about the committee are needed to address our 2015 recommendation that OMB and Treasury establish a data governance structure consistent with leading practices. The Data Standards Committee may provide a useful forum for collecting stakeholder input. However, additional steps need to be taken to build a data governance structure that fully reflects leading practices. Across the federal government, agencies are making final preparations to submit the data required by the DATA Act’s May 2017 deadline. This represents the culmination of almost 3 years of effort by OMB, Treasury, and federal agencies to address the many policy and technical challenges presented by the act’s requirements including the need to standardize data elements across the entire federal government, link data contained in agencies’ financial and award management systems, and expand the type and amount of data to be reported. Their submissions will provide an important initial test of the efficacy of this endeavor. Looking forward, attention will increasingly focus on another critical goal of the act—improving the quality of the data being produced and the mechanisms and assurances needed to communicate such information to users. An important component of this will be the first round of mandated reviews agency IGs will conduct later this year, which will include sampling and testing of data quality. However, prior audits and reviews have already identified much about the challenges agencies face in producing quality data. These reviews have identified material weaknesses and significant deficiencies reported in agencies’ financial audits and identified several widespread and longstanding issues that present risks to agencies’ ability to submit quality data for DATA Act reporting. In addition, specific challenges related to the operationalization of the act’s requirements also represent potential risks to data quality. Because of this, it is especially important for the quality assurance and data governance frameworks established by OMB to be robust, transparent, and effective. Users will need such mechanisms to make informed decisions about the nature and limitations of the data being reported. This is essential to the full implementation of the DATA Act and its promise of improving the usefulness of those financial data to Congress, federal managers, and the American people. To promote transparency in the development and management of data standards for reporting federal spending, the Director of the Office of Management and Budget should ensure that the Data Standards Committee makes information about the topics of the committee’s proceedings and any resulting outcomes available to the public. We provided a draft of this report to the Secretaries of the Departments of Agriculture, Health and Human Services, and Treasury, and the Director of the Office of Management and Budget for review and comment. OMB generally agreed with our recommendation. In addition, OMB, USDA, and Treasury provided technical comments which we incorporated as appropriate. HHS had no comments on the draft report. We are sending copies of this report to the Secretaries of the Departments of Agriculture, Health and Human Services, and Treasury, and the Director of the Office of Management and Budget, as well as interested congressional committees and other interested parties. This report will be available at no charge on our website at http://www.gao.gov. If you or your staff has any questions about this report, please contact J. Christopher Mihm at (202) 512-6806 or [email protected] or Paula M. Rascona at (202) 512-9816 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of our report. Key contributors to this report are listed in appendix IV. This review is part of our ongoing effort to provide reports on the progress being made in implementing the Digital Accountability and Transparency Act of 2014 (DATA Act). This review focuses on what is already known about existing challenges that affect the quality of agency financial data as well as issues that will affect data quality as agencies begin to report under the act. More specifically, it addresses the following: (1) risks to data quality related to known material weaknesses and other deficiencies, including internal controls over financial reporting, that have been identified in selected previous audits, reviews, and reports conducted by GAO, inspectors general (IG), and external auditors; (2) risks to data quality related to challenges in operationalizing DATA Act policy and technical guidance; (3) approaches that agencies will use to assure the quality of their data submissions and any associated limitations; and (4) efforts taken to establish a data governance structure. We also update the current status of the Office of Management and Budget’s (OMB) and the Department of the Treasury’s (Treasury) efforts to address our open recommendations related to DATA Act implementation in appendix II. To assess potential risks to data quality related to known material weaknesses and other significant deficiencies, including internal controls over financial reporting, that have been identified in selected previous audits, reviews, and reports conducted by us, IGs, and external auditors, we examined: (1) the extent to which agencies’ independent auditors have reported material weaknesses, significant deficiencies, and other challenges, and (2) the extent to which we previously reported issues with government-wide systems. To describe the extent to which agencies’ independent auditors have disclosed material weaknesses, significant deficiencies, and other challenges, we reviewed 22 of the 24 Chief Financial Officers Act of 1990 (CFO Act) agencies’ Performance and Accountability Reports (PAR) or Agency Financial Reports (AFR) for fiscal year 2016 to identify material weaknesses and significant deficiencies reported by independent auditors. Two agencies had not issued a PAR or AFR prior to our cutoff date of February 28, 2017, and therefore were not included in our review. We categorized the material weaknesses and significant deficiencies reported by the independent auditors that could affect the quality of the data submitted by agencies under the DATA Act. We also reviewed these agency reports for any auditor-identified noncompliance with the Federal Financial Management Improvement Act of 1996 (FFMIA) to identify factors that may increase the risk to reporting quality data. In addition, because the DATA Act requires IGs and GAO to assess and report on the completeness, timeliness, quality, and accuracy of data submitted by federal agencies, we reviewed readiness reviews issued by IGs to identify reported issues and challenges that could affect the quality of spending data reported under the DATA Act. Four agency IGs did not conduct a readiness review or their reports were not issued prior to our cutoff date of February 28, 2017, and therefore were not included in our review. To ensure we had a comprehensive understanding of these material weaknesses, significant deficiencies, and other challenges, we analyzed these reported issues to determine the extent to which they may hinder the entities’ abilities to submit complete and accurate spending data and categorized them. In our analysis of agencies’ material weaknesses, significant deficiencies, and other challenges reported by independent auditors, we identified three overall categories that could affect data quality: (1) Accounting and Financial Management, (2) Financial Management Systems, and (3) Information Technology (IT) Security and Controls. We reviewed the auditor reports, PARs, AFRs, and readiness reviews using a data collection instrument to document our assessment of the extent to which the issues identified in these reports fit into the aforementioned categories. To describe the extent to which independent auditors have reported issues with government-wide systems, we reviewed our previous reports to identify reported deficiencies in government-wide systems that could affect the quality of spending data submitted to USASpending.gov. According to Treasury, the source systems include: (1) the Federal Procurement Data System-Next Generation, (2) System for Award Management, (3) the Award Submission Portal, and (4) the Federal Funding Accountability and Transparency Act Subaward Reporting System. Although the conditions observed in these reports may not be present in all federal agencies and systems, they illustrate conditions that increase the risks and effects to agency data quality. To assess the risks to data quality related challenges in operationalizing DATA Act policy and technical guidance during implementation of the act we examined (1) the extent to which selected agencies have been able to submit, validate, and certify their data submissions to the DATA Act broker and any challenges they reported, and the (2) the steps OMB and Treasury have taken to address known reporting challenges. To understand the extent to which agencies have been able to submit, validate, and certify their data submissions we reviewed technical documentation; reviewed experiences at two agencies; interviewed knowledgeable officials from OMB, Treasury, and selected federal agencies; and reviewed past GAO reports to identify data quality issues related to DATA Act implementation. The review of technical documentation included material related to the schema version 1.01 to understand reporting structure, and the broker to understand its functionality and validation processes. We obtained technical documentation from the Federal Spending Transparency public website. For the examination of experiences at agencies, we selected two agencies based on whether they were in compliance with existing federal requirements for federal financial management systems; the type of federal funding provided (such as grants, loans, or procurements); and their status as federal shared service providers for financial management. Based on these selection factors, we chose the U.S. Department of Health and Human Services (HHS), and the U.S. Department of Agriculture (USDA). Although the agencies’ experiences are not generalizable, they illustrate different conditions and challenges under which agencies are implementing the act. These two agencies were also selected for our January and December 2016 reports. To understand the steps OMB and Treasury have taken to address known reporting challenges, we reviewed OMB policy guidance intended to facilitate agency reporting. We also interviewed OMB staff and Treasury officials to obtain information about steps they have taken to respond to previously identified challenges, agency requests for clarification on reporting requirements, and any plans for additional guidance. We also met with OMB staff and Treasury officials to obtain information on the status of efforts to address our previous recommendations related to providing policy and technical guidance. To assess the approach that agencies will use to assure the quality of their data submissions and any associated limitations we (1) reviewed relevant OMB policy guidance; (2) spoke with relevant agency officials; and (3) examined experiences at our two case study agencies, HHS and USDA. We reviewed OMB policy guidance to understand the assurance process agency senior accountable officials (SAO) should follow, including the authoritative sources for each file to be submitted in the DATA Act reporting process. We spoke with OMB staff and Treasury officials to understand the purpose and rationale of parts of the assurance process, and asked about plans for additional guidance. We spoke with HHS and USDA officials, and requested and reviewed documentation where applicable, to understand any concerns they have or challenges they are facing or expect to face during the assurance process. To determine the current status of OMB’s and Treasury’s efforts to implement a data governance structure for the DATA Act, we met with OMB staff and Treasury officials to obtain information on the status of their efforts to address our previous recommendation that they establish such a structure. We reviewed documents provided by OMB, including policy memorandums and the charter of the Data Standards Committee, an advisory body established by OMB as part of its data governance efforts. We also met with representatives of organizations with expertise in data governance to review the key practices we described in our December 2016 report and obtain additional information about how these key practices have been implemented in data governance frameworks. We conducted this performance audit from January 2017 to April 2017 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Recommendations 1. To improve the completeness and accuracy of data submissions to the USASpending.gov website, the Director of the Office of Management and Budget (OMB), in collaboration with the Department of the Treasury's (Treasury) Fiscal Service, should clarify guidance on (1) agency responsibilities for reporting awards funded by non-annual appropriations; (2) the applicability of USASpending.gov reporting requirements to non-classified awards associated with intelligence operations; (3) the requirement that award titles describe the award's purpose (consistent with our prior recommendation); and (4) agency maintenance of authoritative records adequate to verify the accuracy of required data reported for use by USASpending.gov. Implementation Status Open. OMB and Treasury are working to implement the Digital Accountability and Transparency Act of 2014 (DATA Act), which includes several provisions that may address these recommendations once fully implemented. 1) OMB staff said they continue to agree with GAO that additional guidance is needed regarding agency responsibilities for reporting awards funded by non-annual appropriations but have not yet developed this guidance. 2) OMB staff stated that they believe a memorandum issued in November 2016 (M-17-04) addresses the applicability of USASpending.gov reporting requirements to non-classified awards associated with intelligence operations. We reviewed the memorandum and determined that additional guidance is still needed to ensure complete reporting of unclassified awards as required by FFATA. 3) OMB staff have agreed that it will be important to clarify guidance on how agencies can report on award titles to appropriately describe the award’s purposes and noted that they are working on providing additional guidance to agencies as part of their larger DATA Act implementation efforts. 4) OMB released policy guidance in May 2016 (Management Procedures Memorandum (MPM) No. 2016-03) and November 2016 (M-17-04) that identifies the authoritative sources for reporting procurement and award data. However, our review of this policy guidance determined that it does not address the underlying source that can be used to verify the accuracy of non- financial procurement data or any source for data on assistance awards. This recommendation was included in priority recommendation letters sent to OMB by the Comptroller General in July 2016 and Spring 2017. Recommendations 2. To improve the completeness and accuracy of data submissions to the USASpending.gov website, the Director of OMB, in collaboration with Treasury's Fiscal Service, should develop and implement a government-wide oversight process to regularly assess the consistency of information reported by federal agencies to the website other than the award amount. Implementation Status Open. As part of their DATA Act implementation efforts, OMB issued policy guidance in May 2016 (MPM 2016-03) and November 2016 (M-17-04) that identifies authoritative systems to validate agency spending information. The guidance also directs the DATA Act senior accountable officials (SAO) to provide quarterly assurance over the data reported to USASpending.gov and specifies that this assurance should leverage data quality and management controls established in statute, regulation, and federal government-wide policy and be aligned with the internal control and risk management strategies in Circular A-123. In addition, the DATA Act broker will provide a set of validation rules to further ensure the proper formatting of data submitted to USASpending.gov. In addition, OMB staff stated that they have reviewed reports from agency inspectors general (IG) on DATA Act implementation and plan to use future IG reports on data quality as part of a government-wide monitoring plan. However, OMB has not documented this monitoring plan. OMB staff noted that OMB and Treasury had prioritized linking financial data to award data as a means of addressing the issue of unreported awards we previously identified. We agree that linking financial and award data can help agencies identify gaps in reporting. However, other than citing agencies’ responsibility to certify the accuracy of their data, OMB did not identify any new or revised processes aimed at addressing the accuracy concerns we addressed. This recommendation was included in priority recommendation letters sent to OMB by the Comptroller General in December 2015, July 2016, and Spring 2017. 1. To ensure that federal program spending data are provided to the public in a transparent, useful, and timely manner, the Director of OMB should accelerate efforts to determine how best to merge DATA Act purposes and requirements with the GPRAMA requirement to produce a federal program inventory. Open. OMB staff told us that they do not expect to be able to identify programs for the purposes of DATA Act reporting until sometime after May 2017. However, they said that they are studying a program definition and alignment to identify a more consistent framework for defining federal agency programs with the aim of improving government-wide comparability and tying programs to spending. The effort is supported by a working group comprised of representatives from the Chief Financial Officers (CFO) community and other federal communities. OMB staff stated that they are incorporating ongoing feedback from this group into OMB’s efforts to identify a framework for defining federal agency programs. This was identified as a high priority recommendation in letters sent from the Comptroller General to the Director of OMB in December 2015, July 2016, and Spring 2017. Recommendations 2. To ensure that the integrity of data standards is maintained over time, the Director of OMB, in collaboration with the Secretary of the Treasury, should establish a set of clear policies and processes for developing and maintaining data standards that are consistent with leading practices for data governance. 1. To help ensure that agencies report consistent and comparable data on federal spending, we recommend that the Director of OMB, in collaboration with the Secretary of the Treasury, provide agencies with additional guidance to address potential clarity, consistency, or quality issues with the definitions for specific data elements including Award Description and Primary Place of Performance and that they clearly document and communicate these actions to agencies providing this data as well as to end-users. Implementation Status Open. OMB and Treasury have taken some initial steps to build a data governance structure including conducting interviews with key stakeholders and developing a set of recommendations for decision-making authority. In September 2016, OMB and Treasury took another step toward establishing a data governance structure by creating a new Data Standards Committee that will be responsible for advising OMB and Treasury on new data elements and revisions to established standards. According to OMB staff, the committee has held several meetings but has not yet provided recommendations to OMB. However, more remains to be done. As part of our ongoing feedback to OMB, we shared five key practices that we believe should inform their plans to develop a data governance framework moving forward. This was identified as a high priority recommendation in letters sent from the Comptroller General to the Director of OMB in December 2015 and to the Director of OMB and the Secretary of the Treasury in July 2016 and Spring 2017. Open. In May 2016, OMB issued additional guidance for implementing the DATA Act entitled Implementing the Data- Centric Approach for Reporting Federal Spending Information (Management Procedures Memorandum No. 2016-03). This memorandum provided guidance on new federal prime award reporting requirements, agency assurances, and authoritative sources for reporting. In November 2016, OMB followed this with additional guidance intended to provide clarification on how agencies should: (1) report financial information for awards involving Intragovernmental Transfers (IGTs); (2) report financial assistance award records containing personally identifiable information (PII); and (3) provide agency SAO assurance regarding quarterly submissions to USASpending.gov. OMB staff also stated that they sent an email announcement to agency senior accountable officials to clarify that information submitted to USASpending.gov is subject to plain language requirements. Despite these positive steps, additional guidance is needed to facilitate agency implementation of certain data definitions (such as "primary place of performance" and "award description") in order to produce consistent and comparable information. We continue to have concerns about whether the guidance provides sufficient detail in areas such as the process for providing assurance on data submissions. This was identified as a high priority recommendation in letters sent from the Comptroller General to the Director of OMB and the Secretary of the Treasury in July 2016 and Spring 2017. Recommendations 2. To ensure that federal agencies are able to meet their reporting requirements and timelines, we recommend that the Director of OMB, in collaboration with the Secretary of the Treasury, take steps to align the release of finalized technical guidance, including the DATA Act schema and broker, to the implementation time frames specified in the DATA Act Implementation Playbook. 1. To enable the development of effective recommendations for reducing reporting burden for contractors, the Director of OMB should ensure that the procurement portion of the pilot reflects leading practices for pilot design. Implementation Status Closed–Implemented. OMB and Treasury issued the finalized technical guidance (DATA Act Information Model Schema, version 1.0) in April 2016 intended to provide a stable base for agencies and enterprise resource planning (ERP) vendors to develop data submission plans. Treasury also released an alpha version of the broker in April 2016 and a beta version of the broker in June 2016. On September 30, 2016, Treasury released its latest version of the broker, which it stated was fully capable of performing the key functions of extracting and validating agency data. Following this release, Treasury continued to release broker updates approximately every 2 weeks. The software patches developed by ERP vendors, intended to help agencies submit required data to the broker, were all released by the end of December 2016. This was identified as a high priority recommendation in letters sent from the Comptroller General to the Director of OMB and the Secretary of the Treasury in July 2016. Closed-implemented. Our review of the revised design for the procurement portion of the Section 5 Pilot updated in January 2017 found that it largely reflected all 5 leading practices for effective pilot design. For example, in the revised design OMB provides additional details regarding its assessment methodology, includes a data analysis plan to evaluate pilot results, describes a strategy for two-way stakeholder outreach, and includes additional details on scalability of the pilot design. As a result we are closing this recommendation as implemented. Recommendations 1. To help ensure effective government- wide implementation and that complete and consistent spending data will be reported as required by the DATA Act, the Director of OMB, in collaboration with the Secretary of the Treasury, should establish or leverage existing processes and controls to determine the complete population of agencies that are required to report spending data under the DATA Act and make the results of those determinations publicly available. 2. To help ensure effective government- wide implementation and that complete and consistent spending data will be reported as required by the DATA Act, the Director of OMB, in collaboration with the Secretary of the Treasury, should reassess, on a periodic basis, which agencies are required to report spending data under the DATA Act and make appropriate notifications to affected agencies. Implementation Status Open. As we previously reported, OMB stated that each agency is responsible for determining whether it is subject to the DATA Act. To help agencies make that determination, OMB published guidance in the form of frequently asked questions and stated that the agencies may consult with OMB for additional counsel. In response to our recommendation, OMB staff told us they have reached out to federal agencies to identify which agencies have determined that they are exempt from reporting under the DATA Act and prepared a list of such agencies. However, OMB has not provided us the list or the procedures for reviewing agency determinations and compiling the results. In addition, OMB has not established procedures for ensuring non-exempt agencies are reporting spending data as required. Finally, OMB has not stated whether it will make the results of the determinations publicly available. Further, additional clarification would improve the usefulness of the frequently asked questions. For example, they state “Any Federal agency submitting data that OMB posts on its SF 133 Report on Budget Execution and Budgetary Resources is required to comply with DATA Act reporting.” However, the SF 133 Report for the third quarter of 2016 includes entities such as the Postal Service which are not required by the DATA Act to report financial and payment information. In explaining the frequently asked questions to us, OMB officials clarified that they meant that an entity is required to report if its data appears on the SF 133 and it meets the applicable statutory definition of agency. The frequently asked questions document does not clearly communicate this two-prong approach. Additionally, OMB’s verbal clarification when meeting with us does not account for those entities that meet the statutory definition of agency and are required by the DATA Act to report financial and payment information but do not appear on the SF 133. This was identified as a high priority recommendation in a letter sent from the Comptroller General to the Director of OMB in Spring 2017. Open. OMB does not have plans to reassess, on a periodic basis, which agencies are required to report spending data under the DATA Act. We continue to believe action on this recommendation is important to effectively implement the DATA Act. This was identified as a high priority recommendation in a letter sent from the Comptroller General to the Director of OMB in Spring 2017. Recommendations 3. To help ensure effective implementation of the DATA Act by the agencies and facilitate the further establishment of overall government- wide governance, the Director of OMB, in collaboration with the Secretary of the Treasury, should request that non-Chief Financial Officers Act of 1990 (CFO Act) agencies required to report federal spending data under the DATA Act submit updated implementation plans, including updated timelines and milestones, cost estimates, and risks, to address new technical requirements. 4. To help ensure effective implementation of the DATA Act by the agencies and facilitate the further establishment of overall government- wide governance, the Director of OMB, in collaboration with the Secretary of the Treasury, should assess whether information or plan elements missing from agency implementation plans are needed and ensure that all key implementation plan elements are included in updated implementation plans. Implementation Status Open. On June 15, 2016, OMB directed CFO Act agencies to update key components of their implementation plans by August 12, 2016. The requirement did not extend to non-CFO Act agencies. OMB stated that it is monitoring non-CFO Act agencies by providing feedback to non-CFO Act agencies through workshops instead of requesting updated implementation plan information. According to OMB officials, OMB has not followed-up with non-CFO Act agencies or requested updated implementation plan information because they are working with the CFO Act agencies which comprise approximately 90 percent of federal spending. In addition to these outreach efforts, OMB has worked with Treasury to engage with small and independent agencies through weekly phone calls and other forms of communication. However, the DATA Act applies to most federal agencies, and we believe that it is important to monitor smaller agencies’ implementation plans as well as large agencies. This was identified as a high priority recommendation in a letter sent from the Comptroller General to the Director of OMB in Spring 2017. Closed–Implemented. On December 8, 2016, OMB testified that OMB had reviewed implementation plan updates from the 24 CFO Act agencies, which enabled them to track and assess agency progress toward successful implementation and identify areas where subsequent action was needed. OMB also conducted in-person follow-up meetings with nine agencies that reported significant issues to better understand their challenges. We determined that these actions meet the intent of our recommendation. Recommendations 1. Implementation Status Closed–implemented. In response to our recommendation, OMB has made some revisions to the procurement portion of the pilot design including adding additional explanatory language. Our review of the revised design for the procurement portion of the Section 5 Pilot updated in January 2017 found that it largely reflected all 5 leading practices for effective pilot design. As a result we are closing this recommendation as implemented. In order to ensure that the procurement portion of the Section 5 Pilot better reflects leading practices for effective pilot design, the Director of OMB should clearly document in the pilot's design how data collected through the centralized certified payroll reporting portal will be used to test hypotheses related to reducing reporting burden involving other procurement reporting requirements. This should include documenting the extent to which recommendations based on data collected for certified payroll reporting would be scalable to other Federal Acquisition Regulation- required reporting and providing additional details about the methodology that would be used to assess this expanded capability in the future. OMB and the Secretary of the Treasury establish mechanisms to assess the results of independent audits and reviews of agencies’ compliance with the DATA Act requirements, including those of agency Offices of Inspectors General, to help inform full implementation of the act’s requirements across government. Open. OMB stated that it generally concurred with our recommendation, but noted that OIG readiness reviews are just one of its agency engagement efforts, which also includes reviewing agency implementation plans, holding numerous meetings with the agencies, and requesting regular progress updates on the agencies’ implementation efforts. We recognize that OMB’s efforts to engage regularly with agencies are helpful for monitoring agencies’ implementation. However, it is also important to use information in independent audits and reviews to validate agencies’ progress. This was identified as a high priority recommendation in a letter sent from the Comptroller General to the Director of OMB in Spring 2017. Legend: — = not applicable. = Significant deficiency or material weakness identified in deficiency category. Agency auditor determined noncompliance with Section 803(a) of the Federal Financial Management Improvement Act of 1996 (FFMIA). Agency did not issue its performance and accountability report or agency financial report by February 28, 2017, therefore it was not included in our review. Auditors did not report any material weaknesses or significant deficiencies relevant to Digital Accountability and Transparency Act of 2014 (DATA Act) reporting. In addition to the above contacts, Peter Del Toro (Assistant Director), Michael LaForge (Assistant Director), Kathleen Drennan (Analyst-in- Charge), Theodore Alexander, Maria C. Belaval, Thomas Hackney, Charles Jones, Kirsten Leikem, Robert L. Gebhart, Carroll M. Warfield, Jr., James Skornicki, Sophie Geyer, Mark Canter, James Sweetman, Jr., Andrew J. Stephens, Carl Ramirez and Jenny Chanley made major contributions to this report. Additional members of GAO’s DATA Act Internal Working Group also contributed to the development of this report. DATA Act: Office of Inspector General Reports Help Identify Agencies’ Implementation Challenges. GAO-17-460. Washington, D.C.: April 26, 2017. DATA Act: Implementation Progresses but Challenges Remain. GAO-17-282T. Washington, D.C.: December 8, 2016. DATA Act: OMB and Treasury Have Issued Additional Guidance and Have Improved Pilot Design but Implementation Challenges Remain. GAO-17-156. Washington, D.C.: December 8, 2016. DATA Act: Initial Observations on Technical Implementation. GAO-16-824R. Washington, D.C.: August 3, 2016. DATA ACT: Improvements Needed in Reviewing Agency Implementation Plans and Monitoring Progress. GAO-16-698. Washington, D.C.: July 29, 2016. DATA Act: Section 5 Pilot Design Issues Need to Be Addressed to Meet Goal of Reducing Recipient Reporting Burden. GAO-16-438. Washington, D.C.: April 19, 2016. DATA Act: Progress Made but Significant Challenges Must Be Addressed to Ensure Full and Effective Implementation. GAO-16-556T. Washington, D.C.: April 19, 2016. DATA Act: Data Standards Established, but More Complete and Timely Guidance Is Needed to Ensure Effective Implementation. GAO-16-261. Washington, D.C.: January 29, 2016. Federal Spending Accountability: Preserving Capabilities of Recovery Operations Center Could Help Sustain Oversight of Federal Expenditures. GAO-15-814. Washington, D.C.: September 14, 2015. DATA Act: Progress Made in Initial Implementation but Challenges Must be Addressed as Efforts Proceed. GAO-15-752T. Washington, D.C.: July 29, 2015. Federal Data Transparency: Effective Implementation of the DATA Act Would Help Address Government-wide Management Challenges and Improve Oversight. GAO-15-241T. Washington, D.C.: December 3, 2014. Government Efficiency and Effectiveness: Inconsistent Definitions and Information Limit the Usefulness of Federal Program Inventories. GAO-15-83. Washington, D.C.: October 31, 2014. Data Transparency: Oversight Needed to Address Underreporting and Inconsistencies on Federal Award Website. GAO-14-476. Washington, D.C.: June 30, 2014. Federal Data Transparency: Opportunities Remain to Incorporate Lessons Learned as Availability of Spending Data Increases. GAO-13-758. Washington, D.C.: September 12, 2013. Government Transparency: Efforts to Improve Information on Federal Spending. GAO-12-913T. Washington, D.C.: July 18, 2012. Electronic Government: Implementation of the Federal Funding Accountability and Transparency Act of 2006. GAO-10-365. Washington, D.C.: March 12, 2010. | Across the federal government, agencies are making final preparations to submit the required data by the DATA Act's May 2017 deadline. This represents the culmination of almost 3 years of effort by OMB, Treasury, and federal agencies to address many policy and technical challenges. Moving forward, attention will increasingly focus on another critical goal of the act: improving the quality of the data produced. Consistent with GAO's mandate under the act, this is the latest in a series of reports reviewing the act's implementation. This report examines (1) risks to data quality related to known material weaknesses and other deficiencies previously identified by GAO, IGs, and external auditors; (2) risks to data quality related to challenges in operationalizing policy and technical guidance; (3) agencies' assurances of the quality of their data submissions; and (4) efforts taken to establish a data governance structure. GAO reviewed DATA Act implementation documents and auditors' reports on known challenges and interviewed staff at OMB, Treasury, and other agencies. Internal control weaknesses and other challenges pose risks to data quality. Material weaknesses and significant deficiencies reported in agencies' financial audits and other challenges reported in Inspectors General (IG) readiness review reports show several widespread and longstanding issues that present risks to agencies' abilities to submit quality data as required by the Digital Accountability and Transparency Act of 2014 (DATA Act). These issues fall into three categories: (1) accounting and financial management, (2) financial management systems, and (3) information technology security and controls. GAO has also reported weaknesses and challenges in government-wide financial management systems used for DATA Act reporting. Challenges with guidance will impact data quality. Challenges related to how agencies report certain intragovernmental transactions, reconcile recipient address information, and align required DATA Act files with missing data continue to present risks to the quality of data displayed on USASpending.gov. The Office of Management and Budget (OMB) and the Department of the Treasury (Treasury) have stated that they do not expect to resolve these challenges before the May 2017 reporting deadline. Unresolved challenges affecting data quality could lead policymakers and the public to draw inaccurate conclusions from the data. This challenge underscores the need for OMB to address GAO's open recommendation that it provide agencies with additional guidance to address data quality issues. GAO will continue to assess how OMB, Treasury, and agencies address data quality issues moving forward. Limitations exist with data quality assurance processes. OMB guidance directs senior accountable officials at each agency to rely on existing assurance processes when they certify that their agencies' DATA Act submissions are valid and reliable. However, GAO identified concerns regarding some existing assurance processes. For example, OMB directed agencies to use a General Services Administration assurance statement attesting to the quality of data in two source systems, but the assurance statement focuses on data security rather than data quality, and it is unclear whether it applies to both procurement and financial assistance data. OMB is aware of these issues and expects to finalize the assurance process in time for the May 2017 reporting deadline. Accordingly, GAO is not making a recommendation at this time but will assess the quality of the assurance process in future work. Efforts to establish a data governance structure are still at an early stage. OMB has taken some actions to improve its data governance framework, but efforts to establish a fully functioning data governance structure are at an early stage with many specifics yet to be worked out. OMB formally chartered the Data Standards Committee as an advisory body in November 2016 to focus on clarifying existing data element definitions and identifying needs for new standards. The charter states that the committee will promote transparency by making the topics and outcomes of its proceedings public, but OMB has not kept records of the committee's meetings nor has the committee produced a work plan for moving forward. Public information about the committee's activities and outcomes would facilitate consultation with stakeholders, as required by the act. GAO recommends that the Director of OMB ensures that the Data Standards Committee publicly releases information about the topics of its proceedings and any resulting outcomes. OMB generally agreed with GAO's recommendation. |
In 1995, the District of Columbia faced the worst financial crisis in its history. Unable to pay its employees or its contractors, the District was running a significant operating deficit, carrying a large accumulated deficit, and relying on the U.S. Treasury for help in funding its operations. The District’s ordinary services, such as motor vehicle inspections and building permits, were difficult to obtain, and the District could not sell its bonds at market rates. In short, as we testified in February 1995, the District was without the cash to pay its bills. Since then, aided by a strong local economy and through the combined and cooperative efforts of the Authority, the District government, Congress, and the citizens of the District, the District has experienced a remarkable turnaround in its financial condition. For example, in fiscal year 1996, the District ended the year with a $33 million operating deficit and a $518 million accumulated deficit. In contrast, for fiscal years 1997, 1998, 1999, and 2000, the District generated operating surpluses. The District has eliminated its accumulated deficit and at the end of fiscal year 2000 had a positive fund balance of over $465 million—a turnaround of almost a billion dollars from its accumulated deficit in September 1996. As shown in figure 1, in looking at the trends in the District’s general fund balance from 1990 through 2000, its financial situation has improved remarkably since fiscal year 1997. Prior to fiscal year 1997, the District had experienced operating deficits in 4 out of 7 years, and the surplus in 1991 reflected a one-time sale of $331 million of “deficit reduction bonds” that were designed to eliminate the District’s accumulated deficit at the time. In addition, the surplus it showed in 1993 included a “windfall” of $173 million in real estate taxes due to a change in the tax year—recognizing 15 months’ worth of taxes in a 12-month period. These transactions masked the financial crisis that was brewing in the District. In 1994, the District’s financial crisis became apparent, and the District experienced 3 consecutive years of significant operating deficits. Once the District’s financial situation began to turn around in 1997, the District reported an operating surplus of $186 million. Currently, the District has achieved its fourth consecutive balanced budget, showing a $241 million surplus for fiscal year 2000—a major achievement for a city that had been struggling to recover from financial difficulties for years. The District expects this trend to continue through 2001 with a projected surplus of $65 million. During 1995, the District’s general obligation (GO) bond ratings were lowered by Standard and Poor’s Corporation, Moody’s Investors Service, and Fitch IBCA to levels that were considered to be below investment grade. The bond ratings were lowered because of the District’s financial deterioration and its lack of a short- or long-term plan for resolving its budget problems. In 1998, after the District’s financial situation had turned around, all three rating agencies began to increase the rating on the District’s GO bonds, a trend that has continued through the most recent bond ratings. In February 2001, Standard and Poor’s upgraded the District’s bond rating from BBB to BBB+, citing the District’s improved financial operations due to substantial operating surpluses and its enhanced debt position. In March of this year, Moody’s also upgraded the District’s bond rating from Baa3 to Baa1, citing, among other things, the District’s fourth consecutive budget surplus in fiscal year 2000. Also in March 2001, Fitch IBCA upgraded the District’s bond rating from BBB to BBB+ because of the District’s positive financial performance and strengthening economic indicators. The District was unable to achieve unqualified, or “clean,” opinions on its fiscal years 1995 and 1996 financial statements and received qualified opinions. The reasons for the qualified opinions included the District’s inability to provide evidence to support business tax receivables and credit balances in the tens of millions of dollars and the related impact on revenues, expenditures, and fund balances as a result of business system inadequacies. The auditors also cautioned that the District experienced increases in its accumulated deficit and declines in its pooled cash. Then, in fiscal year 1997, the District began to turn its financial reporting around and was able to receive a clean opinion on its financial statements. The District continued its recovery and, most recently, in fiscal year 2000, also received a clean opinion on its financial statements. While the District has made significant progress over the last 6 years, it still faces short- and long-term challenges to its financial situation. For example, the District’s current projection for its fiscal year 2001 surplus is approximately $65 million. This represents a fairly tight financial margin for a budget of approximately $4.9 billion. In order to ensure that the District does not experience unexpected deficits, constant monitoring of actual revenues and expenditures is needed throughout the year. As budget pressures are identified, the District needs to take quick, decisive actions in order to address the budget pressures and avoid running deficits. Over the longer term, as Authority Chair Rivlin noted in her February 14, 2001, statement, significant challenges still facing the District are securing its financial future for the longer run and addressing the structural imbalance of a jurisdiction caught between the need for greatly improving services and a narrow tax base. Moreover, the bond rating companies also have issued cautions about future factors that could affect the District. For instance, Moody’s cautions that the District could be vulnerable in two areas: (1) potential costs and obstacles to improving the quality and efficiency of public services and (2) whether elected officials will have the ability and will to produce results to continue to build stakeholder confidence. Standards and Poor’s cautions that financial pressures will come from the District’s limited revenue flexibility, significant amount of capital needs, and risks associated with the District’s unique economic profile. Fitch cautions that the District still faces challenges including a high debt load, funding of health care, and deferred capital and operating needs, in addition to the possibility of an economic downturn, which is beginning to be felt in other parts of the country. A sound financial management system is critical in helping the District address the continuing pressures that it faces. As we noted in our April 30, 2001 report and our May 16, 2001, testimony, the District continues to face significant challenges in its efforts to put in place a financial management framework that ensures timely and reliable financial data on the cost of the District’s operations. Almost 4 years after the District’s acquisition of its core financial management system, that system and related elements are in various stages of implementation. The current mix of components involves duplication of effort and, in some cases, requires cumbersome manual processing. As a result, the system does not produce certain types of financial information on a timely and reliable basis, such as the cost of services at the program level. In our report, we made several recommendations related to the District’s completion of its financial management system implementation and the District’s need to ensure that the system effectively and efficiently meets the District’s information requirements. We are pleased that the CFO and other District leaders are already taking action on some of our recommendations and plan to implement the recommendations remaining from our prior reports. It is also important to note that the District has internal control weaknesses that were identified by its independent auditor during the course of its annual financial statement audits. The weaknesses reported by the District’s independent auditor as a result of its 2000 audit include issues related to reconciliation of bank accounts and cash management, accounting for payroll transactions, transaction processing for the Public Benefit Corporation and the University of the District of Columbia, lack of timely entry of transactions into the District’s core general ledger System of Accounting and Reporting (SOAR), failure to monitor expenditures against open procurements, accounting and reporting for intra-District transactions, and timely reporting of budgetary revisions. Similar to its response to our report, the District has shown a commitment to addressing these problems and is taking action accordingly. At the time of the District’s financial crisis, concerns were raised that Congress did not have the oversight mechanisms in place and the information it needed to identify the nature and scope of the District’s problems before they became a full-blown crisis and to help the District respond effectively to those problems. Since then, Congress has added new reporting requirements that, if effectively implemented, could provide Congress with critical financial and performance information to help Congress in its oversight and decision-making. We believe that two of the requirements in place may be especially helpful in providing information and perspective that Congress needs to make decisions. Since 1997, the CFO has been required to submit a quarterly report to Congress on the District’s financial and budgetary status. This quarterly financial report, which must be submitted no later than 15 days after the end of each calendar quarter, is to contain a comparison between the actual and forecasted cash receipts and disbursements for each month of the quarter. Within the report, the CFO is required to explain any differences between the actual and forecasted cash amounts, any changes that would need to be made to the remaining months’ cash forecasts, any impact these changes would have on the budget or supplemental budget request, or if these changes would necessitate any reduction in any agency’s expenditures. Provided that this financial information is timely, reliable, and objective, this quarterly financial report could be useful to Congress and others in monitoring the District’s financial condition. Since 1998, the Mayor has been required to develop and submit to Congress a performance accountability plan for each fiscal year, including a statement of measurable, objective performance goals for all of the District’s significant activities. After each fiscal year, the Mayor is to develop and submit a performance report that includes (1) the level of performance achieved in relation to each of the goals in the performance plan, (2) the title of the management employee most directly responsible for achieving each goal and the title of the employee’s immediate supervisor or superior, and (3) the status of any applicable court orders and the steps taken to comply with such orders. This law’s general approach of establishing performance goals and reporting on performance is similar to the requirements for executive branch federal agencies under the Government Performance and Results Act of 1993. In reviewing the District’s fiscal year 2000 performance report, we found that performance management remains very much a work in progress for the District, and the performance report reflects that fact. The District’s goals and measures were in a state of flux during fiscal year 2000, changing as the District introduced new plans, goals, and measures into its performance management process. These changes were part of its ongoing efforts to further develop and improve the performance management process. Nevertheless, these significant and continuing revisions to the District’s performance goals limit the usefulness of the performance report for oversight, transparency, accountability, and decision-making. District officials recognize that much work remains in its goal setting, performance measurement, and accountability efforts, and they have important initiatives under way. For example, the Deputy Mayor/City Administrator recently outlined the District’s performance-based budgeting initiative that, if effectively implemented, should help improve the transparency and accountability of District agencies by clearly showing the relationship among dollars spent and activities undertaken and services provided. In addition to these two requirements, there are other permanent and temporary reporting requirements that are intended to provide Congress with specific information regarding the state of the District’s finances.(See appendix I for a sample of these reporting requirements, most of which were included in the 2001 D.C. Appropriations Act.) While the reporting requirements enacted since 1995 are to provide Congress with important information and perspective on the financial condition, plans, and program performance of the District—information that was sorely lacking in the past—Congress may wish to consider the need for additional mechanisms to help it and the District ensure that they have the information needed to help the District maintain its financial viability. One option that Congress may wish to consider is requiring the District to notify it if certain predefined “reportable events” occur that require the prompt attention of Congress and the District to ensure that financial viability is maintained. Under the Financial Responsibility Act, an Authority could be reestablished if any number of a specific set of major events occur, such as the District’s default on any loans, bonds, notes, or other forms of borrowing or the District’s failure to meet its payroll for any pay period. The major events that could lead to the reestablishment of the Authority are clearly to be avoided at nearly all costs. But to do so, Congress and the District need pertinent information in time to act before a crisis occurs that would necessitate the return of the Authority. A reportable event notification system could be designed to provide just such information and include some or all of the following types of information: cash flow pressures that show— projected difficulties in meeting any of the District’s financial responsibilities, including debt service, payroll, pension payments, payments under interstate agreements, or any other financial obligations of the District; projected difficulties in meeting any of the District’s operational, program, and service obligations to its citizens; a need for increased short-term borrowings to cover the District’s budget gap pressures that could indicate— tight operating margins or potential future operating deficits; that certain major programs or services within the District are experiencing difficulties in meeting their missions within their current structures and levels of resources; pressures or questions from the bond rating organizations regarding the District’s credit ratings; and cash projections that indicate a future need for Treasury borrowings. A reportable events notification system for the District would be generally consistent with the approaches that have been taken in other local jurisdictions that have had experiences similar to the District’s. For example, the Office of the New York State Comptroller has an ongoing program to assess cities and townships that experience trouble generating sufficient revenues on a continuing basis while maintaining adequate service levels. The assessment program uses nine financial indicators, such as the jurisdiction’s fund balance, the liquidity of its cash and investments, and its current liabilities as a percent of net operating revenues. These factors are used as ratios to facilitate comparisons with comparable local jurisdictions. The program also uses nonfinancial indicators, such as the locality’s reliance on intergovernmental revenues, the jurisdiction’s management ability (measured by the timeliness of annual reports and stability of key management positions), and economic activity measures (for example, the per capita income and number of building permits issued). After determining the causes for the local jurisdiction’s financial distress, the State Comptroller offers a wide range of services to address the problem. Similarly, the Ohio Auditor of State uses various financial indicators that could result in a “fiscal watch” of local governments under financial stress. To determine if a local government qualifies for a fiscal watch, the Auditor of State conducts an initial review of the jurisdiction’s accounts payable, deficits, cash, and marketable investments. While under a fiscal watch, local governments can receive technical assistance ranging from advice on budget formulation to developing performance audits. A key element of Ohio’s fiscal intervention system is providing local officials the opportunity to respond to a fiscal crisis prior to the establishment of an oversight commission. Another notable example is the ongoing transition to local control from the Miami Financial Emergency Oversight Board to the City of Miami, during which a set of financial integrity principles and policies have been developed and codified into city ordinances. Among the 10 financial integrity principles is a provision for financial oversight and reporting, which includes monthly financial reports issued to city departments, the Mayor, and the city commission on any potentially adverse fiscal trends or conditions including comparing the city’s budgeted revenues and expenditures. The experiences of these governments, our work at the District, and our related work on reportable events notification systems, suggest that such a system would be most useful to Congress and the District if, in crafting the system, the following considerations are kept in mind. The District and Congress should seek to reach broad agreement on the reportable events that would warrant notification to Congress. Such an agreement would help to ensure that the notification system serves the common needs of the District and Congress in ensuring that the District maintains its financial viability. The reportable events should focus squarely on those current financial pressures that have the potential of developing into a triggering event requiring the re-establishment of the Authority if not promptly and adequately corrected. The reportable events should be selected so that, in the event they occur, enough time is available for Congress and the District to take any needed remedial action to address the matter before it leads to a crisis or triggers the return of the Authority. The reportable events should be clearly defined and transparent so as to limit the possibility of unproductive debate about whether or not a reportable event has actually occurred. The reportable events should be well documented; that is, the notification of a reportable event should include discussion of what happened and why, an assessment of the risk to the District’s financial situation, and a discussion of needed actions, if any, to address the reportable event. Such a system should include a “vital few” set of reportable events. Reportable events are not intended to be a substitute for more comprehensive periodic reporting of financial and program performance, but rather are to draw attention to specific events needing immediate attention. The system should seek, as much as possible, to build on financial information already collected, monitored, and used by the District. This would help to minimize the reporting burden and, more importantly, help to ensure that reportable events are valid and reliable indicators of fiscal performance. In that regard, much of the financial information needed to support a reportable events notification system likely is already processed and monitored by the District’s CFO. For example, the CFO produces quarterly Financial Status Reports, which provide consolidated summaries of the District’s financial status and describe the current status of revenues and expenditures, as well as any developing budget gaps and pressures. The reports also provide updated information about projected revenues and expenditures for the remainder of the fiscal year. At the request of Congress, we would be pleased to work with the District and Congress to develop a reportable events notification system that meets the common needs of the District and Congress. As I noted at the outset of my statement, in crafting the Financial Responsibility Act, Congress established an independent Office of the Chief Financial Officer within the District government with full authority over all financial offices of the District. Congress recognized that it was critical for timely, reliable, and objective financial information to be available to the District and Congress. Congress also recognized that the CFO’s independence and authority is vital to its effectiveness. It is important to note, however, that certain powers and functions granted to the OCFO by the Financial Responsibility Act during a control period will change under current law, as the District moves into a noncontrol period. For example: In a control period, all budgeting, accounting, and financial management personnel of the executive branch of the District government (including the independent agencies) are appointed by, serve at the pleasure of, and act under the direction and control of the CFO. This authority will cease during a noncontrol period. In a control period, the CFO employs its own legal counsel. The CFO’s legal counsel is independent of the District’s Office of the Corporation Counsel, which mainly serves the Mayor, and is under the direct administrative control of the Mayor. Current law does not provide the OCFO with authority to employ its own legal counsel during a noncontrol period. In a control period, the CFO is appointed and removed with the approval of the Authority. However, in a noncontrol period, the CFO can be removed by the Mayor for cause, with the approval of two-thirds of the Council. The law does not define “cause.” In a control period, the CFO has the authority to contract for services. This authority will revert to the District’s central procurement process during a noncontrol period. During a control period, the CFO’s budget request is not subject to revision but is subject to comment by the Mayor and Council as part of the District’s annual appropriation request. During a noncontrol period, the CFO’s budget would be included in the District’s regular budget process. As the District and Congress consider options for ensuring the independence and authority of the CFO, they may wish to consider whether the requirement that the CFO certify the availability of funds for contracts should be amended to expressly include leases and collective bargaining agreements, which can involve significant expenditures but are not currently subject to the CFO’s certification. Currently, these items are not expressly included in the CFO’s legal responsibility for certification, thereby leaving the certification of funds process subject to disagreement. In addition, Congress and the District may want to consider whether the CFO’s budget, once it is appropriated by Congress, should be exempt from being reduced by the Mayor. A similar exemption is currently in place for the City Council. Earlier this week, the Chair of the District City Council submitted a legislative proposal to the City Council to specifically address issues related to the CFO’s independence and the scope of the CFO’s duties. While we have not had a chance to analyze the proposal in detail, we support efforts by the District to continue or strengthen the independence and authority of the District’s CFO in a post-Authority environment. Our Executive Guide: Creating Value Through World-class Financial Management, notes that one of the essential elements of a successful finance organization is clear, strong executive leadership. Once the Authority suspends its activities, it is important to consider whether the CFO will be able to continue to operate and perform its ongoing fiscal and financial activities in an independent manner, without encroachment by others, especially if the District faces difficult choices caused by financial downturn. The IG is now appointed to a 6-year term and may be removed by the Mayor only with Authority approval during a control period. In 1995, around the time of the passage of the Financial Responsibility Act, the OIG had seven authorized full-time equivalents (FTE). Since 1995, the OIG has substantially built its operations, staffing, and audit capabilities. Currently, the OIG has authorized staffing of 105 FTEs. The current responsibilities of the IG include the following: conducting independent fiscal and management audits of District government operations; contracting and overseeing the contract with an outside auditor to perform the annual audit of the District’s CAFR; conducting other special audits, assignments, and investigations; annually conducting an operational audit of procurement activities of the District government; forwarding to the appropriate authorities evidence of criminal wrongdoing that is discovered during the course of its audits, inspections, or investigations; and submitting to the appropriate congressional committees and subcommittees an annual report summarizing its activities from the preceding fiscal year. Each year, the IG establishes an audit plan, in consultation with the Mayor, City Council, and Authority (during a control period) 30 days prior to the beginning of the fiscal year. The IG’s criteria for selecting audit areas to be included in the plan include the following: (1) materiality of the programs, (2) activities and functions considered for audit, (3) vulnerability of operations to fraud, waste, and mismanagement, and (4) whether there is a legislative or regulatory audit requirement. As with the CFO, the key is to ensure the IG’s independence and authority, which are vital to its effectiveness. During a control period, the IG is appointed and removed with the approval of the Authority. During a noncontrol period, the IG can be removed by the Mayor for “cause,” although the law does not define “cause.” In addition, Congress and the District may want to examine whether the IG has personnel authorities needed to maintain and assure independence. Finally, as with the CFO, Congress and the District may want to consider whether the IG’s budget, once it is appropriated by Congress, should be exempt from being reduced by the Mayor. One of the IG’s key responsibilities is identifying and reporting to the Mayor, the District Council, and District department and agency heads any problems in the administration of District programs and operations and the need for corrective action. The IG’s role in a post-Authority environment is critical because of its mandate to audit and report on the economy, efficiency, and effectiveness of District programs and operations. As such, Congress, the Mayor, and the District Council should consider how to best use the IG’s financial and performance-related audits and reporting in order to provide critical oversight and early warnings of any potential problems. Audit committees have long been recognized as a key component of the corporate governance system for private sector companies. Generally, audit committees play an important role in corporate governance by providing an independent view of management’s financial reporting and by facilitating communication between management and its internal and external auditors. Typical responsibilities of audit committees include assessing the processes related to the company’s risks and control environment, overseeing financial reporting, and evaluating the internal and independent audit processes. The importance of audit committees has also come to be recognized as increasingly important in the public sector. In 1997, the Government Finance Officers Association (GFOA) recommended that every government establish an audit committee or its equivalent. The GFOA also stated that each audit committee should be formally established by charter and that the members of the audit committee should collectively possess the expertise and experience in accounting, auditing, and financial reporting needed to understand and resolve issues raised by the independent audit of the financial statements. The GFOA stated that the primary responsibility of the audit committee should be to oversee the independent audit of the government financial statements from the selection of the independent auditor to the resolution of audit findings. The GFOA also stated that the audit committee should have access to internal audit reports and plans. Finally, the GFOA recommended that the audit committee present annually to the governing board and management a written report on how it has discharged its duties. The District’s IG has established a CAFR Oversight Committee, which oversees the progress on the annual financial audit. While not an audit committee, the CAFR Oversight Committee provides an excellent opportunity for District financial management staff, OIG staff, and representatives from the Mayor’s office, the D.C. Council, and the Authority to be updated on the status of the audit and any issues being encountered by the auditors. Consequently, issues affecting the audit could be addressed in an effective and timely manner so the auditor’s progress towards timely completion of the CAFR would not be impeded. This process has been key in assuring that the District was able to compensate for current issues and avoid many of the past problems that resulted in the late issuance of the fiscal year 1999 CAFR. The CAFR Oversight Committee, however, does not have the full scope of roles and responsibilities typical of an audit committee, nor does it follow the organizational requirements of a traditional audit committee. Congress and the District may want to consider forming an audit committee or variation of an audit committee based on the objectives of audit committees described above, and/or strengthening and further defining the current CAFR Oversight Committee already in place. In summary, the District and its citizens, the Authority, and Congress have jointly achieved an enormous accomplishment in restoring the District to financial viability. At the same time, many of the challenges the District faced in the past continue, requiring difficult decisions now and in the future. The District and Congress must have reliable, accurate, and timely financial, program cost, and performance information if they are to confidently make these hard decisions. Specifically, the District and Congress need current, reliable information about the District’s financial condition and developing trends in order to promptly respond to any pressures or warning signs that could indicate that future difficulties lie ahead. District officials and Congress could thereby take an active and prospective role in dealing with issues, rather than finding themselves in a position of reacting to a crisis. Such information and oversight will also be helpful to the District in providing confidence that the District is well managed, providing needed services to its citizens, and maintaining its financial solvency. We have a very constructive relationship with the District and we look forward to continuing to work with Congress, your Subcommittees, and District officials as the District government continues to strive to provide the services that its residents expect and deserve. Madam Chairwoman and Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions you or other members of the Subcommittees may have. For further information, please contact Jeanette Franzel, Acting Director, Financial Management and Assurance, at (202) 512-9406 or J. Christopher Mihm, Director, Strategic Issues, at (202) 512-6806. Major contributors to this testimony included Richard Cambosos, Sharon Caudle, Doug Delacruz, Molly Gleeson, Steven Lozano, Meg Mills, Susan Ragland, and Norma Samuel. Since the financial crisis precipitating establishment of the Authority, Congress has enacted a number of reporting requirements for various entities within the District of Columbia government. Some of the reports are required by permanent law while others are temporary. A sample of the permanent reporting requirements is listed in table 1. | Although the District of Columbia, the Financial Responsibility and Management Assistance Authority, and Congress have achieved an enormous accomplishment in restoring the District to financial viability, many of the challenges the District faced in the past continue. The District and Congress need current, reliable information about the District's financial condition and developing trends in order to promptly respond to any pressures or warning signs that could indicate that future difficulties lie ahead. Toward that end, the District must ensure that its new financial management system is effectively implemented and provides decision makers with reliable and timely data. In addition, since 1995, Congress has put in place a number of reporting requirements to help provide the financial, planning, and performance information that it needs to conduct effective oversight and make decisions. Congress may wish to consider additional mechanisms to ensure that it and the District have the information needed to help the District maintain its financial viability and address its current and emerging challenges. Such mechanisms must be considered and implemented within a context that seeks to balance two sets of values: the overriding importance of Home Rule and respect for the District's democratic institutions and Congress' oversight and decision making responsibilities for the nation's capital. |
All local staff who work for U.S. diplomatic missions overseas are eligible to apply for an SIV that allows them to immigrate to the United States, provided they meet certain conditions, such as having 15 years of employment with the U.S. government abroad. Congress has enacted a series of laws since 2006 to enable certain Afghan nationals who have worked as translators or interpreters for the U.S. government in Afghanistan to be eligible for SIVs. In 2009, Congress authorized Afghan employees of the U.S. government in Afghanistan who meet certain criteria to be eligible for SIVs. The first of these SIV programs is permanent and provides SIVs to eligible Afghans who have worked directly with the U.S. armed forces or under chief of mission authority for at least 1 year as translators or interpreters. A maximum of 50 SIVs are currently granted annually for principal applicants, excluding their dependents, under this program. The second program is temporary and was created through Section 602(b) of the Afghan Allies Protection Act of 2009 and provides SIVs to eligible Afghans who worked for at least 1 year in Afghanistan for the U.S. government, or for the International Security Assistance Force (ISAF), who provided “faithful and valuable service” to the U.S. government or ISAF that has been documented by a supervisor, and who have experienced or are experiencing an ongoing serious threat as a consequence of employment by the U.S. government. As the Congressional Research Service has reported, the program initially authorized no more than 1,500 principal applicants to be granted special immigrant status annually for fiscal year 2009 through fiscal year 2013, with a provision to carry forward any unused numbers from 1 fiscal year to the next. Congress subsequently amended the program to authorize up to 3,000 principal applicants for fiscal year 2014 with an additional 1,000 through the end of calendar year 2014, and up to 7,000 for fiscal years 2015, 2016, and 2017. If the numerical limitation is not reached in a fiscal year, the balance of principal applicants who may be provided special immigrant status carries over to the following fiscal year. Principal applicants must apply to the chief of mission for special immigrant status by December 31, 2016, and the authority to issue visas under this program is scheduled to terminate on the date that such visas are exhausted. Though this report focuses on Afghan SIV recipients who were employed by State or USAID, Afghan nationals eligible for SIVs include current or former employees of the Department of Defense, other U.S. government agencies, and U.S.-funded contractors or implementing partners. More than 70 percent of SIV recipients have worked as translators, mostly for the U.S. military in Afghanistan. From fiscal years 2010 through 2012, 73 SIVs were issued to principal Afghan applicants. Issuances of SIVs began accelerating in 2013, with 652 visas issued to principal applicants, and the annual total of SIVs issued to principal Afghan applicants rose to 3,441 in 2014. As of August 28, 2015, 2,372 principal applicants had applications pending in the initial stage of the SIV application process. Applications for 2,873 principal applicants were undergoing administrative processing, which is one of the final steps in the process. See figure 1 for more information on the various steps in the SIV issuance process. State and USAID rely on local staff to assist in accomplishing U.S. diplomatic objectives and in implementing and monitoring U.S. assistance programs in Afghanistan (see fig. 2). According to officials from State and USAID, staffing conditions in Afghanistan include the frequent turnover among American staff, who generally serve 1-year tours there and, as a result, may have limited institutional knowledge about their roles. Furthermore, the security situation in Afghanistan is dangerous and unpredictable, a fact that creates challenges for the international community and Afghan government to implement programs throughout the country. For example, in June 2015, we found that local staff (1) provide programmatic continuity, local knowledge, and language ability at posts where American officers may have short or interrupted tours of duty, and (2) often provide security and programmatic support in locations where American officials cannot safely or easily travel. As of April 2015, the U.S. diplomatic mission in Afghanistan had 882 positions occupied by Afghan staff and 502 positions occupied by direct hire American personnel. Of that total, State and USAID combined had 869 positions occupied by Afghan staff and 471 by Americans. From 2010 to 2015, a total of 378 Afghan local staff resigned from their positions at State and USAID in Afghanistan after receiving SIVs (see fig. 3). State and USAID had a high of 243 SIV-related resignations in 2014, but the number of resignations will likely be lower in 2015 than in 2014, based on both the number of such resignations as of August 2015 and the number of Afghan staff who have currently completed an initial step in the SIV application process. Furthermore, resignations have had varied effects on institutional knowledge at State and USAID. Average tenure among both agencies’ Afghan workforces decreased slightly. In addition, embassy officials said that local staff attrition has affected some program coordination with the Afghan government. Nonetheless, officials reported that recruiting qualified applicants to replace those local staff has not posed a problem. From 2010 through 2012, 6 State and no USAID Afghan staff resigned after receiving an SIV. Prior to 2012, State and USAID issued relatively few employment certification letters, which verify Afghan staff eligibility for the SIV program. The employment certification letter is the first step in the SIV application process; therefore the number of Afghan local staff receiving SIVs will likely be smaller than the number of these letters provided. State and USAID issued 6 letters in 2010 and 37 in 2011. Additionally, agency officials have noted that SIV processing was relatively slow during the early years of the program. State officials acknowledged that, prior to 2013, as a result of delays in administrative processing, relatively few SIVs were issued. In 2013, the number of SIV-related resignations began to increase substantially and reached its highest level in 2014. A total of 81 State and USAID Afghan local staff resigned after receiving SIVs in 2013, and 243 in 2014. In 2013 and 2014, State reported that SIV-related resignations became the single largest cause of attrition among all Afghan local staff employed at the Kabul embassy. From 2010 to 2012, security clearance revocation had been the primary cause of attrition among Afghan staff. The following factors may help explain the increase in SIV-related resignations in 2013 and 2014. In December 2013, changes to the law authorizing SIVs for Afghan nationals altered eligibility requirements for the SIV program. Previously, Afghan local staff who had experienced or were experiencing an ongoing serious threat as a consequence of their U.S. government employment qualified for the visa. While this standard still applies, the 2013 amendment to the law allowed credible sworn statements depicting dangerous country conditions to be a factor in determining the threat to local staff. According to State officials, this enabled all Afghans who met U.S. government employment requirements to be considered eligible. State officials noted that this change allowed the broad threat environment to be used to consider individual cases, alleviating the need for applicants to demonstrate any specific threat incident to determine eligibility. State officials said that these changes helped speed up SIV processing. In fiscal year 2013, State dedicated additional resources to help process SIVs at the Kabul embassy, including creating a position for a U.S. direct hire at post to help administer and address accumulated backlogs in the initial approval stage of the process, and four additional staff positions. The number of employment certification letters issued to Afghan staff increased after 2011. In 2012, State and USAID issued 303 letters (see fig. 4). Given, in part, visa-processing times, this increase in employment certification letters would lead to an increase in SIV- related resignations beginning in 2013. State and USAID are likely to experience fewer SIV-related resignations in 2015 than in 2014. From January to August 2015, a total of 48 Afghan local staff resigned from State and USAID after receiving an SIV. State officials indicated that it is difficult to determine whether SIV issuances for the rest of the calendar year are expected to continue at the same pace as in prior months. However, the number of employment certification letters issued to State’s and USAID’s Afghan local staff have remained lower than the high of 303 letters in 2012. State and USAID issued 174 letters in 2013, 178 in 2014, and 100 from January to August 2015. State and USAID officials provided several explanations for why some Afghan local staff may forgo the SIV program altogether. In 2014, as part of a worldwide adjustment to salaries of local staff at U.S. diplomatic missions, State raised salaries for all Afghan local staff by 45 percent. State reported this salary increase has helped the embassy retain local staff. Additionally, State and USAID officials stated that Afghan SIV recipients who have relocated to the United States often face challenges integrating and obtaining adequate work opportunities and have communicated those challenges to Afghan staff employed at the embassy in Afghanistan. According to our assessment of changes to average tenure and grade level of Afghan staff, Afghan staff attrition, including SIV-related resignations, has had varied effects on State’s and USAID’s institutional knowledge. The average tenure of each agency’s Afghan staff, one measure of institutional knowledge, has decreased slightly since the SIV program began, while average grade level, another measure, has remained relatively stable. From 2010 to June 2015, average tenure among both agencies’ Afghan workforces decreased slightly (see table 1). During this period, average tenure among State’s Afghan local staff has decreased by less than 3 months, while average tenure among USAID’S Afghan local staff has decreased by approximately 5 months. Afghan staff attrition, including SIV-related resignations, has also had no substantial effect on average grade levels among USAID’S Afghan local staff. From 2010 to June 2015, the average grade level among USAID’s local staff in Afghanistan has remained consistent over time at the level that includes management and technical positions. Additionally, the grade levels from which State and USAID had the most SIV-related resignations differed from the grade levels that agency human resources officers reported difficulty filling in 2013. State and USAID officials also identified a number of other effects that Afghan staff attrition, including SIV-related attrition, may have on operations in Afghanistan. USAID officials noted that it can take several years for local staff to build effective relationships with Afghan government officials. When Afghan local staff resign, these contacts are often lost, a result that may affect operations by slowing down program coordination with the Afghan government. Attrition can also affect program management. For example, State has reported that experienced staffing in grants management is needed to ensure accountability and proper oversight. Likewise, USAID officials said that the ability of American staff to perform some aspects of the agency’s work, such as program monitoring and evaluation, can be affected by increased demands on their time caused by local staff attrition. Attrition can lead to American supervisors’ taking on additional responsibilities that they would not be expected to perform at other posts. For example, State and USAID officials said that American personnel spend significant amounts of time training and bringing replacement staff up to speed on embassy processes and operations as a result of attrition. These officials stated that these additional responsibilities can present challenges for maintaining adequate management controls and program oversight in some areas. Attrition, including SIV-related attrition, may also affect the training and productivity of Afghan local staff. State officials said that Afghan staff may need up to 2 years to receive the necessary training and skills to perform their jobs at a high level. However, the period of highest productivity can be short because these staff are eligible to apply for an SIV after 1 year of employment with the U.S. government. For example, according to USAID officials, the agency invests in the training and certification process for contracting officer representatives. When these Afghan staff resign, USAID fills the vacancies and goes through the process of recertifying replacement staff. Embassy managers have reported hesitation about investing in training because they may not see an adequate return on their investment. In July 2014, State’s Office of Inspector General reported that, at that time, only one Afghan staff member in the embassy’s Consular Affairs office had received supervisory or advanced consular training, and none of the Afghan staff in the information management section had received supervisory training. State and USAID reported they were successful in identifying qualified replacements to fill vacancies for local staff positions. State officials reported receiving applications from qualified candidates to staff all but three vacancies from 2010 through 2014. State and USAID officials provided several insights that may help explain the availability of qualified Afghan workers. These officials stated that the U.S. government drawdown and the reduction in civilian organizations’ staffing levels have increased the availability of qualified applicants because fewer potential applicants are now employed by the U.S. government and international organizations. In addition, officials from both agencies report that the SIV program is often perceived as a recruitment incentive for qualified applicants. State officials said that some Afghans may be willing to take comparable or even lower salaries to have the potential benefit of the SIV program. State and USAID have taken a number of actions to help mitigate the effects of attrition among Afghan local staff, including local staff who resigned their positions after receiving an SIV. State and USAID officials said they conduct recruitment to fill positions that have been vacated as a result of SIV-related resignations and for other reasons, such as dismissal due to losing a security clearance. State and USAID officials said they temporarily assign American personnel and local staff from other diplomatic missions overseas to Afghanistan in order to fill staffing gaps and provide experienced staff who can train and supervise Afghan staff. USAID also assigns local staff from other diplomatic missions for longer- term assignments that can last up to several years. Both agencies’ headquarters have provided additional administrative support to their missions in Afghanistan beyond what is generally provided to other overseas missions. Both State and USAID are considering moving additional functions from the U.S. embassy in Kabul to other diplomatic missions in the region. State and USAID officials said they sometimes fill one position with two employees in anticipation of an SIV-related resignation. In 2014, as part of State’s worldwide effort to normalize salaries for local staff, the embassy in Kabul raised salaries for all Afghan local staff by 45 percent, and State and USAID officials said this has helped to retain local staff. Despite 243 resignations in 2014 as a result of receiving an SIV, State and USAID officials said they were able to recruit and hire personnel to replace those lost because of attrition. These officials stated they have to constantly advertise and fill vacant positions within the local workforce as a result of relatively high local staff attrition in Afghanistan, including SIV- related resignations. In 2014, State posted 219 job vacancy announcements and received an average of 555 applications for each vacancy announcement that was posted. From June 2014 through May 2015, State reported it had hired about 120 Afghan staff. USAID officials reported they posted 130 vacancy announcements from April 2014 to April 2015, and USAID officials said they have not had difficulty recruiting qualified replacements. State and USAID officials said that one of the biggest challenges to the recruitment process is the amount of time needed to conduct security screenings for new employees, and typically it may take 6 to 8 months to fill a position. USAID officials said efforts have been made to shorten the security screening process, and State human resources officials said the embassy maintains a queue of qualified applicants in an effort to speed up the hiring process. Similarly, USAID officials said they prescreen applications in Washington, D.C., in order to alleviate some aspects of the recruitment process for USAID in Afghanistan. In addition, USAID officials said the agency streamlined its hiring strategies in 2014, and reduced the amount of time to hire a new employee by 60 days, from 10 months to 8 months. State and USAID officials said they send U.S. direct hire employees to Afghanistan on a temporary basis to fill staffing gaps caused by Afghan staff attrition or to provide additional support to American personnel. Temporarily assigned personnel may work for a few days or several months. According to State and USAID officials, these employees can help to supervise and train Afghan staff recently placed in new positions. The number of these temporarily assigned personnel in Afghanistan anytime varies by the needs of individual offices, as well as security concerns and available housing and office space. The embassy at times restricts these personnel from entering Afghanistan because of security concerns, according to State officials. In fiscal year 2014, the embassy’s Consular Affairs office received approximately 600 staff days’ worth of temporary assignments from U.S. consular officers and local staff from other diplomatic missions. State and USAID officials also reported they recruit local staff from U.S. missions in other countries, referred to as third country nationals (TCN), to fill key positions at the U.S. embassy in Afghanistan. TCNs are experienced State and USAID employees who have expertise in key areas and are able to build capacity among Afghan staff and provide training. According to State and USAID officials, TCNs tend to have a high level of experience and are familiar with State and USAID policies and procedures, and therefore can work more independently than newer Afghan staff. According to USAID officials, USAID employs TCNs on a short-term basis, typically 6 months, and also utilizes a TCN program where local staff from other diplomatic missions work in Afghanistan for at least 1 year with the option to renew. USAID had 34 TCNs supporting the USAID mission as of September 2015. State also uses TCNs on a short- term basis, and has proposed a TCN program similar to the USAID program, where local staff from other diplomatic missions work for 1 year or longer in Afghanistan. State has identified 20 key positions for TCNs that would provide the continuity, expertise, and training lacking in several offices within the embassy. State and USAID officials noted TCNs are more expensive for the mission than Afghan staff because they receive higher salaries, incur travel expenses associated with deployment to Afghanistan, and have other benefits and costs not associated with Afghan staff. In addition, the diplomatic missions from which TCNs are transferred have expressed concerns regarding their own workforce needs. Short-term TCNs create temporary vacancies at the diplomatic missions that send them, and TCNs who accept long-term positions must resign their positions at their current diplomatic missions, creating vacancies that must be filled. State currently performs some administrative functions outside of Afghanistan on behalf of the embassy in Kabul. For example, State headquarters in Washington, D.C., performs financial and security in- processing functions for American personnel who are going to Afghanistan. Officials said that these are functions usually performed at an overseas mission. In addition, the embassy has started to conduct procurements from the U.S. embassy in Amman, Jordan, and State’s Regional Procurement Support Office in Frankfurt, Germany. USAID’s Afghan Hands program supports the mission in Afghanistan with 20 available U.S. direct hire positions at USAID headquarters in Washington, D.C. The Afghan Hands personnel work directly on USAID programs and projects in Afghanistan, and provide management and oversight to USAID implementing partners. According to USAID officials, Afghan Hands personnel are expected to travel frequently to Afghanistan for short-term assignments. As of May 2015, 17 of the positions were filled, according to USAID officials. Many of the Afghan Hands personnel have previously served at the USAID mission in Afghanistan and have institutional knowledge of USAID programs and procedures in Afghanistan. Afghan Hands personnel perform functions that are often performed by American personnel or Afghan staff in Afghanistan. State and USAID have proposed to offshore additional administrative functions to other U.S. missions in the region. In August 2014, USAID proposed to offshore 9 positions in Almaty, Kazakhstan, in order to provide dedicated support for USAID’s financial management, acquisitions, and the economic growth and infrastructure team. The USAID proposal notes that Afghan staff attrition has created a continuous need for training of newly hired Afghan employees, which could be provided by offshore staff on temporary assignment in Afghanistan. Furthermore, in this proposal, USAID estimated the total annual costs for a fully staffed Afghanistan Support Team in Kazakhstan. According to State officials, State is considering offshoring some procurement functions to provide continuous support, similar to what is provided in Amman, Jordan. However, State officials said that other diplomatic missions may find it difficult to reassign their local staff to provide functions for the U.S. mission in Afghanistan or may be limited in the amount of available office space. According to State and USAID officials, these agencies sometimes double-encumber positions when a local employee reports that he or she is in the process of applying for an SIV. Double-encumbering occurs when agencies fill one position with two employees in anticipation of an SIV-related resignation. As of September 2015, State had 36 positions that were double-encumbered, and USAID had 11 as of May 2015, according to State and USAID officials. State and USAID officials reported that the embassy allows for agencies to start recruiting for a currently filled Afghan position when the Afghan staff person occupying that position informs his or her supervisor that an application for an SIV has been initiated. State and USAID officials said the employee expecting to depart an embassy can train his or her replacement. State officials said that sometimes this practice results in two employees filling the same position if the original employee’s application is delayed or rejected. As previously mentioned, the U.S. mission in Afghanistan provided a 45 percent salary increase to all agencies’ Afghan staff in July 2014, as part of State’s effort to raise the salaries of local staff worldwide to better reflect the median wage rate of similar and comparable organizations. State officials said the salary increase was part of a State effort to update salaries at diplomatic missions worldwide, and was not in response to the SIV program. However, State and USAID officials said higher salaries help to recruit and retain well-qualified employees. Human resources officials at the embassy in Kabul reported that the pay increase was a strong incentive for Afghan staff to postpone SIV applications and remain employed by the U.S. government. The U.S. mission provides 25 percent additional compensation for local staff in Afghanistan given the extra measures they may take to avoid or endure terrorist threats or harassment. State provides local staff at selected diplomatic missions additional compensation as a percentage of their salary because of potential harassment or threats of violence related to their U.S. government employment. In 2015, State designated 21 posts, including Afghanistan, as offering such allowances. While State and USAID have made a number of efforts to mitigate the effects of Afghan staff attrition, according to officials, agencies have not formally evaluated the extent to which these actions have addressed effects on the workforce or programs. Key principles of human capital management call for agencies to evaluate the success of human capital strategies, such as actions taken to mitigate attrition among staff, by using performance measures to assess the extent to which these activities contribute to achieving programmatic goals. An evaluation of actions taken to mitigate effects related to local staff attrition can help determine if an agency has effectively filled gaps in institutional knowledge from attrition among Afghan staff, and identify reasons for any performance shortfalls resulting from those gaps. Without such evaluations, agencies will be limited in having information to determine the costs, benefits, and relative effectiveness of actions taken. Further, in August 2014, State’s Office of Inspector General (OIG) noted that mission operations may be negatively affected without a programmatic approach to addressing attrition among Afghan staff. State and USAID officials have also noted that American personnel’s 1-year tours in Afghanistan create challenges with institutional knowledge. Evaluations can provide critical information to enable knowledge transfer among American staff in Afghanistan and minimize duplication of efforts that have already proven to be ineffective or resource intensive. For example, agencies can measure whether actions such as hiring, training, and retention have changed the skill level of the workforce or affected the U.S. mission’s capabilities related to maintaining its overseas presence in Afghanistan. In its draft proposal to employ TCNs in Afghanistan, State noted that if the program were to proceed, the agency would need to demonstrate the benefits associated with the employment of TCNs and justify increased costs. However, in its proposal, State did not identify any potential measurements to evaluate the benefits of using TCNs or the additional costs that would be incurred to attract these individuals to long-term positions in Afghanistan. USAID identified cost information that could be utilized to evaluate human capital efforts in its strategic staffing document for Afghanistan, which outlines a number of proposals to potentially address staffing challenges there. The document includes examples of resources required and cost analyses of some of the proposals to mitigate the effects of attrition, such as the option to offshore positions that may be vacated by Afghan staff to another embassy in the region. However, USAID officials also said they were not aware of any completed evaluations of actions taken related to mitigating the effects of attrition. State and USAID officials noted that agencies operate in a reactive state and face resource constraints managing a large diplomatic mission in a dangerous and unpredictable environment such as Afghanistan. Accordingly, agencies may not fully document or evaluate certain efforts. Key principles for human capital management note that evaluations of human capital strategies may help agencies determine if they met human capital goals and whether those strategies helped or hindered the agencies from reaching their programmatic goals. While the State OIG has reported that increased security risks in Afghanistan hinder employees’ ability to assess programs, inadequacies with such assessments can impair program performance. Nonetheless, State’s evaluation policy calls for evaluations to improve programs, projects, and management processes. USAID’s evaluation policy also notes that though security concerns can pose challenges to conducting evaluations, creative approaches can be utilized to measure achievements in such environments. Local staff are a vital component of the success of U.S. diplomatic missions overseas. The U.S. mission in Afghanistan faces a number of uncertainties and challenges that make the presence of its Afghan staff all the more important, including an unpredictable security situation, relatively short tours among U.S. personnel, and an evolving diplomatic presence that relies on the U.S. military for security support. State and USAID have taken a number of actions to mitigate the effects of Afghan staff attrition, including SIV-related resignations, such as increasing recruiting efforts and augmenting staff with experienced local staff from other U.S. missions overseas. However, State and USAID have not evaluated their actions to address the effects of Afghan staff attrition to assess the costs or effectiveness of these actions. Information gained from such evaluations could inform agencies’ workforce planning efforts, including strategies related to hiring, training, and staff development and could improve how agencies manage attrition of Afghan staff in the future, whether because of SIVs or other reasons. Agencies could also share information learned from these evaluations with one another, particularly if an agency conducted evaluations on resource-intensive efforts to mitigate the effects of attrition. For example, USAID has a program in which third country nationals from U.S. missions in other countries are employed for periods of 1 year or longer to help mitigate the effects of attrition among local staff in Afghanistan—a practice that is more costly than employing Afghan staff and one that can pose challenges for the U.S. missions that send them. If USAID had evaluated its program, USAID could have informed State’s assessment of a similar proposal. Furthermore, without evaluation of mitigating actions that agencies have previously undertaken, agencies may be unable to weigh the costs and benefits of actions being implemented, and may be unable to identify the strategies that are most effective for handling future workforce-related needs in challenging environments. To better understand the costs and effectiveness of actions to mitigate the effects of Afghan staff attrition, and to inform future workforce planning efforts, we recommend that the Secretary of State evaluate these actions, and the Administrator of USAID evaluate these actions. We provided a draft of this report for review and comment to State and USAID. In written comments, summarized below and reproduced in appendix II and III, respectively, State and USAID agreed with the recommendation to evaluate actions to mitigate the effects of Afghan staff attrition. In its written comments, State agreed with the recommendation. State noted that the Afghanistan SIV program has had considerable impact on mission staffing levels and SIV-related resignations are currently the largest contributing factor for increased attrition among local staff. However, State wrote that many elements should be taken into consideration when looking at sustaining a workforce capable of meeting U.S. goals and objectives in Afghanistan. Further, State noted that strategically approaching workforce planning is complicated by, among other things, the unpredictable nature of events in a dangerous environment. State said that it evaluates staffing levels as part of its regular agency-wide review processes, and that a specific analysis of actions taken to mitigate attrition among Afghan staff would be reactive in nature and have minimal value added in a more complex staffing picture. Nevertheless, as we note in this report, an evaluation of the relative costs and effectiveness of specific actions taken to mitigate effects related to local staff attrition could help determine if State has effectively filled gaps in institutional knowledge from attrition among Afghan staff, and enable knowledge transfer among American staff in Afghanistan. In its written comments, USAID agreed with the recommendation. USAID noted that it proactively tracks staffing levels in Afghanistan, and has taken steps to develop and implement creative approaches to staffing. For example, USAID said that, in addition to weekly and monthly staffing reports, from January to October 2015 it conducted seven ad hoc analyses regarding locally employed staff for internal and external audiences. In addition, USAID said it regularly discusses staff retention and recruitment and staffing mechanisms at strategic management meetings. According to USAID, these meetings serve as a venue to discuss, evaluate, and iterate strategies and other efforts to mitigate the effects of local staff resignations. We will continue to work with USAID in monitoring the implementation of the recommendation. State and USAID also provided technical comments that we incorporated, as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of State, the Administrator of USAID, and other interested parties. In addition, the report is available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have any questions about this report, please contact Michael J. Courts at (202) 512-8980 or at [email protected]. Contact points for our Office of Congressional Relations and Office of Public Affairs can be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. In this report, we evaluated (1) special immigrant visa (SIV)-related resignations, including how, if at all, the Department of State’s (State) and U.S. Agency for International Development’s (USAID) workforces in Afghanistan have been affected in recent years; (2) the actions, if any, State and USAID have taken to mitigate any effects related to the attrition of Afghan staff, including SIV recipients; and (3) the extent to which State and USAID have evaluated mitigating actions related to the attrition of Afghan staff, including SIV recipients. We interviewed agency officials at State and USAID in headquarters and at the U.S. diplomatic mission in Afghanistan, including consular officers, human resource officers, USAID mission executive officers, and State management officials to address all three objectives. We reviewed background on the SIV program for Afghan nationals, including relevant legislation and a report from the Congressional Research Service. In order to provide background information on the SIV program for Afghan nationals, we also utilized reports published by State and the Department of Homeland Security on the SIV program for Afghan nationals, primarily data on visa issuances and general processing times. To assess SIV-related resignations, and how, if at all, State’s and USAID’s workforces in Afghanistan have been affected by the resignations of SIV recipients in recent years, we obtained and analyzed data for each calendar year, 2010 through 2014, and for January to June or August 1, 2015. We performed longitudinal analysis of the data in order to identify the initial extent of SIV effects, significant trends or changes over time, and any correlation between variables. We assessed data on Afghan staff for the following categories: the number of SIV- related resignations at State and USAID, the number of employment certification letters State and USAID issued to Afghan staff, average tenure of State’s and USAID’s current staff, and average grade levels of USAID’s current staff. We analyzed data on SIV-related resignations related to the special category of SIVs created by the Afghan Allies Protection Act of 2009. State and USAID provided these data, which included only Afghan staff who departed their positions after receiving an SIV and did not include those who departed employment for other reasons. These data were relevant to Afghan local staff but did not include third country nationals or other staff working in Afghanistan on a temporary duty basis. Agencies provided data on start and end dates of employment for those Afghan staff who resigned after receiving SIVs. We utilized data on average tenure and grade level of Afghan local staff as rough indicators of institutional knowledge. Both agencies provided start and end dates of employment, from which we calculated average tenure. While average tenure provides an overall summary of yearly trends, a relatively small drop in average tenure can be associated with a relatively larger increase in the number of newly hired Afghan staff. Agency data demonstrated this increase in the number of newly hired Afghan staff. For example, in June 2015, USAID had 92 Afghan staff with less than a year’s tenure, representing about 46 percent of the agency’s local staff, compared with 65 in December 2012, representing about 30 percent of the agency’s local staff. In addition to calculating averages, we also calculated and examined yearly median tenure levels and considered the distribution of length of tenure. USAID provided staff grade levels but State could not provide similar data for its Afghan staff. We analyzed average tenure and grade level for a single-month slice of each year within the scope of our analysis (i.e., May 2015 and December for all other years). Accordingly, the data do not represent all Afghan local staff who worked for State or USAID over the course of any particular year. Average tenure rates were also affected by local staff separating from mission employment for reasons other than SIVs, such as retirements or terminations. The data the agencies provided did not report whether newly hired local staff had previously been agency employees and may therefore understate the actual experience these staff brought to their agencies. We also utilized data related to recruitment of local staff from the 2010 through 2014 local compensation questionnaires for Afghanistan. This annual questionnaire gathers input from all U.S. agencies at an overseas mission across a range of topics related to the local workforce. To assess the reliability of State’s and USAID’s data and responses to the local compensation questionnaires, we interviewed knowledgeable human resources officials from State in Kabul and solicited input from both agencies on their internal controls, potential data vulnerabilities, and any incidence of missing data. We determined the data to be sufficiently reliable for our purposes. To assess the actions, if any, State and USAID have taken to mitigate any effects related to the attrition of Afghan staff, including SIV recipients, we reviewed agency documents that described these efforts, including any analyses agencies had undertaken. To assess the extent to which State and USAID have evaluated mitigating actions related to the attrition of Afghan staff, including SIV recipients, we reviewed criteria for key principles in strategic human capital management, State’s and USAID’s evaluation policies, and agency documents that included workforce-related planning and analyses. We also reviewed State’s August 2014 Office of Inspector General Inspection of Embassy Kabul, Afghanistan, for the recommendations it made to address challenges associated with attrition in the Afghan workforce. We compared State’s and USAID’s efforts against key principles in strategic human capital management. We conducted this performance audit from January 2015 to December 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, Hynek Kalkus (Assistant Director), Jon Fremont, Farhanaz Kermalli, and Owen Starlin made key contributions to this report. Ashley Alley, Tina Cheng, Martin De Alteriis, Katie Bernet, Karen Deans, Thomas Gilbert, and Michael Silver provided additional support. | Congress established an SIV program in 2009 for Afghan nationals with at least 1 year of U.S. government service, given the risk these employees face. Local staff at the U.S. diplomatic mission in Afghanistan are key to implementing U.S. policies and programs because of their institutional knowledge, language skills, and local relationships. A high rate of Afghan staff resigning after receiving an SIV could diminish the U.S. government's capacity to carry out its mission. GAO was asked to review State's and USAID's efforts to mitigate the loss of Afghan staff. GAO evaluated (1) SIV-related resignations, including how, if at all, State's and USAID's workforces in Afghanistan have been affected in recent years; (2) the actions, if any, State and USAID have taken to mitigate any effects related to attrition of Afghan staff, including SIV recipients; and (3) the extent to which State and USAID have evaluated mitigating actions related to the attrition of Afghan local staff, including SIV recipients. GAO analyzed data from 2010 to 2015, reviewed documents regarding the Afghan workforce, and interviewed State and USAID officials. Resignations of Afghan local staff at the Department of State (State) and the U.S. Agency for International Development (USAID) after receiving a special immigrant visa (SIV) reached their highest level in 2014, and have had varied effects on the agencies' institutional knowledge (fig.). Resignations increased as more Afghan staff began the SIV application process than in the initial years of the program, and as State addressed delays that had previously slowed visa issuances. Afghan staff resignations are likely to be lower in 2015 than in previous years based on the number of current staff that have initiated the SIV process. Based on GAO's assessment of changes to average tenure and grade level of Afghan staff from 2010 until June 2015, and insights from agency officials, the effects of SIV-related resignations on State's and USAID's institutional knowledge is varied. For example, average tenure among both agencies' Afghan workforces decreased slightly. In addition, embassy officials said that local staff attrition may affect some program coordination with the Afghan government. Nonetheless, despite this attrition, agency officials reported that they were successful in identifying qualified replacements to fill positions. Agencies have taken a number of actions to mitigate the effects of Afghan staff attrition, including SIV-related resignations. For example, State and USAID temporarily transfer experienced local staff from other diplomatic missions to Afghanistan, and the agencies sometimes fill one position with two employees in anticipation of an SIV-related resignation. In addition, the agencies provide additional administrative support from Washington, D.C., beyond what is generally provided to other U.S. missions, and send U.S. personnel to Afghanistan on a temporary basis to fill staffing gaps caused by attrition. State and USAID officials said that these agencies have not evaluated actions taken to mitigate the effects of Afghan staff attrition. Officials said agencies have not conducted such assessments because of resource constraints and the reactive nature of operations in such an unpredictable environment. Key principles of human capital management that GAO identified call for agencies to evaluate the contribution that such activities make toward achieving programmatic goals, including those related to the workforce. Without these assessments, it will be difficult for agencies to have information to determine the costs and benefits of actions taken and handle workforce-related needs in challenging environments in the future. GAO recommends that State and USAID evaluate actions intended to mitigate the effects of Afghan local staff resignations. State and USAID agreed with the recommendations. |
Our review of the pilot test identified several challenges related to pilot planning, data collection, and reporting, which affected the completeness, accuracy, and reliability of the results. DHS did not correct planning shortfalls that we identified in our November 2009 report. We determined that these weaknesses presented a challenge in ensuring that the pilot would yield information needed to inform Congress and the card reader rule and recommended that DHS components implementing the pilot—TSA and USCG—develop an evaluation plan to guide the remainder of the pilot and identify how it would compensate for areas where the TWIC reader pilot would not provide the information needed. DHS agreed with the recommendations; however, while TSA developed a data analysis plan, TSA and USCG reported that they did not develop an evaluation plan with an evaluation methodology or performance standards, as we recommended. The data analysis plan was a positive step because it identified specific data elements to be captured from the pilot for comparison across pilot sites. If accurate data had been collected, adherence to the data analysis plan could have helped yield valid results. However, TSA and the independent did not utilize the data analysis plan. According to officials test agentfrom the independent test agent, they started to use the data analysis plan but stopped using the plan because they were experiencing difficulty in collecting the required data and TSA directed them to change the reporting approach. TSA officials stated that they directed the independent test agent to change its collection and reporting approach because of TSA’s inability to require or control data collection to the extent required to execute the plan. We identified eight areas where TWIC reader pilot data collection, supporting documentation, and recording weaknesses affected the completeness, accuracy, and reliability of the pilot data 1. Installed TWIC readers and access control systems could not collect required data on TWIC reader use, and TSA and the independent test agent did not employ effective compensating data collection measures. The TWIC reader pilot test and evaluation master plan recognizes that in some cases, readers or related access control systems at pilot sites may not collect the required test data, potentially requiring additional resources, such as on-site personnel, to monitor and log TWIC card reader use issues. Moreover, such instances were to be addressed as part of the test planning. However, the independent test agent reported challenges in sufficiently documenting reader and system errors. For example, the independent test agent reported that the logs from the TWIC readers and related access control systems were not detailed enough to determine the reason for errors, such as biometric match failure, an expired TWIC card, or that the TWIC was identified as being on the list of revoked credentials. The independent test agent further reported that the inability to determine the reason for errors limited its ability to understand why readers were failing, and thus it was unable to determine whether errors encountered were due to TWIC cards, readers, or users, or some combination thereof. 2. Reported transaction data did not match underlying documentation. A total of 34 pilot site reports were issued by the independent test agent. According to TSA, the pilot site reports were used as the basis for DHS’s report to Congress. We separately requested copies of the 34 pilot site reports from both TSA and the independent test agent. In comparing the reports provided, we found that 31 of the 34 pilot site reports provided to us by TSA did not contain the same information as those provided by the independent test agent. Differences for 27 of the 31 pilot site reports pertained to how pilot site data were characterized, such as the baseline throughput time used to compare against throughput times observed during two phases of testing. However, at two pilot sites, Brownsville and Staten Island Ferry, transaction data reported by the independent test agent did not match the data included in TSA’s reports. Moreover, data in the pilot site reports did not always match data collected by the independent test agent during the pilot. 3. Pilot documentation did not contain complete TWIC reader and access control system characteristics. Pilot documentation did not always identify which TWIC readers or which interface (e.g., contact or contactless interface) the reader used to communicate with the TWIC card during data collection.different readers were tested. However, the pilot site report did not identify which data were collected using which reader. For example, at one pilot site, two 4. TSA and the independent test agent did not record clear baseline data for comparing operational performance at access points with TWIC readers. Baseline data, which were to be collected prior to piloting the use of TWIC with readers, were to be a measure of throughput time, that is, the time required to inspect a TWIC card and complete access-related processes prior to granting entry. However, it is unclear from the documentation whether acquired data were sufficient to reliably identify throughput times at truck, other vehicle, and pedestrian access points, which may vary. 5. TSA and the independent test agent did not collect complete data on malfunctioning TWIC cards. TSA officials observed malfunctioning TWIC cards during the pilot, largely because of broken antennas. If a TWIC with a broken antenna was presented for a contactless read, the reader would not identify that a TWIC had been presented, as the broken antenna would not communicate TWIC information to a contactless reader. In such instances, the reader would not log that an access attempt had been made and failed. 6. Pilot participants did not document instances of denied access. Incomplete data resulted from challenges documenting how to manage individuals with a denied TWIC across pilot sites. Specifically, TSA and the independent test agent did not require pilot participants to document when individuals were granted access based on a visual inspection of the TWIC, or deny the individual access as may be required under future regulation. This is contrary to the TWIC reader pilot test and evaluation master plan, which calls for documenting the number of entrants “rejected” with the TWIC card reader system operational as part of assessing the economic impact. Without such documentation, the pilot sites were not completely measuring the operational impact of using TWIC with readers. 7. TSA and the independent test agent did not collect consistent data on the operational impact of using TWIC cards with readers. TWIC reader pilot testing scenarios included having each individual present his or her TWIC for verification; however, it is unclear whether this actually occurred in practice. For example, at one pilot site, officials noted that during testing, approximately 1 in 10 individuals was required to have his or her TWIC checked while entering the facility because of concerns about causing a traffic backup. Despite noted deviations in test protocols, the reports for these pilot sites do not note that these deviations occurred. Noting deviations in each pilot site report would have provided important perspective by identifying the limitations of the data collected at the pilot site and providing context when comparing the pilot site data with data from other pilot sites. 8. Pilot site records did not contain complete information about installed TWIC readers’ and access control systems’ design. TSA and the independent test agent tested the TWIC readers at each pilot site to ensure they worked before individuals began presenting their TWIC cards to the readers during the pilot. However, the data gathered during the testing were incomplete. For example, 10 of 15 sites tested readers for which no record of system design characteristics were recorded. In addition, pilot reader information was identified for 4 pilot sites but did not identify the specific readers or associated software tested. According to TSA, a variety of challenges prevented TSA and the independent test agent from collecting pilot data in a complete and consistent fashion. Among the challenges noted by TSA, (1) pilot participation was voluntary, which allowed pilot sites to stop participation at any time or not adhere to established testing and data collection protocols; (2) the independent test agent did not correctly and completely collect and record pilot data; (3) systems in place during the pilot did not record all required data, including information on failed TWIC card reads and the reasons for the failure; and (4) prior to pilot testing, officials did not expect to confront problems with nonfunctioning TWIC cards. Additionally, TSA noted that it lacked the authority to compel pilot sites to collect data in a way that would have been in compliance with federal standards. In addition to these challenges, the independent test agent identified the lack of a database to track and analyze all pilot data in a consistent manner as an additional challenge to data collection and reporting. The independent test agent, however, noted that all data collection plans and resulting data representation were ultimately approved by TSA and USCG. As required by the SAFE Port Act and the Coast Guard Authorization Act of 2010, DHS’s report to Congress on the TWIC reader pilot presented several findings with respect to technical and operational aspects of implementing TWIC technologies in the maritime environment. However, DHS’s reported findings were not always supported by the pilot data, or were based on incomplete or unreliable data, thus limiting the report’s usefulness in informing Congress about the results of the TWIC reader pilot. For example, reported entry times into facilities were not based on data collected at pilot sites as intended. Further, the report concluded that TWIC cards and readers provide a critical layer of port security, but data were not collected to support this conclusion. Because of the number of concerns that we identified with the TWIC pilot, in our March 13, 2013, draft report to DHS, we recommended that DHS not use the pilot data to inform the upcoming TWIC card reader rule. However, after receiving the draft that we sent to DHS for comment, on March 22, 2013, USCG published the TWIC card reader notice of proposed rulemaking (NPRM), which included results from the TWIC card reader pilot. We subsequently removed the recommendation from our final report, given that USCG had moved forward with issuing the NPRM and had incorporated the pilot results into the proposed rulemaking. In its official comments on our report, DHS asserted that some of the perceived data anomalies we cited were not significant to the conclusions TSA reached during the pilot and that the pilot report was only one of multiple sources of information available to USCG in drafting the TWIC reader NPRM. We recognize that USCG had multiple sources of information available to it when drafting the proposed rule; however, the pilot was used as an important basis for informing the development of the NPRM, and the issues and concerns that we identified remain valid. Given that the results of the pilot are unreliable for informing the TWIC card reader rule on the technology and operational impacts of using TWIC cards with readers, we recommended that Congress should consider repealing the requirement that the Secretary of Homeland Security promulgate final regulations that require the deployment of card readers that are consistent with the findings of the pilot program; and that Congress should consider requiring that the Secretary of Homeland Security complete an assessment that evaluates the effectiveness of using TWIC with readers for enhancing port security. This would be consistent with the recommendation that we made in our May 2011report. These results could then be used to promulgate a final regulation as appropriate. Given DHS’s challenges in implementing TWIC over the past decade, at a minimum, the assessment should include a comprehensive comparison of alternative credentialing approaches, which might include a more decentralized approach, for achieving TWIC program goals. Chairman Mica, Ranking Member Connolly, and members of the subcommittee, this concludes my prepared statement. I would be happy to respond 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 Dave Bruno, Assistant Director; Joseph P. Cruz; and James Lawson. Key contributors for the previous work that this testimony is based on are listed within each individual product. 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 GAO's work examining the Department of Homeland Security's (DHS) Transportation Worker Identification Credential (TWIC) program. Ports, waterways, and vessels handle billions of dollars in cargo annually, and an attack on our nation's maritime transportation system could have serious consequences. Maritime workers, including longshoremen, mechanics, truck drivers, and merchant mariners, access secure areas of the nation's estimated 16,400 maritime-related transportation facilities and vessels, such as cargo container and cruise ship terminals, each day while performing their jobs. The TWIC program is intended to provide a tamper-resistant biometric credential to maritime workers who require unescorted access to secure areas of facilities and vessels regulated under the Maritime Transportation Security Act of 2002 (MTSA). TWIC is to enhance the ability of MTSA-regulated facility and vessel owners and operators to control access to their facilities and verify workers' identities. Under current statute and regulation, maritime workers requiring unescorted access to secure areas of MTSA-regulated facilities or vessels are required to obtain a TWIC, and facility and vessel operators are required by regulation to visually inspect each worker's TWIC before granting unescorted access. Prior to being granted a TWIC, maritime workers are required to undergo a background check, known as a security threat assessment. This statement today highlights the key findings of a report GAO released yesterday on the TWIC program that addressed the extent to which the results from the TWIC reader pilot were sufficiently complete, accurate, and reliable for informing Congress and the TWIC card reader rule. For the report, among other things, GAO assessed the methods used to collect and analyze pilot data since the inception of the pilot in August 2008. GAO analyzed and compared the pilot data with the TWIC reader pilot report submitted to Congress to determine whether the findings in the report are based on sufficiently complete, accurate, and reliable data. Additionally, we interviewed officials at DHS, TSA, and USCG with responsibilities for overseeing the TWIC program, as well as pilot officials responsible for coordinating pilot efforts with TSA and the independent test agent (responsible for planning, evaluating, and reporting on all test events), about TWIC reader pilot testing approaches, results, and challenges. |
DOD provides active duty servicemembers with a comprehensive compensation package that includes a mix of cash, such as basic pay; noncash benefits, such as health care; and deferred compensation, such as retirement pension. The foundation of each servicemember’s compensation is regular military compensation, which consists of basic pay, housing allowance, subsistence allowances, and federal income tax advantage. The amount of cash compensation that a servicemember receives varies according to rank, tenure of service, and dependency status. For example, a hypothetical servicemember with 1 year of service at the rank of O-1 and no dependents would currently receive an annual regular military compensation of $54,663, whereas a hypothetical servicemember with 4 years of service at the rank of E-5 and one dependent would receive an annual regular military compensation of $52,589. In addition to cash compensation, DOD offers current and retired servicemembers a wide variety of noncash benefits. These range from family health care coverage and education assistance to installation- based services, such as child care, youth, and family programs. While many studies of active duty military compensation have attempted to assess the value of the compensation package, most did not consider all of the components of compensation offered to servicemembers. CBO, RAND, and CNA have assessed military compensation using varying approaches. All of their studies include some components of compensation—for example, cash compensation beyond basic pay, which includes housing and subsistence allowances, the federal income tax advantage, and, when possible, special and incentive pay. However, these studies did not assess all components of compensation offered to servicemembers. Thus, the results of these studies differ based on what is being assessed, the methodology used to conduct the assessment, and the components of compensation included in the calculations. The most recent study, a 2008 DOD-sponsored study performed by CNA, assessed military compensation using regular military compensation and some benefits (specifically, health care, the military tax advantage, and retirement benefits). In particular, the results of this study state that in 2006, average enlisted servicemembers’ compensation ranged from approximately $40,000 at 1 year of service to approximately $80,000 at 20 years of service. Additionally, in 2006 the average officers’ compensation ranged from approximately $50,000 at 1 year of service to approximately $140,000 at 20 years of service. Our analysis of CNA’s 2008 study found that overall, CNA used a reasonable approach to assessing military compensation; however, we provided comments on two issues. In general, we agree that when assessing military compensation for the purpose of comparing it with civilian compensation, it is appropriate to include regular military compensation and benefits (as many as can be reasonably valued from the servicemembers’ perspective). For example, in order to value health care, CNA estimated the difference in value between military and civilian health benefits, because servicemembers receive more comprehensive health care than most civilians. As mentioned previously, we identified two areas for comment with regard to CNA’s approach. First, with regard to retirement, health care, and tax advantage, CNA’s methodology makes various assumptions that allow the study to calculate approximate values for these benefits. While the assumptions are reasonable, we note that other, alternative assumptions could have been made, and thus, in some cases, could have generated substantially different values. Second, the CNA study omits the valuation of retiree health care, which is a significant benefit provided to servicemembers. Nevertheless, we note that CNA’s study and other studies of military compensation illustrate that valuing total military compensation from a servicemember’s perspective is challenging, given the variability across the large number of pays and benefits, the need to make certain assumptions to estimate the value of various benefits, and the utilization of benefits by servicemembers or their dependents, among other reasons. In comparing military and civilian compensation, CNA’s study as well as a 2007 CBO study, found that military pay generally compares favorably with civilian pay. CNA found that in 2006, regular military compensation for enlisted personnel averaged $4,700 more annually than comparable civilian earnings. Similarly, CNA found that military officers received an average of about $11,500 more annually than comparable civilians. Further, CNA found that the inclusion of three military benefits—health care, retirement, and the additional tax advantage for military members— increased the differentials by an average of $8,660 annually for enlisted servicemembers and $13,370 annually for officers. A 2007 CBO study similarly found that military compensation compares favorably with civilian compensation. For example, CBO’s report suggested that DOD’s goal to make regular military compensation comparable with the 70th percentile of civilian compensation has been achieved. We note that the major difference between the two studies lies in their definitions of compensation. CNA asserted, and we agree, that the inclusion of benefits allows for comparisons of actual levels of compensation and provides some useful comparison points for determining whether servicemembers are compensated at a level that is comparable to that of their civilian peers, although the caveats that we discuss below should be considered. CBO also noted, and we agree, that including benefits can add another level of complexity to such analytical studies. However, while these studies and comparisons between military and civilian compensation in general provide policymakers with some insight into how well military compensation is keeping pace with overall civilian compensation, we believe that such broad comparisons are not sufficient indicators for determining the appropriateness of military compensation levels. For example, the mix of skills, education, and experience can differ between the comparison groups, making direct comparisons of salary and earnings difficult. While some efforts were made by CNA to control for age (as a proxy for years of experience) and broad education levels, CNA did not control for other factors, such as field of degree or demographics (other than age), that we feel would be needed to make an adequate comparison. As another example, one approach that is sometimes taken to illustrate a difference, or “pay gap,” between rates of military and civilian pay is to compare over time changes in the rates of basic pay with changes in the Employment Cost Index. We do not believe that such comparisons demonstrate the existence of a pay gap or facilitate accurate comparisons between military and civilian compensation because they assume that military basic pay is the only component of compensation that should be compared to changes in civilian pay and exclude other important components of military compensation, such as the housing and subsistence allowances. We note that CBO also previously discussed three other shortcomings of making such comparisons in a 1999 report. Specifically, CBO noted that such comparisons (1) select a starting point for the comparison without a sound analytic basis, yet the results of the pay gap calculation are very sensitive to changes in that starting point; (2) do not take into account differences in the demographic composition of the civilian and military labor forces; and (3) compare military pay growth over one time period with a measure of civilian pay growth over a somewhat different period. The 10th QRMC’s recommendation to include regular military compensation and select benefits when comparing military and civilian compensation appears reasonable to us because it provides a more complete measure of military compensation than considering only cash compensation. Given the large proportion of servicemember compensation that is comprised of in-kind and deferred benefits, the 10th QRMC emphasized that taking these additional components of compensation into account shows that servicemember compensation is generous relative to civilian compensation—more so than traditional comparisons of regular military compensation suggest. The 10th QRMC also recommended that in order to maintain the standard established by the 9th QRMC’s 70th percentile (which includes only regular military compensation), DOD adopt the 80th percentile as its goal for military compensation when regular military compensation and the value of some benefits, such as health care, are included in the analysis. In general, when comparing military and civilian compensation, a more complete or appropriate measure of compensation should include cash and benefits. When considering either a military or a civilian job, an individual is likely to consider the overall compensation—to include pay as well as the range and value of the benefits offered between the two options. The challenge with this approach, as mentioned previously, lies in determining how to “value” the benefits, and which benefits to include in the comparison. Prior to issuing our report earlier this month the Deputy Under Secretary of Defense for Military Personnel Policy provided us with oral comments on a draft of the report. The Deputy Under Secretary generally agreed with our findings, noting that numerous studies have attempted to estimate the value military members place on noncash and deferred benefits and that each study has found that identifying relevant assumptions, valuing these benefits, and finding appropriate benchmarks and comparisons are significant challenges. Noting the variation in the results of these studies, the Deputy Under Secretary stated that further study is necessary before DOD is willing to consider measuring and benchmarking military compensation using a measurement that incorporates benefits. While comparisons between military and civilian compensation are important management measures, they alone do not necessarily indicate the appropriateness or adequacy of compensation. Another measure is DOD’s ability to recruit and retain personnel. We have reported in the past that compensation systems are tools used for recruiting and retention purposes. Similarly, in 2009, CBO stated that ultimately, the best barometer of the effectiveness of DOD’s compensation system is how well the military attracts and retains high-quality, skilled personnel. Since 1982, DOD has only missed its overall annual recruiting target three times—in 1998 during a period of very low unemployment, in 1999, and most recently in 2005. Given that (1) the ability to recruit and retain is a key indicator of the adequacy of compensation and (2) DOD has generally met its overall recruiting and retention goals for the past several years, it appears that regular military compensation is adequate at the 70th percentile of comparable civilian pay as well as at the 80th percentile when additional benefits are included. We note that although the services have generally met their overall recruiting goals in recent years, certain specialties, such as medical personnel, continue to experience recruiting and retention challenges. As a result, permanent, across-the-board pay increases may not be seen as the most efficient recruiting and retention mechanism. In fact, our previous work has shown that use of targeted bonuses may be more appropriate for meeting DOD’s requirements for selected specialties where DOD faces challenges in recruiting and retaining sufficient numbers of personnel. In closing, we note that comparisons between military and civilian compensation are important management tools—or measures—for the department to use to assess the adequacy and appropriateness of its compensation. However, such comparisons present both limitations and challenges. For example, data limitations and difficulties valuing nonmonetary benefits prevent exact comparisons between military and civilian personnel. Moreover, these comparisons represent points in time and are affected by other factors, such as the health of the economy. To illustrate, it is not clear the degree to which changes in the provision of civilian health care or retirement benefits affect the outcome of comparing military and civilian compensation. In addition, valuing military service is complicated. While serving in the military offers personal and professional rewards, such service also requires many sacrifices—for example, frequent moves and jobs that are arduous and sometimes dangerous. Ultimately, DOD’s ability to recruit and retain personnel is an important indicator of the adequacy—or effectiveness—of its compensation. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or members of the subcommittee may have at this time. For further information about this testimony, please contact Brenda S. Farrell, Director, Defense Capabilities and Management, at (202) 512-3604, or [email protected]. Key contributors to this statement include Marion A. Gatling, Assistant Director; K. Nicole Harms; Wesley A. Johnson; Susan C. Langley; Charles W. Perdue; Jennifer L. Weber; and Cheryl A. Weissman. Other contributors include Natalya Barden, Margaret Braley, Timothy J. Carr, and Patrick M. Dudley. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. 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 our most recent report on military and civilian pay comparisons and the challenges associated with those types of comparisons. The Department of Defense's (DOD) military compensation package, which is a myriad of pays and benefits, is an important tool for attracting and retaining the number and quality of active duty servicemembers DOD needs to fulfill its mission. Since DOD transitioned to an all-volunteer force in 1973, the amount of pay and benefits that servicemembers receive has progressively increased. When it is competitive with civilian compensation, military compensation can be appropriate and adequate to attract and retain servicemembers. However, comparisons between the two involve both challenges and limitations. Specifically, as we have previously reported, no data exist that would allow an exact comparison between military and civilian personnel with the same levels of work experience. Also, nonmonetary considerations complicate such comparisons, because their value cannot be quantified. For example, military service is unique in that the working conditions for active duty service carry the risk of death and injury during wartime and the potential for frequent, long deployments, unlike most civilian jobs. In addition, there is variability among past studies in how compensation is defined (for example, either pay or pay and benefits) and what is being compared. Most studies, including those done by the Congressional Budget Office (CBO) and RAND Corporation, have compared military and civilian compensation but limit such comparisons to cash compensation--using what DOD calls regular military compensation--and do not include benefits. The National Defense Authorization Act for Fiscal Year 2010 required that we conduct a study comparing the pay and benefits provided by law to members of the Armed Forces with those of comparably situated private-sector employees, to assess how the differences in pay and benefits affect recruiting and retention of members of the Armed Forces. Earlier this month, we issued our report. This testimony today summarizes the findings of that report. Comparisons between military and civilian compensation are important management tools--or measures--for the department to use to assess the adequacy and appropriateness of its compensation. However, such comparisons present both limitations and challenges. For example, data limitations and difficulties valuing nonmonetary benefits prevent exact comparisons between military and civilian personnel. Moreover, these comparisons represent points in time and are affected by other factors, such as the health of the economy. To illustrate, it is not clear the degree to which changes in the provision of civilian health care or retirement benefits affect the outcome of comparing military and civilian compensation. In addition, valuing military service is complicated. While serving in the military offers personal and professional rewards, such service also requires many sacrifices--for example, frequent moves and jobs that are arduous and sometimes dangerous. Ultimately, DOD's ability to recruit and retain personnel is an important indicator of the adequacy--or effectiveness--of its compensation. |
Each year, between 1.3 million and 1.5 million households have commercial moving firms move their household goods to another state, according to industry estimates. There are approximately 2,900 motor carriers registered with the Department of Transportation that are active in transporting household goods across state lines. These 2,900 carriers represent a small percentage of the approximately 654,000 commercial motor carriers engaged in all aspects of interstate commerce (and registered with the Department). Household goods carriers are of three types: national van lines, independent carriers, and short-haul movers. Most interstate moves are conducted by approximately 25 van lines—companies that market and dispatch moves in which agents, acting on the van lines’ behalf, perform the actual moves. These agents are local moving companies that own the moving equipment and storage facilities used in interstate moves. Independent carriers lease or own their own equipment and storage facilities but do not have agents. Independent carriers often share storage facilities and some equipment in an effort to provide enough capacity and flexibility to compete with the van lines. According to industry officials, short-haul movers typically undertake moves of around 500 miles that do not require storage facilities or return trip loads of goods. Because most consumers seldom use moving companies for their household goods, they are less prepared to protect themselves financially than are commercial shippers. Until 1996, the Interstate Commerce Commission (ICC) had regulatory responsibility for interstate household goods carriers, including issuing regulations, conducting oversight activities, and taking enforcement actions. The ICC Termination Act of 1995, among other things, dissolved ICC and transferred these consumer protection functions (called “economic regulation”) to the Department of Transportation. These functions were further assigned to the motor carrier safety office within the Federal Highway Administration. The Motor Carrier Safety Improvement Act of 1999 transferred these consumer protection functions to a new organization within the Department, the Federal Motor Carrier Safety Administration. In addition to its headquarters facilities, the Federal Motor Carrier Safety Administration maintains a field office structure consisting of 4 service centers and 52 division offices—one in each state, Puerto Rico, and the District of Columbia. Data weaknesses do not allow us to assess the nature and extent of the problems consumers have had nationwide with various aspects of the interstate moving industry since 1996. One reason is that the government offices and business and industry organizations we contacted that receive complaints from consumers do not centrally compile information on the nature of the complaints and often do not differentiate between complaints against interstate and intrastate moving companies. Another reason is that organizations did not collect information on how the complaints were resolved. The federal motor carrier administration estimates that it receives 3,000 to 4,000 complaints about interstate moves each year. Available information indicates that consumers have complained about a broad range of problems in dealing with household goods carriers in recent years. Some alleged problems reflect misunderstandings between consumers and carriers about (1) when services were to be paid for or (2) what services were included in the original cost estimate provided to the consumer. For example, a carrier arrived at the destination with the consumer’s goods on the scheduled delivery date but the consumer was not present; the carrier then took the consumer’s goods to a storage facility—at an extra cost to the consumer—until the consumer arrived, and the consumer complained about the extra cost. In another example, the consumer failed to obtain complete information about the services, accepting a telephone estimate of the expected moving charges rather than having the moving company provide an on-site estimate—and then complained when the actual cost of the move included charges for services that were not covered by the estimate. Other problems occurred when a carrier lost or damaged the consumer’s goods but the consumer and the carrier disagreed on the amount of compensation or the carrier took a long time to settle the claim. In some instances, the disputed amounts involved thousands of dollars. Consumers have also complained that carriers held their goods “hostage” by refusing to unload them from the moving truck until the consumer paid the entire balance of money due, even though the consumer is not required to pay more than 110 percent of the estimated amount to the carrier at the time of delivery. Yet some carriers required payment in full—over and above the 110 percent amount—in cash at the time of delivery. And when the consumer did not pay the amount above 110 percent of the estimate, the carrier stored the goods at an added cost to the consumer. Finally, available information indicates that some consumer complaints arose because unscrupulous carriers had no regard for the rights of consumers or for the law. In some instances, carriers provided unreasonably low estimates that they had no intention of honoring. Some carriers also extracted unreasonably high fees from consumers by imposing unjustified and exorbitant charges for packing, boxes, tape, and other ancillary services. In addition, some carriers engaged in a practice called “weight bumping,” in which they artificially inflated the weight of a shipment by including the weight of another household’s goods when calculating the final bill. Consumers have complained that, in some instances, even when they have won judgments against carriers in court, they have been unable to collect damages because the carrier has hidden its assets. The limited information that is available from selected federal and industry organizations suggests that the number of complaints against household goods carriers is increasing. The complaints recorded by 12 federal motor carrier administration division offices about interstate household goods carriers doubled from 318 in 1996 to 659 in 1999. (Two other division offices we contacted did not record complaints received.) Nationwide data maintained by the Council of Better Business Bureaus indicate a nationwide increase in complaints against interstate and intrastate household goods carriers from about 3,000 in 1996 to about 5,100 in 1999. Another measure—consumer requests for formal arbitration proceedings to resolve disputes with carriers—indicates an increase in consumer dissatisfaction. Such requests submitted to the American Moving and Storage Association increased between 1996 and 2000 from about 100 to over 700. While all consumer complaints or requests for arbitration may not have merit, they represent consumer dissatisfaction that consumers want addressed. (See app. II for additional information.) To resolve individual disputes over interstate shipments of household goods, consumers are expected to avail themselves of self-help mechanisms, such as neutral arbitration. Under the ICC Termination Act of 1995, the Department of Transportation is authorized to conduct oversight and provide enforcement activities, among other things, to protect these consumers. For moves of household goods across state lines, as for other services, consumers are primarily responsible for protecting their own interests. It is up to them to select a reputable carrier, ensure that they understand the terms and conditions of the contract, and understand the remedies that are available to them when problems arise so that they can resolve disputes directly with the carrier. Typically, a consumer first tries to work with the carrier directly or through state or local government agencies, if such help is available, to resolve a dispute. If the results are not satisfactory, the consumer can seek further recourse—arbitration—through industry and business associations, such as the American Moving and Storage Association, the Council of Better Business Bureaus, and other independent arbitration organizations nationwide. Alternatively, the consumer can pursue civil litigation for violations of the household goods consumer protection statutes and regulations. Since 1996, the Department of Transportation has had primary federal authority for regulating the interstate household goods moving industry— specifically, for issuing regulations to protect consumers, conducting oversight activities (including reviewing carriers’ compliance with those regulations), and taking enforcement actions. Among other things, the Department’s existing consumer protection regulations cover the (1) types of cost estimates carriers can provide to consumers, (2) guidance that carriers must provide to consumers about their rights and responsibilities when they move, (3) approved methods for carriers to weigh shipments of household goods used to determine the final costs of the move, (4) process through which carriers handle inquiries and complaints, and (5) maximum charges consumers are required to pay at the time their goods are delivered to the final destination. Historically, the Department’s oversight activities for all types of commercial motor carriers—not just household goods carriers—include collecting information on the state of the industry, such as complaints lodged against registered carriers. The Department also reviews compliance with regulatory requirements (called “compliance reviews”) at a carrier’s base of operations. When it identifies instances of noncompliance, the Department can rely on a variety of enforcement activities. For example, it can issue orders to compel compliance, impose civil monetary penalties, revoke the carrier’s operating authority, or seek federal court orders to stop regulatory violations. While the Congress provided the Department with the authority to regulate the interstate household goods moving industry, a House Committee report accompanying the 1995 act directed the Department not to intervene and help resolve individual complaints—as was the practice of ICC. According to Department officials, the Department has followed this direction and, when it undertakes enforcement actions, focuses on patterns of behavior (e.g., multiple complaints) by a carrier. Another federal agency, the Surface Transportation Board, has the authority to determine whether a moving company’s charges to consumers are consistent with its tariff (a published list of charges for specific services provided). Consumers can use the Board’s opinion in negotiating with the carrier or in court. The states may regulate the transportation of household goods within their boundaries (intrastate transportation). In addition, 9 of the 14 states we contacted attempt to help consumers with complaints involving interstate transportation. According to state officials, this involvement is generally limited to informal mediation of the complaint with the carrier, unless state officials believe the carrier has violated that state’s consumer protection or fraud statutes. State involvement in matters involving interstate carriers is limited, at least in part, by a federal statute that preempts a broad range of state law claims for loss or damage in interstate transportation. (See app. III for additional information on states’ roles.) Since the Department assumed authority for the oversight and enforcement of the household goods moving industry 5 years ago, its activities in all areas—consumer education, oversight, compliance, and enforcement— have been minimal. According to Department officials, no more than two staff positions were transferred from ICC for household-goods-related functions. Typically, the Department has devoted about 5 staff years to its household goods consumer protection activities and has not requested more resources for these activities from the Congress. Rather, it has devoted its attention to motor carrier safety issues, which are its primary motor carrier responsibility. The Department undertook few, if any, activities related to the industry between 1996 and 1998. In 1998, after a congressional hearing on growing problems with certain carriers, it formed a task force to provide increased enforcement against egregious carriers. This task force initiated 29 enforcement actions against carriers but was disbanded in 2000 to be replaced with a permanent enforcement team as part of the Department’s plans to increase its efforts in this area. The Department also published proposed rules implementing the ICC Termination Act and addressing certain consumer protection issues, but the rules have not been finalized because of work on other, safety-related rules. In 2000, when the authority for these activities was transferred to the motor carrier administration, the Department established the Office of Enforcement and Compliance within the motor carrier administration, with enforcement and compliance responsibilities for all carrier types, including household goods carriers. Through January 2001, this unit had established a minimal system for recording complaints about household goods carriers, established a toll-free telephone consumer complaint hotline, and produced an outline of plans for public education and enforcement efforts, among other things. However, significant elements of the outline— including plans for public education and outreach, as well as training of field investigators on the household goods regulations—lack specific steps. Officials of the government, industry, and consumer organizations we contacted agreed that this minimal activity has created a vacuum that has allowed egregious carriers to flourish and take advantage of consumers. According to these officials, carriers are aware that the Department does little to enforce the consumer protection regulations or provide much oversight of the industry. As a result, these officials believe that while most moves are completed by reputable carriers with few or no problems, unscrupulous carriers are taking advantage of the lack of oversight and are operating without concern for the regulations or the rights of consumers. Education helps consumers understand how they can make the choices that will lead to more successful interstate moves. The Department has not made an effort to reach out to consumers and organizations, such as consumer groups, to promote a message of how consumers can protect themselves and get redress when problems arise. Given that consumers have primary responsibility for preventing and resolving problems with moving companies, such outreach could help prevent consumer problems. The Department recognized the importance of consumer education when it continued to make available an ICC-developed booklet on consumers’ rights and responsibilities. In addition, the Department continued an ICC requirement that all interstate household goods carriers provide this booklet to their customers. The Department’s consumer education efforts have been minimal, limited mostly to placing the rights and responsibilities booklet and a Department- developed “17 most frequently asked questions” document about moving on the agency’s Internet Web site. The rights and responsibilities booklet and the frequently asked questions document contain much useful consumer information. However, making the booklet available on the Department’s Web site may not be sufficient because many households do not have Internet access. In addition, some movers may not be making the booklet available to their customers, as required. In this regard, motor carrier administration officials who receive consumer complaints in California and New York and the Executive Director of the Illinois Movers and Warehouseman’s Association told us that, according to consumers who contact their organizations after a move has taken place, some carriers have not offered them this booklet. The motor carrier administration also offers a “self-help” package to those who request it. However, the usefulness of this package is questionable. It consists of photocopies of federal regulations and statutes without explanation to help the reader understand them. One means of consumer education would be through concerted outreach to consumers, such as through consumer and industry groups and state consumer protection and enforcement agencies. The motor carrier administration endorsed the concept of this approach in December 2000, but it will not develop concrete activities for carrying it out until June 2001. (The motor carrier administration’s plans to increase its presence in this area are discussed at the end of this section.) We agree that such outreach could be useful in helping consumers understand how to make a move more successful and how to seek redress when problems arise. It would also be helpful to state agencies when consumers complain to them about interstate household goods movers. Over half of the state agencies we contacted did not know which federal agency regulates these movers, or that any federal agency had any role since the termination of ICC. Therefore, they were unable to forward complaints they received about interstate moves to the motor carrier administration. Another opportunity for the Department to help consumers make informed choices is to make complaint information available to the public. For example, the motor carrier administration receives complaints from some consumers about household goods carriers but does not share this information with the public because it believes that by doing so it may violate consumers’ privacy. Such concerns would have merit if the Department identified the complainant when making the information public. However, the complaints could be aggregated by carrier and type of complaint (e.g., damage to goods shipped, hostage freight) without revealing the identity of the complainant. This approach is used by the Department’s Aviation Consumer Protection Division. The Aviation Consumer Protection Division routinely shares complaint information (e.g., damage to luggage, poor service) collected from consumers through its Air Travel Consumer Report. The Aviation Consumer Protection Division shares this information with consumers through its Internet Web site to help them make choices about which airlines to use. According to the Assistant Director for Aviation Consumer Protection, publishing these data assists consumers in assessing the airlines’ service quality while encouraging the airlines to improve their service. In addition, Department officials are concerned about providing the public with complaint information that has not been substantiated by the Department. However, the Assistant Director for Aviation Consumer Protection explained that his office and the airline industry generally agree that complaints, as reported, are real and valid from a consumer’s perspective regardless of whether there has been a violation of regulations or simply a disagreement over policy and procedures. Similarly, in 1998, the Department proposed rules that would implement the requirements of the 1995 act and would require carriers to file annual reports with the agency that, among other things, include information on the number of claims filed with the carrier. The Department planned to make this information available to the public, further indicating that privacy concerns could be addressed. (The Department has not finalized these rules and, therefore, has not implemented this action.) Previously, ICC required similar reports and made this information available to the public. Oversight efforts that would help the Department understand the industry and shape its enforcement strategy have been minimal. The motor carrier administration has not collected information on the nature and extent of complaints in a way that could be used in overseeing the industry. Even though it required its division offices to collect information on all complaints that came in to them in a complaint register, 2 of the 14 division offices we contacted were not using complaint registers because the officials in charge of those offices decided that the complaints were so infrequent that the registers were unnecessary. The other offices collected the information inconsistently, hampering the motor carrier administration in understanding the nature and extent of problems reported by consumers. For example, one office recorded only complaints made in writing and ignored complaints made over the telephone, even though the motor carrier administration’s guidance specified that information from telephone complaints be recorded. Agency guidance indicates that a primary purpose of the complaint register is to identify substantial patterns of noncompliance that would aid in targeting unscrupulous carriers for enforcement actions. However, the motor carrier administration did not issue any guidance to its division offices on how and when to report complaint data to headquarters. Division office staff told us that the registers were primarily used to log complaints because the agency guidance did not ask for complaints to be supplied to headquarters for analysis. In addition to having data quality problems, the complaint register system is not designed to share information across state lines or with headquarters: The databases that each office maintains are “stand-alone”—not electronically linked to each other or to headquarters. This design limits the register’s usefulness in oversight and enforcement. According to Department officials, the motor carrier administration plans to create a new, national consumer complaint database by April 2001 for use in enforcement and oversight. While this database will accept complaints from all sources—including the general public—motor carrier administration staff at headquarters, service centers, and division offices will have limited access to the entire system. Finally, the Department has not undertaken a study of the effectiveness of arbitration as a means of settling household goods disputes, despite the requirement in the ICC Termination Act that it complete this study within 18 months. A study of arbitration—required for the first time by the 1995 act—would be useful in determining the degree to which carriers have established accessible and fair arbitration programs. The motor carrier administration has no plans to undertake the study. Agency officials could not tell us how many of the nearly 500 compliance reviews of carriers that transport household goods conducted since 1996 involved ensuring compliance with consumer protection requirements, such as the one for carriers to establish accessible and fair arbitration programs. Agency officials told us that unless specific complaints have been made against a carrier, compliance reviews typically do not include checks of the carrier’s compliance with the consumer protection regulations because (1) the focus of compliance reviews is to determine the operating safety of the carrier; (2) investigators’ training, limited to 1 day, is insufficient for them to evaluate compliance with the regulations; and (3) departmental manuals on how to conduct compliance reviews include guidance on only one of the consumer protection regulations (that carriers participate in an arbitration program). While the Department’s December 2000 plans include providing additional training to field safety investigators on the household goods regulations, the plans do not indicate the extent of training to be provided. In addition, this training is not scheduled to be completed until September 2001. In commenting on a draft of this report, Department officials noted that the Department began updating its compliance review manual to include additional household goods regulations in January 2001. The Department has not determined whether it is carrying out the appropriate level of enforcement activity with respect to households goods carriers relative to the other carriers it regulates. Departmental data suggest that disproportionately fewer household goods carriers are targeted for enforcement than are other types of carriers. In connection with routine enforcement activities, the Department has opened 11 cases involving household goods carriers (of the approximately 2,900 carriers registered with the Department) as compared with completing about 13,000 enforcement cases involving over 650,000 carriers of all types departmentwide since 1996 for all regulatory violations. The 11 cases opened against household goods carriers were for (1) violating consumer protection regulations, (2) failing to register with the Department, or (3) failing to have insurance. The Department had settled these cases, including assessing civil penalties against the carriers, as of February 2001. In response to congressional concerns in 1998 about such limited enforcement, the Department established a temporary task force with seven members, including three former ICC investigators, to inspect household goods carriers reported to the agency for egregious behavior. The task force investigated 29 household goods carriers and brokers that appeared to exhibit patterns of abusive activities. Various criminal and civil actions were imposed against 22 of them. In December 2000, the motor carrier administration proposed to evaluate its compliance and enforcement efforts to ensure the effectiveness of its enforcement activities. The Department plans to establish a tracking and monitoring system to evaluate its efforts by May 2001. In addition, it plans to prepare press releases (as needed) of civil penalties and other significant enforcement actions taken against household goods carriers or brokers. Only recently has the motor carrier administration decided that increased efforts are needed. As a result, in December 2000, it approved an outline of plans to take a more active role in public education, oversight, compliance, and enforcement in the household goods moving industry. The outline proposes establishing two motor carrier administration teams dedicated to addressing consumer problems in the industry. The consumer affairs team, comprising two motor carrier administration staff and five contract employees, would provide guidance for the public and others about available consumer protections, take consumer complaint calls on a toll- free telephone hotline, and log complaints into a national complaint database. Team members would be responsible for handling any hostage goods complaints through negotiation and appropriate exercise of agency authority. If this team was not available to handle the complaint, the complaint would be forwarded to the second team, the enforcement team, for further handling. This latter team, to consist of four headquarters and three field staff members, would monitor complaints and investigate household goods carriers on the basis of such factors as the kinds of alleged violations, the number of complaints relative to the size of the carrier, and the degree of harm to consumers. Enforcement actions would then be taken in response to those violations for which the agency determined such actions were warranted. The team would also work to provide information for the news media, public interest groups, industry groups, state governments, and others about consumers’ rights and responsibilities and about enforcement remedies within the motor carrier administration’s jurisdiction through such means as presentations and Internet postings. The approved plans did not include milestones for implementing the Department’s proposed actions. In commenting on a draft of our report, which pointed out this omission, the Department announced that in January 2001, it had approved milestones for elements of its planned approach. However, these plans consist of little more than objectives, lacking specific steps needed for implementation. For example, the plans lack details on the duration and frequency of training for field investigators on the household goods regulations. In addition, the Department’s plans do not address the possible retirements within 3 years of several motor carrier administration staff with institutional knowledge of the household goods regulations. Consumer protections have the potential to be enhanced by expanding the states’ role in the regulation of interstate household goods carriers. The Congress has already expanded state authority in certain other areas of commerce, including telemarketing and fair credit reporting, in which the Congress has recognized that the states can contribute to addressing abusive business practices that extend beyond their borders. As in these areas, the states could be authorized to enforce federal statutes and regulations applicable to interstate carriers of household goods. Industry representatives we contacted opposed such changes, stating that inconsistent interpretations of federal statutes and regulations by states would damage legitimate carriers. Changes to the federal statute governing carriers’ liability for loss or damage in interstate shipments, which limit state law claims, also have the potential to improve protection for consumers. The Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 required the Federal Trade Commission (FTC) to adopt rules prohibiting deceptive and abusive telemarketing practices and authorized the states to take enforcement action against those engaging in patterns or practices of telemarketing that violate those rules. The act reflects congressional findings that interstate telemarketing fraud had become a problem of such magnitude that FTC’s resources were not sufficient to ensure adequate consumer protection. Although FTC does not regularly track state activities, an official estimated that at least 21 individual state actions have been brought and that joint actions number in the hundreds. An FTC official also pointed out that since 1996, in joint FTC and state investigations of telemarketing fraud, the resources of all 50 states and FTC have been efficiently used to benefit consumers nationwide. The states also share enforcement authority with FTC with respect to credit reporting under the 1996 amendments to the Federal Fair Credit Reporting Act. The act authorizes the states to take enforcement action on behalf of consumers to bring a stop to violations and recover damages. According to an FTC official, the states have generally not yet used their authority under the act and may be allocating enforcement resources to other law enforcement priorities. The industry position, as articulated by the American Moving and Storage Association, is that authorizing the states to enforce federal statutes and regulations would result in “ . . . a firestorm of inconsistent, varying interpretations of federal law that present the potential for injunctive relief, threatening the continued operations of legitimate movers.” The Association has also argued that a small minority of consumers would push their grievances, even when carriers had complied with federal regulations, and that some states would improperly move against the carriers. To address the potential for inconsistent state interpretation in connection with the telemarketing and fair credit reporting statutes, FTC works with the states to address interpretation issues before cases are initiated. Both statutes require the states to notify the Commission before taking enforcement action or, if that is not possible, immediately upon taking action. Consumer advocates and state officials we contacted also advocate changes to the Carmack Amendment, a federal statute that preempts a broad range of state law remedies in connection with loss and damage in interstate shipments. The Carmack Amendment imposed a uniform scheme of liability for loss or damage to eliminate the uncertainty associated with conflicting state laws regarding interstate shipments. Courts have consistently held that the Carmack Amendment bars consumers from filing claims under state law, including those for a carrier’s breach of contract, negligence, deceptive practices, and fraud. However, the extent of the Carmack Amendment’s preemptive effect in connection with individual consumer claims is not as clear. Furthermore, there is some question about the states’ authority to take enforcement action against interstate carriers unrelated to loss or damage under state consumer protection statutes. The National Association of Consumer Agency Administrators and several state officials have suggested that the Congress explicitly authorize the states to enforce such statutes against interstate movers to remove any questions concerning their enforcement authority in light of the Carmack Amendment. In addition, the preemptive effect of the Carmack Amendment could be limited to allow individual consumers to recover damages under state law under certain circumstances. For example, an official from one state suggested that the Carmack Amendment be modified so as not to preempt state law with respect to household goods carriers operating without tariffs in violation of federal law. (See app. III for additional information.) As discussed in the previous section, a number of areas exist in which the motor carrier administration could better oversee the household goods moving industry and help consumers make informed choices when they move their household goods. We believe that actions in these areas could lead to improved compliance with federal laws and regulations. We also believe that action by the Department in areas in which it currently is exercising little authority should precede state involvement in this area. Once the Department completes its December 2000 plans and effectively implements the recommendations contained in this report, it will be in a better position to determine what additional benefits, if any, would accrue from legislative changes that would expand the states’ role with respect to interstate household goods carriers. Available information indicates that consumer complaints in the household goods industry are increasing. In addition, there was widespread agreement among the government, industry, and consumer organizations we contacted that the Department’s lack of action has contributed to the growth of problems. The Department defends its limited actions by stating that safety activities are the primary focus of its motor carrier efforts. However, the Department has not taken steps to understand the nature and extent of problems in the industry—and therefore to determine whether its limited approach to oversight and enforcement is appropriate. Nor has it made more than minimal efforts to provide information to consumers that would assist them in making more informed choices. Consumer education as a preventative tool takes on increased importance if the motor carrier administration is to pursue its course of limited oversight and enforcement. The motor carrier administration has recently recognized the need to be more active in this area and has outlined plans to increase its involvement. We are making recommendations for actions to better ensure that these actions are fully implemented and achieve the intended results. We recommend that the Secretary of Transportation direct the Administrator of the Federal Motor Carrier Safety Administration to undertake activities that would help it better oversee the industry. These actions should include undertaking and completing the study of alternative dispute mechanisms required by the ICC Termination Act of 1995 and ensuring that the motor carrier administration’s division offices collect and maintain information on consumer complaints consistently and that the information be shared across division offices and with headquarters. We further recommend that the Secretary direct the Administrator to determine the adequacy of its enforcement efforts. These actions should include assessing whether enforcement activities against household goods carriers are effective and sufficient and, if not, increase enforcement actions against interstate household goods carriers, as outlined in the motor carrier administration’s plans, and determining whether legislative changes are needed to supplement the Department’s efforts, including (1) authorizing the states to enforce federal statutes and regulations and (2) changing the federal statute limiting carriers’ liability with respect to interstate shipments of household goods. If such changes are needed, the Department should submit them to the Congress. This determination should be made after the other recommendations in this report have been implemented and sufficient time has passed to assess the effects of the Department’s actions. We also recommend that the Secretary direct the Administrator to carry out public education efforts that will promote awareness of means that consumers can employ to protect themselves when they are moving their household goods across state lines and on what they can do when problems arise. These efforts should include reaching out to consumers, consumer and industry groups, and state governments and using Internet postings and other means, consistent with the motor carrier administration’s plans; notifying state consumer and law enforcement agencies and national consumer organizations that the motor carrier administration is responsible for regulating the interstate household goods industry; making information on the number and general nature of complaints made against individual carriers available to the public without disclosing the complainants’ identity; and publicizing the results of the Department’s enforcement cases against household goods carriers. We provided the Department of Transportation with a draft of this report for review and comment. We obtained comments from departmental representatives, including the Director of the Federal Motor Carrier Safety Administration’s Office of Enforcement and Compliance. These representatives told us that the motor carrier administration recognizes its responsibility in the area of household goods consumer protection and has been endeavoring to do the best it can with the limited resources available. It will continue to work to the best of its ability, within established resource constraints, to effectively fulfill its responsibilities in this area. The officials indicated that the Department has received only a fraction of the resources ICC devoted to the area and has augmented its staffing to the degree it is able, while it continues to pursue the ambitious safety agenda set out before it with the motor carrier community. The representatives also told us that the motor carrier administration recently established a new approach to deal more effectively and comprehensively with issues in the household goods moving industry, particularly those involving carriers and brokers that have demonstrated persistent noncompliance with applicable economic and commercial regulations. They said that this approach will focus on educating consumers, tracking complaints, and formulating a more effective approach to regulatory enforcement. We agree that the new approach adopted by the Department has the potential to improve oversight and enforcement over the household goods moving industry. However, since many of the initiatives are still in their early stages, we cannot predict the ultimate success of these endeavors. The Department will need to demonstrate to the Congress and to the public that it can follow through with its consumer protection efforts over the long term. The Department also made several technical and clarifying comments, which we incorporated where appropriate. Finally, the Department did not comment on our recommendations. Our draft report contained a proposed recommendation that the motor carrier administration establish implementation and completion dates for actions contained in its plans to improve oversight and enforcement activities involving interstate household goods carriers. As discussed in this report, the motor carrier administration has developed these milestones and incorporated them into its plans. As a result, we deleted this recommendation from this report. We are sending copies of this report to congressional committees and subcommittees with responsibilities for transportation and consumer protection issues; the Honorable Norman Y. Mineta, Secretary of Transportation; Ms. Julie Anna Cirillo, Acting Deputy Administrator of the Federal Motor Carrier Safety Administration; the Honorable Linda J. Morgan, Chairman of the Surface Transportation Board; and the Honorable Mitchell E. Daniels, Director of the Office of Management and Budget. We will make copies available to others upon request. If you or your staff have any questions about this report, please call me at (202) 512-2834. Key contributors to this report were Lori Adams, Helen Desaulniers, James Ratzenberger, Deena Richart, and William Sparling. To attempt to determine the extent of complaints in the interstate household goods moving industry, we obtained summary information from several sources. We did so because detailed records on the complaints were kept as paper records in individual offices where the complaints were filed. In addition, some sources could not readily provide information on whether complaints were for interstate or intrastate moves. From 12 motor carrier administration division offices in Arizona, California, Colorado, Florida, Georgia, Illinois, Missouri, New Jersey, New York, Ohio, Pennsylvania, and Texas, we obtained summary information from their Economic Complaint Registers. We selected these offices because they represent the states that (1) had the most interstate moves and, according to motor carrier administration officials, (2) reported the most problems with household goods movers. We did not verify the reliability of the data maintained in these registers. We also obtained summary complaint information and/or summary requests for arbitration from the Council of Better Business Bureaus and the American Moving and Storage Association. To determine the number of motor carriers that might be involved in interstate household goods moves, we obtained information from the Department of Transportation and from the American Moving and Storage Association. To determine the nature of the complaints, we interviewed federal and state officials and a number of industry and law enforcement and consumer protection organization officials. We relied on interviews because information on the nature of problems was not available without expending extraordinary efforts. We also reviewed the record for the 1998 hearing on consumer protection issues involving the household goods moving industry. To establish how consumer protection for this industry is provided, we determined the Department of Transportation’s role with respect to the household goods moving industry, as well as the roles of other federal agencies and the states. To do so, we reviewed the ICC Termination Act of 1995 and the Motor Carrier Safety Improvement Act of 1999. We also reviewed the Department of Transportation’s applicable regulations, program guidance, and self-help packages provided to consumers. We discussed with motor carrier administration officials (at headquarters and in 14 division offices—the 12 previously mentioned, as well as those in New Hampshire and North Carolina) their duties and actions with respect to the household goods moving industry, including consumer complaint tracking, public education efforts, and enforcement efforts. We also contacted officials at the Surface Transportation Board and the Federal Trade Commission (FTC) to discuss their roles in consumer protection for this industry. In addition, we contacted agencies in 14 states to determine what activities they undertake with respect to this industry. (The organizations we contacted are listed at the end of this appendix.) We chose these states because they either had the most interstate moves or were identified through our discussions with federal agencies, industry associations, and consumer groups as those apparently experiencing the most problems with interstate moves. To assess the Department of Transportation’s consumer protection activities for the household goods moving industry, we reviewed the Department of Transportation’s documents and interviewed its officials on how it implemented its responsibilities. Topics included its overall regulation and enforcement philosophy, rulemaking, staffing, public education and outreach, complaint resolution, enforcement actions, and investigator training. We also reviewed and discussed with motor carrier administration officials the agency’s plans for increasing its activities in this area. In addition, we obtained information on the Department of Transportation’s Aviation Consumer Complaint Database for air travel complaint reporting and resolution. Finally, we met with a number of industry, consumer, and alternative dispute resolution organizations and with selected states to obtain their perspectives on the actions taken by and the effectiveness of the Department of Transportation in this area. To identify issues surrounding an expansion of the states’ role with respect to the interstate moving industry, we contacted officials from federal, state, industry, consumer protection, and alternative dispute resolution organizations that are knowledgeable about the household goods moving industry and obtained their insights. We reviewed legislation and discussed with officials from FTC, state offices of the attorney general, and the National Association of Attorneys General how consumer protection is provided and enforced for the telemarketing industry. We also discussed consumer protection in consumer credit reporting with FTC and reviewed applicable legislation. We selected these industries because they were cited in an August 1998 congressional hearing on the Department of Transportation’s efforts to oversee the household goods moving industry as possible models for federal oversight. We conducted our review from June 2000 through February 2001 in accordance with generally accepted government auditing standards. Aviation Consumer Protection Division Federal Highway Administration Federal Motor Carrier Safety Administration Federal Trade Commission Surface Transportation Board Office of the Attorney General Corporation Commission Department of Commerce Department of Transportation Office of the Attorney General Public Utility Commission Office of the Attorney General Department of Transportation Public Utilities Commission Office of the Attorney General Department of Agriculture and Consumer Services Office of the Attorney General Governor’s Office of Consumer Affairs Public Service Commission Office of the Attorney General Commerce Commission Office of the Attorney General Department of Transportation Office of the Attorney General Utilities Commission Office of the Attorney General Department of Safety Department of Law and Public Safety Division of Consumer Affairs Office of the Attorney General Department of Transportation Office of the Attorney General Public Utilities Commission Office of the Attorney General Public Utility Commission Office of the Attorney General Department of Transportation American Moving and Storage Association California Moving and Storage Association Florida Movers and Warehousemen’s Association Georgia Movers Association Illinois Movers and Warehousemen’s Association National Council of Moving Associations Law Enforcement and Consumer Associations American Association of Retired Persons The Better Business Bureau of Chicago and Northern Illinois The Better Business Bureau of Los Angeles, California The Better Business Bureau of Metropolitan New York Council of Better Business Bureaus National Association of Consumer Agency Administrators National Association of Attorneys General American Arbitration Association Fulcrum Institute Dispute Resolution Clinic Interstate Dispute Resolution Greenmount Moving and Storage, Inc. The motor carrier administration does not centrally compile information on the number or nature of the consumer complaints it receives about interstate household goods carriers. However, motor carrier administration officials estimated that the agency’s division offices receive between 3,000 and 4,000 complaint calls each year about interstate household goods carriers. We contacted 14 of the agency’s 52 division offices to obtain data on the number and types of complaints recorded. For the 12 division offices we contacted that collected this information, the number of complaints increased from 318 to 659 between 1996 and 1999—an increase of 107 percent. (See fig. 1.) About 75 percent of these complaints came from the division offices in three states—California, New Jersey, and New York. However, the number of consumer complaints is understated because the division offices said they did not record all complaints—such as those made by telephone. Two other division offices we contacted—in New Hampshire and North Carolina—did not have a database in place to record consumer complaints. Motor carrier administration data from 11 of the division offices we contacted on the nature of the complaints show that almost all—96 percent—of the complaints concerned lost and damaged goods, untimely deliveries of goods, and rates and charges (e.g., overcharges or final charges that differed from original estimates). However, the motor carrier administration’s records do not indicate the exact nature of each complaint recorded or how it was ultimately resolved. According to motor carrier administration officials, the most egregious complaints do not involve agents of major moving companies; most concern small companies that act as independent movers. They said most of these complaints come from two corridors: (1) the West Coast and (2) the New York/New Jersey area to Florida. Officials noted that the worst cases arise from the latter corridor and involve movers who prey on senior citizens—most of whom have never moved before and are not very “move savvy.” Motor carrier administration officials estimated that the dollar value of individual consumer claims against interstate moving companies has ranged anywhere from $500 to $10,000. An official with the American Moving and Storage Association indicated that the average amount paid on a claim is $610 (1995 data). The Council of Better Business Bureaus has also received an increasing number of complaints against household goods carriers. Complaints increased from 2,970 in calendar year 1996 to 5,097 in 1999, an increase of about 72 percent. (See fig. 2.) These data include both interstate and intrastate moves. The Senior Vice President of the Council’s Dispute Resolution Division told us that if the number of complaints against household goods carriers keeps rising, the moving industry could go into the top 10 most-complained-about industries in the next couple of years. Although the Council does not have readily available information on what types of complaints have been lodged, whether they involve interstate or intrastate carriers, or whether they are lodged against national or independent carriers, Better Business Bureau officials in New York, Chicago, and Los Angeles told us that most complaints involve lost or damaged goods, untimely deliveries, or “low-balling” estimates. While the Chicago official estimated that the complaints lodged in that office were against an array of movers, the Los Angeles and New York officials estimated that the majority of the complaints received in their offices were against smaller, locally based movers. The American Moving and Storage Association also receives informal complaints from consumers about loss and damage, untimely service, inadequate service, and other matters. The Association advises consumers to file a claim with the mover but also notifies member carriers about any complaints received. The Association does not track the number of such complaints it receives or the nature of the complaints. However, for loss and damage claims that are not resolved to the consumer’s satisfaction, the Association keeps a record of how often consumers request an arbitration proceeding through its Dispute Settlement Program. The number of requests for such arbitration increased from 96 in 1996 to 727 in 2000. (See fig. 3.) The Association does not keep track of whether the arbitration was completed or how the complaints were resolved. An Association official familiar with the arbitration program told us that it is difficult to determine why the number of requests for arbitration has increased, noting, however, that the program only started in 1996. The federal statute governing interstate carriers’ liability for loss and damage to goods (called the Carmack Amendment) limits state law claims against interstate household goods carriers. Under the Carmack Amendment, carriers are liable, to the person entitled to recover under a receipt or bill of lading, for actual loss or damage to property, but they may limit their liability to a declared value or other amount agreed to by the consumer as authorized by the Surface Transportation Board. The Carmack Amendment was enacted to impose a uniform scheme of liability that would eliminate the uncertainty associated with conflicting state laws on interstate shipments. Courts have consistently held that the Carmack Amendment preempts a broad range of state law claims relating to the loss or damage of goods in interstate shipments. Specifically, the Carmack Amendment bars individual consumers from asserting claims that would enlarge the carrier’s responsibility for loss or affect the grounds or measure of recovery, including those for violations of state consumer protection statutes, breach of contract, negligence, and fraud. However, the extent of the Carmack Amendment’s preemptive effect is not as clear. Emphasizing the goal of uniformity underlying the Carmack Amendment, some courts addressing state law claims asserted by individual consumers have held that the amendment essentially preempts every state law claim related to the contract of shipment. Others have suggested that the Carmack Amendment does not preempt claims that stem from injuries separate and distinct from loss or damage, but have identified little actionable conduct. Furthermore, there is some question about the states’ authority under consumer protection statutes to take enforcement action against interstate carriers for claims unrelated to loss or damage. Although at least one state has successfully taken action against an interstate household goods carrier under such statutes and other states are currently pursuing such action, officials from two states told us that they would not attempt to bring such cases because of the Carmack Amendment’s pervasive preemption of state law. The states can provide for the regulation of intrastate household goods carriers, and some states have decided not to regulate the household goods moving industry. Of the 14 states we contacted, 11 regulate household goods carriers through a state agency, such as a public utilities commission or a department of transportation. The remaining three states (Florida, Arizona, and Colorado) do not regulate the industry. The states that regulate intrastate household goods carriers require them to follow regulations, such as those to file tariffs, file proof of insurance, provide educational material to potential consumers, maintain operating authority, and pass examinations on state regulations to obtain authority. While all 12 state offices of the attorney general we contacted said they would bring cases against intrastate carriers for violations of state fraud or business fair practices laws, only 3 of the offices—in New York, Illinois, and Pennsylvania—were pursuing intrastate household goods cases. The states’ enforcement authority includes imposing temporary restraining orders and injunctions to halt practices, imposing monetary penalties, and revoking carriers’ authority to haul goods. For example, in three cases in which the State of New York showed the court that the mover was performing moves within New York without authority from the state, the court agreed to order that the mover’s phone lines be disconnected to prevent continued illegal business activities. In the areas of telemarketing and fair credit reporting, the Congress has enabled the states to enforce federal statutes and regulations. According to our discussions with FTC officials, authorizing the states to enforce federal statutes and regulations can result in more investigations and enforcement actions if the states pursue cases that the Commission would consider too local to pursue, given available investigation and enforcement resources. The Commission allocates its investigative and law enforcement resources to address practices that cause the greatest harm. As a result, cases considered significant on a state or regional level may not spur the Commission to initiate an investigation. While the states may be required to use their enforcement resources in other areas, allowing 50 states to enforce federal and state consumer protection statutes has an enhanced deterrent effect not realized through FTC’s enforcement alone, according to Commission officials. Consumer advocates and household goods moving industry representatives with whom we spoke see the states’ enforcement of federal statutes and regulations in very different ways. The industry position, as articulated by the American Moving and Storage Association, is that authorizing the states to enforce federal statutes and regulations will result in “ . . . a firestorm of inconsistent, varying interpretations of federal law that present the potential for injunctive relief, threatening the continued operations of legitimate movers.” Consumer advocates support an expansion of the potential for enforcement against unscrupulous interstate household goods carriers. Commenting on the similarities between telemarketing and interstate moving, one state official noted that the states are well positioned to identify the worst problems through their established consumer-complaint-gathering function. Similarly, while the National Association of Attorneys General does not have an official position on state regulation in household goods transportation, it generally supports federal legislative efforts to ensure that consumer protection laws are not preempted and that the states have the option to enforce both federal and state consumer protection laws in federal court. | For moving services, the primary responsibility for consumer protection lies with consumers to select a reputable household goods carrier, ensure that they understand the terms and conditions of the contracts, and understand and pursue the remedies that are available to them when problems arise. Available information indicates that consumer complaints in the household goods industry are increasing. In addition, there was widespread agreement among the government, industry, and consumer organizations GAO contacted that the Department of Transportation's lack of action has contributed to the growth of problems. The Department contends that safety activities are the primary focus of its motor carrier efforts. However, the Department has not taken steps to understand the nature and extent of problems in the industry--and therefore to determine whether its limited approach to oversight and enforcement is appropriate. Nor has it made more than minimal efforts to provide information to consumers that would assist them in making more informed choices. Consumer education as a preventive tool takes on increased importance if the motor carrier administration is to pursue its course of limited oversight and enforcement. The motor carrier administration has recently recognized the need to be more active in this area and has outlined plans to increase its involvement. |
In the current environment of making government work better and cost less, there are high expectations of information technology to change old, inefficient ways of running programs and delivering taxpayer services. Most federal agencies are largely dependent on information systems to deliver services, maintain operations, track outlays and costs, manage programs, and support program decisions. Technology offers government a means to revolutionize the way it interacts with citizens to streamline service, improve quality, and curtail unnecessary costs. Demonstrating these critical linkages to top government executives is paramount to achieving the necessary attention, understanding, and support necessary for long-term success. Several facts are well known. The expectations for technology are set in a challenging federal environment. Increasingly, pressure is being brought to bear on shrinking the size of the federal deficit, not only by reducing spending but by getting better service for lower ongoing costs. IT-related obligations in the federal budget, exceeding $25 billion annually, may be put under increasing scrutiny as part of overall discretionary spending. Further, technology itself is evolving at a rapid pace. The industry reports on this issue are consistent. Every few years, the performance-to-price ratio of computer hardware doubles. New product cycles in the information technology industry now average months rather than years. This rapid evolution produces new challenges—such as the security of global networks—before current problems can be fully resolved—such as the replacement of aging, legacy systems that can no longer meet requirements. In this environment of demanding requirements, close scrutiny, and rapid change, more attention needs to be focused on what is not known about the government’s technology investments. First, the government really does not know exactly how much it is spending on IT. The $25 billion figure represents specific IT obligations reported to OMB by federal agencies through a special budget exhibit. This information is not comprehensive or collected on a governmentwide basis; therefore, the total amount of annual spending for IT is unknown. For example, agencies are not required to report IT obligations under $50 million. The legislative and judicial branches of government are not required to report IT obligation data to OMB. Additionally, IT obligations embedded in weapon systems and federally funded research on computers are also not part of the reporting requirement. If included, these figures could significantly alter the size of the governmentwide IT investment portfolio. The Department of Defense, for example, has estimated it spends $24 billion to $32 billion annually for software embedded in weapon systems. Second, most agencies do not capture or maintain reliable information on projected versus actual costs and benefits of IT investments. Without this type of information, it is virtually impossible to construct a return on investment calculation as a way of demonstrating positive net gains in cost reductions, improvements in quality, and reduced cycle time for service delivery. The promise of new information technologies is compelling in the federal environment where aging systems prevail that are often ill-designed for changing business or mission requirements. There are inherent risks associated with not acting to address these technology deficiencies, including potential operational disruptions to vital government services such as air traffic control, income tax collection, and benefit payments to recipients of health care or social security. The opportunities for using technology to improve cost effectiveness and service delivery in government are immense. While the return of these investments are not yet proven, examples of how technology can be a powerful tool include: reducing public burden, such as IRS’ Telefile project that allows taxpayers to file 1040EZ tax returns via touch-tone phones; reducing operating costs, such as data center and telecommunications consolidation projects being conducted by the Department of Defense and now OMB on a governmentwide basis, as well as post-FTS 2000 implementation, and governmentwide E-mail; creating choices and alternatives for the delivery of government services, such as electronic benefit transfer payments, information Kiosks, agency home pages on the Internet, and electronic data interchange between government vendors and agencies; increasing the responsiveness and timeliness of services, such as the Social Security’s highly rated telephone customer service program. improving the value and impact of government information, such as the international trade and environmental data index projects being conducted under the auspices of the National Performance Review; and increasing the integrity and reliability of government information systems, such as reducing health care fraud through better software detection methods and enhancing the security of federal data through implementation of better internal controls. But there are also risks associated with taking action to implement new information systems. Our reviews of major modernization efforts have shown that the introduction of newer, faster, cheaper technology is not a panacea for flawed management practices or poorly designed business processes. Business needs must dictate the requirements and justification for the type of technology to be used. To ensure this occurs, program units in agencies must carefully analyze the processes or procedures that are being modernized. When processes are reengineered in concert with the power of information technology, significant results can be achieved. Let me illustrate with a few select examples from both the public and private sector. Liberty Mutual reports that cycle time for the issuance of insurance policies averaged 62 days, even though the actual determination time took less than 3 days. Upon close inspection, management discovered inherent process and support inefficiencies, such as up to 24 different handoffs of the policy paperwork, separate appeals processes for both sales and underwriting, and separate computer systems for each department. By combining process redesign with a more powerful, integrated information system, Liberty was able to reduce cycle times by one-half, eliminated virtually all policy handoffs, and was able to significantly reduce appeals to policy denials. IBM Credit Corporation reports that the process to approve credit for IBM customers of computers, software, and services was redesigned from five steps and an average cycle time of seven days to a one-person, four hour process — a 90 percent improvement in cycle time and hundredfold improvement in productivity. Again, better designed and integrated information systems were part of the total solution. Eastman Chemical found that maintenance staff were spending as much as 50 percent of their time finding and ordering equipment parts. By combining process redesign with a computerized maintenance information system, Eastman Chemical reports it was able to cut by 80 percent the time needed to find and order materials. As a result, maintenance productivity has risen sharply and the company is saving more than $1 million every year in duplicate inventory costs. The Department of Interior’s Bureau of Reclamation has concluded that mission rescoping has resulted in a focus on water resources management rather than building large public works projects. The Bureau reports that reengineering and better use of technology has resulted in a grants approval process being reduced from 15 steps over 6 months to 5 steps and one week. Similarly, fish ladder design and funding approval processes have been streamlined from 21 steps taking over 3 years to eight steps taking just 6 months. Nonetheless, just as technology can help produce impressive success stories, it can also become the focus of costly business failures. Dramatic, captured results can be few and far between. A recent research study conducted by The Standish Group on private and public sector organizations in the United States confirms this troubling trend.According to the research, IT executives report that one-third of all systems development projects are cancelled before they are ever completed. This statistic highlights the reality of the complexity in planning, designing, and managing successful IT projects. IT executives participating in the Standish Group research also reported that only 16 percent of all IT projects were considered successful—that is, judged to have accomplished what was expected within the budget anticipated at the outset. In addition, of those IT projects that are completed, only about 42 percent of the largest companies are successful in meeting their initial objectives. In addition, the study’s participants reported that over 50 percent of IT projects exceed their original cost estimates by almost 200 percent. These statistics serve as a stark reminder that information systems projects carry high risks of failure if not carefully managed and controlled. Although no comparable data is available that focuses exclusively on the federal government, our work on specific systems projects has found a cascade of problems—ranging from poorly defined requirements, poor contractor oversight, and inadequate system design to managerial and technical skill deficiencies—have led to project terminations, delays, or suspensions of procurement authority. In addition, three agencies with oversight responsibility—GAO, OMB, and GSA—have identified problems that selected systems development efforts or IT operations are having. Each agency has constructed a corresponding “high-risk” list to help focus top management attention on the problems and implement effective remedial actions. Of the 18 agencies and departments representing over 90 percent of total federal spending on information management and technology, nine have IT projects or areas of IT management on one or more of these high risk lists. Table 1 lists the eleven agencies and projects that are currently on high risk lists. GAO has testified regularly on the urgent need for basic management reforms in the federal government. Systems development efforts often fail due to inadequate management attention and controls. Despite the visibility and oversight focus on many large systems development efforts, agency management has often been ineffective in reducing the risks associated with large, multi-year projects. For example, in our July 1995 review of IRS’ Tax System Modernization, we found an absence of effective information management practices—such as IT investment selection, control, and evaluation processes—which were placing selected modernization projects at risk of failing to meet critical business needs.The absence of these practices places executive level understanding and support of the technology project in jeopardy and reduces accountability for project success. Inadequate project management, poor contractor oversight, and a shortage of staff with appropriate technical skills have also contributed greatly to systems development problems. After investing over 12 years and more than $2.5 billion, the Federal Aviation Administration (FAA) chose to cut its losses in its problem-plagued $6-billion Advanced Automation System (AAS) by either cancelling or extensively restructuring elements of this effort to modernize our nation’s air traffic control system. Our work showed that AAS’ problems were attributable to FAA’s failure to (1) accurately estimate the technical complexity and resource requirements for the effort, (2) stabilize system requirements, and (3) adequately oversee contractor activities. We are also finding that agencies have not instituted a well-defined investment control process to manage the quality of systems development efforts and monitor progress and problems at an executive level. Our recent analysis of the potential risks associated with the Health Care Financing Administration’s (HCFA) Medicare Transaction System (MTS) illustrates this problem. MTS, though small in comparison to larger modernization efforts in other agencies, is one of the most critical new claims-processing systems being put into government today. When the system becomes operational in 1999, HCFA expects it to process over 1 billion claims annually and be responsible for paying $288 billion in benefits per year. Although MTS is in its early development stages, our work last November found that HCFA is experiencing a series of problems related to requirements definition, project schedule, and project cost. Some of these are classic symptoms associated with the fate of other large, complex systems projects—extensive delays and schedule compression early in the project along with ill-defined systems requirements and objectives. It is important that federal executives learn from leading organizations that have been successful in applying and managing technology to thorny business problems as well as opportunities for change. To help federal agencies improve their chances of success, we completed a study of how successful private and public organizations designed and implemented information systems that significantly improved their ability to carry out their missions. Our report describes an integrated set of fundamental management practices that are instrumental in producing success. The active involvement of senior managers, focusing on minimizing project risks and maximizing return on investment, are essential. To accomplish these objectives, senior managers in successful organizations consistently follow these practices to ensure that they receive information needed to make timely and appropriate decisions. Executives in leading organizations manage through three fundamental areas of practices. First, they decide to work differently by quantitatively assessing performance against leading organizations and recognizing that program managers and stakeholders need to be held accountable for using information technology well. Second, they direct their scarce resources toward high-value uses by reengineering critical functions and carefully controlling and evaluating IT spending through specific performance and cost measures. Third, they support major cost reduction and service improvement efforts with the up-to-date professional skills and organizational roles and responsibilities required to do the job. Table 2 illustrates the set of management practices we found in the leading organizations we studied. The power and the attraction of these practices is that they are intuitive and straightforward. And when used, they can help produce repeatable success. Some of our case study organizations experienced dramatic improvements, such as the proportion of IT projects completed on-time, within budget, and according to specified requirements going from 50 percent to 85 percent in two years, a 158 percent increase in workload being handled with the same level of staffing because of redesigned processes and modern, integrated information systems, and a 14-fold increase in benefits returned from information systems projects—from 9 percent of that projected to 133 percent of that projected. But, as experience shows us, the challenge lies in the discipline and rigor with which they are consistently applied by organizations. Rather than discuss each practice individually, let me focus on a few key ones and highlight their importance in the context of an overall strategic management framework. In the information age, top executives have the responsibility not only to define business goals, but also to initiate, mandate, and facilitate major changes in information management to support the achievement of these goals. Top executives must get personally involved in understanding the relative costs, benefits, risks, and returns associated with information technology investments they are making decisions about and allocating resources to. Unless top executives make these linkages, meaningful change can be slow and sometimes impossible. Driven by budget constraints, one chief executive in our case study sample benchmarked existing systems development capabilities against industry standards. The CEO discovered that the company was getting only a small fraction of expected benefits from systems investments, while taking twice as long and spending four times the resources compared to an industry standard. To correct this, the CEO fostered partnerships between business unit managers and IT professionals that focused on building information systems with measurable benefits. Within 3 years, some tangible payoffs from this approach were occurring. Returns on IT investments rose from $2 million to $20 million per year, applications development and productivity improvements increased steadily, and staff resources were moved from maintaining existing computer applications to more strategic reengineering development and support. New technology alone will not improve performance or solve operational problems. It is merely a tool—albeit a powerful one—that supports work processes and the decisions surrounding those processes. If the work processes are inherently inefficient, then technology will not have substantive impact. Accomplishing dramatic improvements in performance usually requires streamlining or fundamentally redesigning existing work processes. Information technology projects must then become focused on improving the way work is done rather than simply automating existing, outmoded processes. As we have seen in the federal government, initiating information systems development projects to replace old technology or automate processes in and of itself is often a poor project justification. In one company we examined, long customer waits and unacceptable error and rework rates were threatening successful business growth. Business unit executives and information technology professionals worked together to redesign existing work processes and systems. As a result, a customer process that used to involve 55 people, 55 procedural steps, and a 14-day service delivery was reduced to one person, one phone call, and one step with a 3-day service delivery. Applying technology to new business processes cannot be done in an organizational vacuum. It requires careful consideration of the technical platform, or architecture, of the information systems. If several process improvement efforts are pursued in an unintegrated fashion, they may result in the creation of many new information systems that are isolated from each other. Such fragmentation can seriously inhibit the organization’s ability to share information assets or leverage the benefits of new technology across the organization. The importance of developing and managing an integrated information architecture is one reason why sound strategic information planning is so critical. Strategic planning often is depicted as “visionary” thinking or “where we want to go, whether we can get there or not.” In the federal government, strategic management at the enterprise level is often a well-orchestrated paper chase responding to bureaucratic requirements and short-term crises, rather than an integrated, institutionalized process that focuses on producing results for the public. Conversely, in the leading organizations we visited, strategic business and information systems plans were always grounded in explicit, high-priority customer needs. Planning, budgeting, program execution, and evaluation are conducted in a seamless fashion, with the outputs of one process a direct input into the other. Most importantly, strategic goals, objectives, and direction are used to actually manage and evaluate the performance of the organization. In one state revenue collection agency we examined, they decided to use the external customer—the taxpayer—as the focus for rethinking and redesigning its services. Using customer focus groups, comprised of individual taxpayers, small businesses, and large corporations, they redesigned the revenue collection process. Information systems and technology were used to maintain customer profiles to assist the agency in responding to questions, problems, and special situations for each taxpayer. Getting the most out of scarce resources available to spend on IT is another key to success. Executives expect meaningful bottom-line improvements in the outcomes of key business process changes and applications of information systems and related technologies. For this reason, leading organizations carefully measure the performance of their processes, including the contribution that technology makes to their improvement. Senior management is personally involved in project selection, control, and evaluation and uses explicit decision criteria for assessing the mission benefits, risks, and costs of each project. One leading organization we studied uses a “portfolio” investment process—based on decision criteria for assessing costs, benefits, and risks—to select, control, and evaluate information systems projects. As a consequence of more carefully scrutinizing proposed benefits and measuring actual performance results, the company realized a 14-fold increase in the return on investment from IT projects within 3 years. The key to this investment approach is the ability to identify early—and avoid—investments in projects with low potential to provide improvements in program outcomes. Without this focus, organizations can easily become entangled in a web of difficult problems, such as unmanaged development risks, low-value or redundant IT projects, and an overemphasis on maintaining old systems at the expense of using technology to redesign outmoded work processes. Leading organizations have found that one important means for establishing a clear organizational focus for information management is to position a Chief Information Officer (CIO) as a senior partner with the organization’s top executives. The position itself is not the solution. What matters is the influence that the right person can bring to bear on strategic management issues and IT’s role in both helping resolve existing performance problems and capturing potential from new opportunities. An effective CIO should: serve as a bridge between top executives, line management, support staff, advise top executives and senior managers on the worthiness of major technology decisions and investments, work with managers to understand and define the role of IT in helping achieve expected business or program outcomes, creating a joint partnership with line management to achieve successful project outcomes, design and manage the system architecture supporting the business needs and decision-making processes of the organization, and set and enforce appropriate technical standards to facilitate the effective use of information resources throughout the entire organization. In one of our case study organizations, prior to establishing a CIO, the cost of maintaining and enhancing existing systems consumed nearly all the organization’s IT budget. There was no one to focus senior management attention on critical information management and technology decisions. Once an experienced CIO was put in place, technology investment decisions became highly visible and line executives were held accountable for the business case underlying these decisions. The CIO focused on improving the speed, productivity, and quality of IT products and services. A key CIO responsibility is to promote a productive relationship between the users of technology and the information management and systems staff who support them. Managers in leading organizations recognize that they are customers of IT products and services. They assert control over the funding of IT projects and take responsibility for understanding and helping to define the technology needed to support their work. The IT professionals then act as suppliers, working to support efforts to meet clearly defined management objectives, make critical decisions, and solve business problems. This requires facilitation, mediation, balance, and consensus—particularly when weighing the needs of individual business units with the corporate needs of the organization. The CIO can help make this process work smoothly. If the management focus of leading organizations who are successful at applying technology to business needs and problems are compared with typical management practices found in federal departments and agencies, major differences appear. Table 3 summarizes some of the primary discrepancies. Congress has provided clear direction to move the debate from whether to change information management practices in the government to what exactly to change and how to do it. Significant changes in law have already occurred that represent major, positive steps forward in pushing for greater top management responsibility and accountability for successful IT outcomes and provide the impetus for improvements in agency management approaches. Last year, the Paperwork Reduction Act was revised to include many of the fundamental management practices endorsed by our research. For example, strategic IT planning provisions explicitly call for linkages between agency business plans and IT projects. This strategic planning is to be anchored in customer needs and mission goals. Moreover, the agency head is now directly responsible for ensuring that IT-related activities directly support the mission of the agency. Additionally, IT projects are to be managed as investments, with a process put in place to maximize the value and assess and manage the risks of major IT initiatives. In addition, OMB has revised its Circular A-130—the primary governmentwide policy guidance for strategic information management planning—to require agencies to (1) improve the effectiveness and efficiency of government programs through work process redesign and appropriate application of information technology, (2) conduct benefit-cost analyses to support ongoing management oversight processes that maximize return on investment, and (3) conduct post-implementation systems reviews to validate estimated benefits and costs. Most notable is the Information Technology Management Reform Act of 1996 that has been passed as an amendment to the Fiscal Year 1996 DOD Authorization Act. Not only does this legislation effectively build upon management and strategic planning themes in the Government Performance and Results Act and the Paperwork Reduction Act, it also contains some of the most significant changes made to IT planning, management, and procurement in decades. Agencies are required to use capital planning and investment processes for reaching decisions about IT spending, rigorously measure performance outcomes of IT projects, and appoint Chief Information Officers to ensure better accountability for technology investments. In addition, the procurement process has been streamlined to allow agencies more flexibility in buying commercially available products and awarding contracts. Collectively, these changes in law and regulation should make it clear to agency leaders what the Congress and the Administration intend to be done differently in investing and managing information and technology. Just as important as the “what to do” is the “how to make it happen.” Agency managers need new methods and tools that will help facilitate fact-based discussions and analyses of proposed IT investments. Toward this end, we have developed a strategic information management assessment guide used in five agencies and departments to date—Housing and Urban Development, Coast Guard, IRS, Pension Benefit Guaranty Corporation, and the Bureau of Economic Analysis. This analysis has been used to identify management strengths and weaknesses and to construct corrective action plans. Several of these agencies have reported that the implementation of new management processes in concert with our best practices framework has helped save several millions of dollars by consolidating systems with business function redundancies, and cancelling questionable low-value IT investments. Other agencies have conducted self-assessments on their own, and we are in the process of obtaining feedback on their results. OMB has also published an IT investment analysis guide, which provides agencies with a structured management process for reaching decisions about selecting, controlling, and evaluating IT investment projects. Finally, we are developing more detailed management assessment guides for business process reengineering and IT performance measurement which we expect to distribute in the near future. Mr. Chairman, two key factors will inevitably affect changes to the government’s approach to information technology management. First, government leaders must facilitate success. Never before has there been such a sense of urgency to improve how the government is managing and acquiring its information and technology assets. Where possible, success stories both inside and outside of the federal government must be shared and senior agency managers must learn from them. The second key factor affecting long-term improvement to IT management in government is reinforcing accountability for results. In this regard, focused and consistent direction, advice, and oversight is needed from the Congress, the Executive Branch, and central oversight agencies. It is essential that the federal government’s IT portfolio be visibly monitored in the oversight process. Agencies should be required to produce performance baselines, report on all IT obligations and expenses, show projected versus actual project results, and establish a proven track record in managing and acquiring systems technologies. Oversight flexibility should be increasingly earned as demonstrated capability to deliver increases. With proper incentives and encouragement, agency managers can be expected to surface problems early and move towards management resolution before huge sums of money are expended. Budget and appropriations decisions as well as oversight hearings can focus on anticipated risks and returns of IT projects, interim performance results, and final evaluations of long-term improvements to program outcomes, service delivery, and cost effectiveness. This Subcommittee can play an important role in promoting new, effective management practices throughout the government by: providing oversight and guidance to federal agencies in implementing the IT-management related provisions of the Paperwork Reduction Act and the Information Technology Management Reform Act—similar to the very effective role you have played in overseeing the implementation of the Chief Financial Officers Act; focusing oversight attention on high risk IT projects and initiatives, such as your upcoming hearing planned on IRS’s financial management reforms and Tax System Modernization project; identifying and focusing agency attention on new systems development efforts that are demonstrating signs of managerial or technical problems early in their life cycle before huge sums of money have been spent, such as your recent hearing on HCFA’s Medicare Transaction System; and highlighting the importance of emerging information technologies and management techniques that can be effectively applied to the federal government. Mr. Chairman, this concludes my prepared testimony. We look forward to working with you and the Subcommittee in your efforts to improve the public’s return on investment in information technology. I would be glad to answer any questions you or other members of the Subcommittee may have at this time. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 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 how leading organizations' best practices can be effectively used to improve information technology (IT) management in the federal government. GAO noted that: (1) federal IT-related expenditures total over $25 billion per year, but the benefits from IT are unknown; (2) IT can be used to improve organizational performance, but risks of failure must be carefully managed to ensure successful decisions and project completions; (3) organizations that have successfully implemented IT projects have found that with rapidly changing technological power and choices, sustainable and effective management practices are needed to achieve consistent success; and (4) federal agencies must facilitate success by implementing improved IT management processes and reinforce accountability to produce noticeable results with IT investments. |
About two-thirds of all Medicare beneficiaries live in areas where they can choose among traditional fee-for-service and one or more managed care plans. Although approximately 82 percent of beneficiaries are in the fee-for-service program, the percentage of beneficiaries enrolled in managed care plans is growing. Over the last 3 years, Medicare managed care enrollment has nearly doubled to almost 7 million members, as of March 1999. Most Medicare managed care enrollees are members of plans that receive a fixed monthly fee for each beneficiary they enroll. In enacting BBA, the Congress sought to widen beneficiaries’ health plan options. BBA permitted new types of organizations—such as provider-sponsored organizations and preferred provider organizations—to participate in Medicare. It also changed Medicare’s payment formula to encourage the wider availability of health plans. provide some basic comparative information about the various health care options available. HCFA is also required to mail basic comparative and other information to all beneficiaries. However, for detailed information about specific managed care plans, all of these resources direct beneficiaries to the MCOs that offer those plans—the only source for specific plan information. To inform Medicare beneficiaries—both those interested in enrolling and those already enrolled—about plan-specific information, MCOs distribute membership literature—packets of information that describe plan benefits, fees, and coverage restrictions. Membership literature may be mailed to interested beneficiaries or distributed directly by sales agents who work for the MCO. HCFA requires MCOs to include certain explanations in their member materials, such as provider restrictions; but otherwise, MCOs have wide latitude in what information is included and how it is presented. However, HCFA reviews all materials that MCOs distribute to beneficiaries. In addition to membership literature, HCFA reviews enrollment forms; administrative letters, such as those notifying beneficiaries of benefit changes; all advertising; and other informational materials. The review process is intended to help ensure that the information is correct and conforms to Medicare requirements. MCOs must submit these materials to HCFA, which has 45 days to conduct its review. If the agency does not disapprove of the materials within that period, the MCOs can distribute them. Medicare beneficiaries enrolled in a managed care plan have the right to appeal if their plan’s MCO refuses to provide health services or pay for services already obtained. If an MCO denies a beneficiary’s request for services—such as skilled nursing care or a referral to a specialist—it must issue a written notice that explains the reason for the denial and the beneficiary’s appeal rights. Such notices must also tell beneficiaries where and when the appeal must be filed and that they can submit written information to support the appeal. dissatisfied with CHDR’s decision have additional appeal options, provided certain requirements are met. A member who loses an appeal is responsible for the cost of any disputed health care services that were obtained. HCFA reviews each MCO’s plan appeals process as part of its biennial evaluation of each organization’s compliance with HCFA regulations. Our review of 16 Medicare MCOs found various types of flaws in the membership literature they distributed. The documents we examined were used by MCOs to inform prospective enrollees and members about covered services, fees, and restrictions. Although HCFA had reviewed and approved the documents, some incorrectly described plan benefit packages. In several instances, the information was outdated or incomplete. Some MCOs provided beneficiaries with detailed benefit information only after they had enrolled in a plan. We also found it difficult to compare benefit packages because MCOs are not required to follow common formats or use standard terms when describing their benefits. In contrast, each MCO that participates in FEHBP is required to distribute a single, comprehensive booklet that describes its benefit package using a standard format and standard terminology. Most MCOs’ plan documents contained errors or omitted information about the three benefits we reviewed—prescription drugs, mammography, and ambulance services. Problems ranged from minor inaccuracies to major errors. For example, documents from five MCOs we reviewed erroneously stated that beneficiaries needed a referral to obtain a routine annual mammogram—a Medicare-covered service. HCFA policy clearly states that plans cannot require a referral for annual mammograms and must inform beneficiaries of this policy. (See fig. 1 for HCFA policy and excerpts from Medicare plan materials.) We also found serious problems with plan information regarding coverage for outpatient prescription drugs—a benefit that attracts many beneficiaries to Medicare managed care plans. For example, a large, experienced MCO specified in its Medicare contract that its plan would provide brand name drug coverage of at least $1,200 per year. However, the plan’s membership literature indicated lower coverage limits—in some areas as low as $600 per year. Based on 1998 enrollment data, we estimate that over 130,000 plan members may have been denied part of the benefit to which they were entitled and for which Medicare paid. Another MCO, which used the same documents to promote its four plans, stated in its handbook that all plan members were entitled to prescription drug coverage. However, only two of the MCO’s four plans provided such coverage. A third MCO provided conflicting information about its drug coverage. Some documents stated that the plan would pay for nonformulary drugs, while other documents said it would not. Some MCOs distributed outdated information, which could be misleading. HCFA allows this practice if MCOs attach an addendum updating the information. HCFA officials believe this policy is reasonable because beneficiaries can figure out a plan’s coverage by comparing the changes cited in the addendum with the outdated literature. However, we found that some MCOs distributed outdated literature without the required addendum and that when MCOs included the addendum, it often did not clearly indicate that the addendum superseded the information contained in other documents. In addition, some MCOs did not put dates on the literature they distributed, which obscured the fact that the literature was no longer current. provided general descriptions of their plans’ ambulance coverage but did not explain the extent of the coverage. constitutes only a summary of the . . . . The contract between HCFA and the [MCO] must be consulted to determine the exact terms and conditions of coverage. HCFA officials responsible for Medicare contracts, however, said that if a beneficiary were to request a copy of the contract, the agency would not provide it due to the proprietary information included in an MCO’s contract proposal. Furthermore, an MCO is not required to provide beneficiaries with copies of its Medicare contract. MCO officials with whom we spoke differed in their responses about whether their organizations would provide beneficiaries with copies of their Medicare contracts. Some MCOs we reviewed provided detailed benefit information only after beneficiaries had enrolled. The information packages distributed by several MCOs we reviewed stated that beneficiaries would receive additional, detailed descriptions of plan benefits, costs, and restrictions following enrollment. In addition, four MCOs did not provide 1998 benefit details until several months after the new benefits took effect. In fact, one MCO did not distribute its detailed benefit information until August—8 months after the benefit changes had taken effect. The membership literature we reviewed varied considerably in terminology, depth of detail, and format. These variations are similar to those that we encountered in previous reviews undertaken for this Committee and greatly complicated benefit package comparisons. The lack of clear and uniform benefit information likely impedes informed decisionmaking. HCFA officials in almost every region noted that a standard format for key membership literature, along with clear and standard terminology, would help beneficiaries compare their health plan options. To illustrate this problem, we identified the location in each MCO’s plan literature where enrollees would find answers to basic questions regarding coverage of the three benefits we studied. This information was often difficult to find; enrollees would have to read multiple documents to answer the basic coverage questions. For example, to understand the three plans’ prescription drug benefits, we had to review 12 different documents: 2 from Plan A, 5 from Plan B, and 5 from Plan C. (See fig. 2.) Medicare+Choice: HCFA Actions Could Improve Plan Benefit and Appeal Information Plan documents contradict one another as to whether the plan will cover a nonformulary drug. It was also not easy to know where to look for the information. For example, the answer to our question about whether a plan used a drug formulary was found in Plan A’s summary of benefits, in Plan B’s Medicare prescription drug rider, and in Plan C’s contract amendment. Plan C’s materials required more careful review to answer the question because the membership contract indicated the plan did not provide drug coverage. However, an amendment—included in the member contract as a loose insert—listed coverage for prescription drugs and the use of a formulary. To avoid the types of problems found in Medicare MCOs’ membership literature, OPM requires each participating health plan to describe, in a single document, its benefit package—that is, covered benefits, limitations, and exclusions—and to include a benefit summary in a standardized language and in OPM’s prescribed format. OPM officials update the mandatory language each year to reflect changes in the FEHBP requirements and to respond to organizations’ requests for improvements. Finally, OPM requires health plans to distribute plan brochures prior to the FEHBP annual open enrollment period so that prospective enrollees have complete information on which to base their decisions. OPM officials told us that all participating plans publish brochures that adhere to these standards. Plan membership literature is required to contain information on beneficiaries’ appeal rights. In addition, beneficiaries are supposed to be informed of their appeal rights when they receive a plan’s written notice denying a service or payment. HCFA requires denial notices to contain information telling beneficiaries where and how to file an appeal. Furthermore, denial notices are required to state the specific reason for the denial because vaguely worded notices may hinder beneficiary efforts to construct compelling counterarguments. Vague notices may also leave beneficiaries wondering whether they are entitled to the requested services and should appeal. Finally, HCFA regulations state that whenever MCOs discontinue plan services, such as skilled nursing care, they must issue timely denial notices to beneficiaries. Substantial evidence indicates, however, that many beneficiaries did not receive the required information when their MCOs denied services or payment for services. Denial notices were frequently incomplete or never issued, and many notices did not indicate the specific basis for the denial. Furthermore, beneficiaries often received little advance notice when their MCO discontinued plan services. studies by the OIG, using different methodologies, provide additional evidence that beneficiaries are not always informed of their appeal rights.In one study, the OIG surveyed beneficiaries who were enrolled or had recently disenrolled from a managed care plan. According to the survey results, 41 respondents (about 10 percent) said that their health plans had denied requested services. Of these, 34 (83 percent) of the respondents said that they had not received the required notice explaining the denial and their appeal rights. Most notices that we reviewed contained general, rather than specific, reasons for the denial. In 53 of the 74 CHDR cases that contained the required denial notices (notices were missing in 32 other cases), the notices simply said that the beneficiary did not meet the coverage requirements or contained some other vague reason for the denial. Likewise, representatives from several advocacy groups told us that in cases brought to their attention, the denial notices were often general and did not clearly explain why the beneficiary would not receive, or continue to receive, a specific service. HCFA regulations state that whenever MCOs discontinue plan services, they must issue timely denial notices to beneficiaries. The regulations, however, do not specify how much advance notice is required before coverage is discontinued. Beneficiaries who receive little advance notice may not be able to continue to receive services because of their potential financial liability. If the beneficiary appeals and loses, he or she is responsible for the cost associated with the services received after the date specified in the denial notice. In three of the MCOs we visited, the general practice was to issue the denial notices the day before the services were discontinued. We found that many skilled nursing facility (SNF) discharge notices were mailed to the beneficiary’s home instead of being delivered to the facility. In other cases, it appeared that the beneficiary or his or her representative received the notice a few days after the beneficiary had been discharged from the SNF or the SNF coverage had ended. Ten of the 25 SNF discharge cases we reviewed at CHDR also involved the receipt of a notice after the patient had been discharged. The fourth MCO we visited issued SNF discharge notices 3 days prior to the discharge date. This lead time helped ensure that a beneficiary received the notice before the discharge date. It also allowed more time for the beneficiary to file an expedited appeal and receive a decision from the plan. Consequently, beneficiaries in this MCO’s plan who appeal and lose are less exposed to the SNF costs incurred during the appeals process. Officials from all the MCOs we visited said that, in almost every instance, the decision to discharge a beneficiary from a SNF is made days in advance and that discharge notices could be issued several days prior to discharge. Although HCFA reviews and approves all materials that MCOs distribute to beneficiaries, weaknesses in the agency’s review practices and information standards allowed the plan information problems we observed to go uncorrected. One weakness is that HCFA reviewers must rely on a faulty document to determine whether plan member materials are correct. In addition, HCFA review practices are sometimes inadequate to detect or correct the problems we found. Finally, HCFA has not used its authority to require that MCOs use a common format and terminology to describe their plans’ benefit packages. To ensure the accuracy of membership literature, HCFA reviewers are instructed to compare each MCO’s membership literature to its Medicare contract. Specifically, HCFA reviewers are expected to rely on one particular contract document—the Benefit Information Form—which summarizes plan benefits and member fees. Reviewers told us, however, that this contract document often does not provide the detail they need. Consequently, they sometimes rely on benefit summaries provided by the MCOs to verify the accuracy of plan information. This practice is contrary to HCFA policy, which requires an independent review of MCOs’ plan literature. The reviewer who approved the plan literature advertising a $600 annual drug benefit, instead of the contracted $1,200 annual limit, said that the mistake was caused by her reliance on a benefit summary provided by the MCO. copies of the printed documents, they are often unaware as to whether MCOs have made the required corrections. Shortcomings in HCFA’s monitoring procedures also limit the agency’s ability to ensure that beneficiaries know that plans’ service and payment decisions can be appealed. For example, to determine whether MCOs informed beneficiaries of their appeal rights, HCFA’s monitoring protocol requires agency staff to review a sample of appeal case files. HCFA staff check these files to determine whether each contains a copy of the required denial notice. However, it seems reasonable to assume that beneficiaries who appeal are more likely to have been informed of their rights than those who do not appeal. Yet, HCFA does not generally check cases where services or payment for services were denied but not appealed. Furthermore, when MCOs contract with provider groups to perform certain administrative functions, such as issuing denial notices, HCFA staff generally do not check to see that the delegated duties were carried out in accordance with Medicare requirements. HCFA has the authority to set standards for the format, content, and timing of the plan information that MCOs distribute to beneficiaries. Unlike OPM, however, HCFA has made little use of its authority. Instead, each MCO decides on the format—and to large extent, content and timing—of the plan information it distributes. In addition to making plan comparisons more difficult, the lack of common information standards has adversely affected HCFA’s review process. First, the lack of standards has resulted in inconsistent review practices and misleading comparisons. For example, one MCO representative told us that several MCOs’ plans in its market area required a copayment for ambulance services if a beneficiary was not admitted to a hospital, but not every MCO was required to disclose that fact. Consequently, although the plans had similar benefit restrictions, the MCOs that were required to disclose the plan restrictions appeared to offer less generous benefits than the other MCOs’ plans. considerable amount of time reviewing plan documents that could be standard administrative forms—such as member enrollment applications—and thus had less time to spend reviewing important documents describing plan benefits. HCFA is moving to address some of the problems and systemwide shortcomings we identified during our recent reviews. For example, HCFA is working to revise the contract document that agency reviewers use to verify the accuracy of plan information. The proposed new contract document will help ensure that HCFA collects the same information from each plan and presents the information in a consistent format and in greater detail than the current document. The agency expects to test this new document later this year and fully implement it in 2000. HCFA officials believe that the Office of Management and Budget’s clearance process for the proposed new contract document must begin no later that August 1999 to meet this timetable. Otherwise, full implementation could be delayed. Agency officials recognize the importance of more uniform membership literature and have articulated their intent to standardize key documents in future years. As a first step, the agency established a work group—consisting of representatives from HCFA, MCOs, senior citizen advocacy groups, and other relevant entities—to develop a standard format and common language for MCOs’ plan benefit summaries. HCFA hopes to establish these new standards by next month so MCOs’ fall 1999 benefit summary brochures can follow the new standards. HCFA’s long-term goals involve the establishment of standards for other key documents. However, the agency has not yet developed a strategy for its long-term efforts or decided whether the information standards it sets will be voluntary or mandatory. HCFA officials said they have also undertaken several initiatives to help ensure that beneficiaries are informed of their appeal rights and the steps necessary to file an appeal. Sometime this year, HCFA intends to publish additional instructions regarding the content of denial notices. The agency will also revise its monitoring protocol to better ensure that MCOs issue the required denial notices. Finally, HCFA is working to develop timeliness requirements for the issuance of notices when MCOs reduce or discontinue services, such as skilled nursing care, home health care, or physical therapy. As the Medicare+Choice program grows and more health plan options become available, the need for reliable, complete, and useful information will increase. In our recent reviews, however, we found major problems in the plan information that some MCOs provided to beneficiaries. In several instances the information was incorrect or incomplete; in other cases, the problem was poor timing—important information was distributed long after the benefit package had changed or only after beneficiaries had enrolled in a plan. None of the information was provided in a format that facilitated comparisons among plans. We also found that some MCOs did a poor job informing beneficiaries about their appeal rights and the appeals process. HCFA has both the authority and the responsibility to ensure that Medicare MCOs distribute information that helps beneficiaries make informed decisions. To date, however, its policies and practices have fallen short of that mark. HCFA’s review of plan information has been inadequate and has not prevented plans from distributing incorrect and incomplete information. Furthermore, unlike OPM, HCFA has not set standards for plan information that could facilitate informed decisions. The agency is taking some steps to address the problems we identified. We believe, however, that these problems will not be fully addressed until HCFA implements our past and current recommendations by setting information standards for MCOs and requiring them to adhere to those standards. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions you or other Members of the Committee might have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO discussed the: (1) accuracy, completeness, and usefulness of the information Medicare managed care organizations (MCO) distribute about their plans' benefit packages; (2) extent to which MCOs inform beneficiaries of their plan appeal rights and the appeals process; and (3) Health Care Financing Administration's (HCFA) review, approval, and oversight of the plan information that MCOs distribute. GAO noted that: (1) it found problems with the benefit information distributed by all of the 16 MCOs it reviewed; (2) although HCFA had reviewed and approved all of the information GAO examined, some MCOs misstated the coverage they were required by Medicare or their contracts to offer; (3) one MCO advertised a substantially less generous prescription drug benefit than it had specified in its Medicare contract; (4) some MCOs provided complete benefit information only after a beneficiary enrolled; (5) others never provided full descriptions of benefits and restrictions; (6) as GAO has reported previously, it is difficult to compare available options using literature provided to beneficiaries because MCOs use different formats and terminology to describe the benefit packages being offered; (7) the variation in Medicare plan literature contrasts sharply with the uniformity of plan information distributed by MCOs that participate in the Federal Employees Health Benefits Program (FEHBP); (8) MCOs participating in FEHBP are required to provide prospective enrollees with a single, comprehensive, and comparable brochure to facilitate informed choice; (9) in GAO's study of the appeals process, GAO found that when MCOs deny plan services or payment, they do not always inform beneficiaries of their appeal rights; (10) sometimes MCOs issue denial notices that do not contain all the information that HCFA requires; (11) GAO also found that some MCOs delay issuing denial notices until the day before discontinuing services, such as skilled nursing care; (12) this delay can increase a beneficiary's potential financial liability should the beneficiary appeal the plan's decision and lose; (13) many of the information problems GAO identified regarding plan benefit packages and beneficiaries' appeal rights went uncorrected because of shortcomings in HCFA's review practices; (14) in addition, HCFA has not exercised its authority to require MCOs to distribute plan information that is more complete, timely, and comparable; (15) agency officials recognize many of the shortcomings GAO identified and are beginning efforts to address them; and (16) however, GAO believes that the agency could do more. |
The FCS concept is designed to be part of the Army’s Future Force, which is intended to transform the Army into a more rapidly deployable and responsive force that differs substantially from the large division-centric structure of the past. The Army is reorganizing its current forces into modular brigade combat teams, each of which is expected to be highly survivable and the most lethal brigade-sized unit the Army has ever fielded. The Army expects FCS-equipped brigade combat teams to provide significant warfighting capabilities to DOD’s overall joint military operations. The Army has also instituted plans to spin out selected FCS technologies and systems to current Army forces throughout the program’s system development and demonstration phase. The FCS program is recognized as being high risk and needing special oversight. Accordingly, in 2006, Congress mandated that the Department of Defense (DOD) hold a milestone review following its preliminary design review. Congress directed that the review include an assessment of whether (1) the needs are valid and can best be met with the FCS concept, (2) the FCS program can be developed and produced within existing resources, and (3) the program should continue as currently structured, be restructured, or be terminated. Congress required the Secretary of Defense to review and report on specific aspects of the program, including the maturity of critical technologies, program risks, demonstrations of the FCS concept and software, and a cost estimate and affordability assessment. This statement is based on work we conducted between March 2007 and March 2008 and is 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. Ideally, the Army should have entered development in 2003 with firm requirements and mature technologies. However, the FCS program will be challenged to meet these markers by the time of the preliminary design review in 2009. The Army has only recently formed an understanding of what will be expected of the FCS network. Complementary programs, necessary to the success of the FCS, are not yet fully synchronized with the FCS schedule and face funding and technical challenges. By 2009, the Army will have spent 6 years and $18 billion on these initial efforts, with the costlier components of a development program still to come. It will be years before demonstrations validate that the FCS will provide needed capabilities. While the Army should have firmed requirements at the outset of its development program, it now faces a daunting task in completing this work by the preliminary design review and subsequent milestone review in 2009—6 years into a 10-year development schedule. Many of FCS’s thousands of requirements are almost certain to be modified as the program approaches these reviews. The Army’s decision to restructure the program in early 2007, reducing the set of systems from 18 to 14, resulted in requirements modifications, deferrals, and redistributions that affected the requirements balance among the remaining systems. As this program adjustment is implemented, further requirements changes to the systems, as well as to the network, could be required. The Army also continues to make design trade-offs to accommodate restrictions such as space, weight, and power constraints; affordability; and technical risks, such as transport requirements for manned ground vehicles. FCS software development is hampered by incomplete requirements and designs for the information network. While the Army’s user community expects that FCS will deliver capabilities that are as good as or better than current forces, this position is based on the results of modeling and simulation activities—it will be several years before field demonstrations validate the user community’s position. FCS’s critical technologies remain at low maturity levels. According to the Army’s latest technology assessment, only two of FCS’s 44 critical technologies have reached a level of maturity that, based on best practice standards, should have been demonstrated at program start. Even applying the Army’s less rigorous standards, only 73 percent can be considered mature enough to begin system development today. The technological immaturity, coupled with incomplete requirements, is a mismatch that has prevented the Army from reaching the first critical knowledge point for this program—a precursor for cost growth. Many of these immature technologies may have an adverse cumulative impact on key FCS capabilities such as survivability. In addition, the Army is struggling to synchronize the schedules and capabilities of numerous essential complementary programs with the overall FCS program. The Army has identified problems that raise concerns about the likelihood that many complementary systems will deliver the required capabilities when needed. In some cases, complementary programs have been adversely affected by FCS demands, and in others, lack of coordination between FCS and complementary program officials has stalled efforts aimed at synchronizing programs and resolving cost, schedule, and technical issues. It is not yet clear if or when the information network that is at the heart of the FCS concept can be developed, built, and demonstrated by the Army and lead system integrator (LSI). Significant management and technical challenges—owing more to the program’s complexity and immaturity than to the approach to software—have placed development of the network and software at risk. These risks include network performance and scalability, immature network architecture, and synchronization of FCS with Joint Tactical Radio System (JTRS) and Warfighter Information Network-Tactical programs that have significant technical challenges of their own. The amount of estimated software code required for the FCS network and platforms has recently increased to 95.1 million lines. This is nearly triple the size of the original estimate in 2003, and the largest software effort by far for any weapon system. Software code is difficult to estimate, and underestimation is not unique to FCS. Compounding this inherent difficulty on FCS were the program’s poorly defined requirements, indicative of its immaturity. Lines of code have grown as requirements have become better understood. The Army believes the latest increases will not substantially increase software development costs, but updated Army and independent cost estimates will not be available until next year. Previously, the independent estimates have differed sharply from the Army’s in the area of FCS software development costs. Although several disciplined practices are being used to develop FCS’s network and software, the program’s immaturity and aggressive pace during development have delayed requirements development at the software developer level. For example, software developers for five major software packages that we reviewed report that high-level requirements provided to them were poorly defined, omitted, or late in the development process. These caused the software developers to do rework or defer functionality to future builds. In turn, these poor or late requirements had a cascading effect that caused other software development efforts to be delayed. It is unclear when or how it can be demonstrated that the FCS network will work as needed, especially at key program junctures. For example, in 2009, network requirements, including software, may not be well defined nor designs completed at the preliminary design review; and at the FCS milestone review later that year, network demonstration is expected to be very limited. The Army and LSI have identified and need to address numerous areas of high risk such as network performance and scalability. The first large scale FCS network demonstration—the limited user test in 2012—will take place at least a year after the critical design review and only a year before the start of FCS production. That test will seek to identify the impact of the contributions and limitations of the network on the ability to conduct missions. This test will be conducted after the designs have been set for the FCS ground vehicles, a situation that poses risks because the designs depend on the network’s performance. A full demonstration of the network with all of its software components will not be demonstrated until at least 2013 when the fully automated battle command system is expected to be ready. When FCS reaches its planned preliminary design review in 2009, the Army will have expended over 60 percent of its development funds and schedule. However, much will still need to be done in terms of technology maturation, system integration and demonstration, and preparing for production—all three knowledge points fundamental to a successful acquisition. Large scale demonstrations of the network will not occur until after manned ground vehicles, which depend on the performance of the network, are already designed and prototyped. The Army does not plan to demonstrate that the FCS system of systems performs as required until after the production decision for the core program in 2013. That would preclude opportunities to change course if warranted by test results and increasing the likelihood of costly discoveries in late development or during production. The cost of correcting problems in those stages is high because program expenditures and schedules are less forgiving than in the early stages of a program. Conversely, the test standards we apply reflect the best practice of having production-representative prototypes tested prior to a low rate production decision. This approach demonstrates the prototypes’ performance and reliability as well as manufacturing processes—in short, that the program is ready to be manufactured within cost, schedule, and quality goals. While the FCS production decision for the core FCS program is to be held in fiscal year 2013, production commitments will begin in fiscal years 2008 and 2009 with production for the first of a series of three planned spin out efforts and the early versions of the NLOS-C vehicle. When considering these activities, along with long-lead and facilitization investments associated with the production of FCS core systems, a total of $11.9 billion in production money will have been appropriated and another $6.9 billion requested by the time of the production decision for the FCS core systems in 2013. When development funds are included, $39 billion will have been appropriated and another $8 billion requested. As noted previously, key demonstrations will not yet have taken place by this time. Also, in April 2007, the Army announced its intention to contract with the LSI for the production for the first three brigade combat teams of FCS systems, the production of the FCS spin out items, and the early production of NLOS-C vehicles. This decision makes an already unusually close relationship between the Army and the LSI even closer, and heightens the oversight challenges FCS presents. In 2004, the Army revised its acquisition strategy to bring selected technologies and systems to current forces via spin outs while development of the core FCS program is underway. The first of these spin out systems will be tested and evaluated in the coming year, and a production decision is planned in 2009. However, the testing up to that point will feature some surrogate subsystems rather than the fully developed subsystems that would ultimately be deployed to the current forces. For example, none of the tests will include fully functional JTRS radios or associated software. The Army believes this strategy is adequate; however, testing of surrogates may not provide quality measurements to gauge system performance, and the Army may have to redesign if JTRS radios have different form, fit, and function than expected. Taken together, these spin out 1 capabilities serve as a starting point for FCS but represent only a fraction of the total capability that the Army plans for FCS to provide. The Army has general plans for a second and third set of spin out items but, according to the Army, these have not yet been funded. Responding to congressional direction, the Army will begin procuring long lead production items for the NLOS-C vehicle in 2008. The Army will deliver six units per year in fiscal years 2010 through 2012; however, these early NLOS-C vehicles will not meet threshold FCS requirements and will not be operationally deployable without significant modifications. Rather, they will be used as training assets for the Army Evaluation Task Force. To meet the early fielding dates, the Army will begin early production of the NLOS-C vehicles with immature technologies and designs. Several key technologies will not be mature for several years, and much requirements and design work remains on the manned ground vehicles, including the NLOS-C. Significant challenges involving integrating the technologies, software, and design will follow. To the extent these aspects of the manned ground vehicles depart from the early production cannons, costly rework of the cannons may be necessary. The Army is planning a seamless transition between NLOS-C production and core FCS production. However, beginning the production of NLOS-C vehicles 5 years before the start of FCS core production could create additional pressure to proceed with FCS core production. Moreover, to the extent that beginning NLOS-C production in 2008 starts up the manned ground vehicle industrial base, it could create a future need to sustain the base. If decision makers were to consider delaying FCS core production because it was not ready, a gap could develop when early NLOS-C production ends. Sustaining the industrial base could then become an argument against an otherwise justified delay. The Under Secretary of Defense for Acquisition, Technology, and Logistics recently took steps to keep the decisions on the NLOS-C early production separate from FCS core production. In approving procurement of long lead items for the NLOS-C vehicles in 2008, the Under Secretary designated the 18 early prototypes as a separate, special interest program for which he will retain authority for making milestone decisions. The Under Secretary will make a second decision in 2009 whether to approve NLOS-C production and has put a cost limit of $505.2 million (fiscal year 2003 dollars) on production of these vehicles. He also added that specific requirements be met at that time, such as a capability production document, technology readiness assessment, test plan, independent estimate of costs, and an approved acquisition program baseline. This is a positive step in ensuring that the Army’s efforts to meet Congressional direction do not result in unfavorable consequences. The Army’s April 2007 decision to contract with the LSI for FCS production makes an already close relationship closer, represents a change from the Army’s original rationale for using an LSI, and may further complicate oversight. The specific role the LSI will play in production of spin outs, NLOS-C, and FCS core production are unclear at this point. According to program officials, the statements of work for the long lead items contracts for spin outs and NLOS-C have not yet been worked out. The statements of work for the production contract will also be negotiated later. The work the LSI does in actual production of FCS is likely to be small compared to the other hardware suppliers and assemblers. Thus, the production role of the LSI is likely to be largely in oversight of the first tier subcontractors. From the outset of the program, the LSI was to focus its attention on development activities that the Army judged to be beyond what it could directly handle. Army leadership believed that by using an LSI that would not necessarily have to be retained for production, the Army could get the best effort from the contractor during the development phase while at the same time making the effort profitable for the contractor. Nonetheless, the LSI’s involvement in the production phase has been growing over time. The current LSI development contract for the core FCS systems extends almost 2 years beyond the 2013 production decision. The Army does not expect the initial brigades outfitted by FCS will meet the upper range of its requirements and has made the LSI responsible for planning future FCS enhancements during the production phase. Combined with a likely role in sustainment, the LSI will remain indefinitely involved in the FCS program. By committing to the LSI for early production, the Army effectively ceded a key point of leverage it had held—source selection—and is perhaps the final departure from the Army’s initial efforts to keep the LSI’s focus solely on development. This decision also creates a heightened burden of oversight in that there is now additional need to guard against the natural incentive of production from creating more pressure to proceed through development checkpoints prematurely. As we have previously reported, this is a burden that will need to be increasingly borne by the Office of the Secretary of Defense. The Army’s $160.9 billion cost estimate for the FCS program is largely unchanged from last year’s estimate despite a program adjustment that reduced the number of systems from 18 to 14. This may mean a reduction in capabilities of the FCS program and thus represents a reduction in the Army’s buying power on FCS. Further, two independent cost estimates— from DOD’s Cost Analysis Improvement Group (CAIG) and the other from the Institute for Defense Analyses (IDA), a federally funded research and development center—are significantly higher than the Army’s estimate. Both assessments estimate higher costs for software development, to which a recent increase in lines of code adds credence. The Army has not accepted either of the independent estimates on the grounds that they each include additional work scope, particularly in the later years of the development phase. Also, the CAIG and IDA both use historical growth factors in their estimates, based on the results of previous programs. It is reasonable to include such growth factors, based on our own analysis of weapon systems and the low level of knowledge attained on the FCS program at this time. Given the program’s relative immaturity in terms of technology and requirements definition and demonstrations of capabilities to date, there is not a firm foundation for a confident cost estimate. The Army has not calculated confidence levels on its estimates, though this is a best practice and could reduce the probability of unbudgeted cost growth. Under its current structure, the Army will make substantial investments in the FCS program before key knowledge is gained on requirements, technologies, system designs, and system performance, leaving less than half its development budget to complete significantly expensive work, such as building and testing prototypes, after its preliminary design review. The Army maintains that if it becomes necessary, FCS content will be further reduced, by trading away requirements or changing the concept of operations, to keep development costs within available funding levels. As the Army begins a steep ramp-up of FCS production, FCS costs will compete with other Army funding priorities, such as the transition to modular organizations and recapitalizing the weapons and other assets that return from current operations. Together, the program’s uncertain cost estimate and competing Army priorities make additional reductions in FCS scope and increases in cost likely. The deficiencies we cite in areas such as requirements and technology are not criticisms of progress in the sense that things should have gone smoother or faster. At issue, rather, is the misalignment of the program’s normal progress with the events used to manage and make decisions on such acquisitions—key decisions are made well before sufficient knowledge is available. The decision in 2009 will provide an opportunity to realign the progress of knowledge in FCS with events such as the critical design review and tests of prototypes before the production decision. The 2009 decision may also be the government’s last realistic opportunity to safeguard its ability to change course on FCS, should that be warranted. The first decision, as we see it, will have to determine whether FCS capabilities have been demonstrated to be both technically feasible and militarily worthwhile. If they have not, then DOD and the Army will need to have viable alternatives to fielding the FCS capability as currently envisioned. Depending on the results of the first decision, the second decision is to determine how to structure the remainder of the FCS program so that it attains high levels of knowledge before key commitments. Other aspects of the FCS program warrant attention that should not wait until the 2009 decision. Primary among these is the Army’s decision to extend the role of the LSI into FCS production. This is a decision that will necessarily heighten the role the Office of the Secretary of Defense will have to play in overseeing the program and departs from the Army’s philosophy of having the LSI focus on development without the competing demands and interests that production poses. A second aspect of the program warranting attention is the Army’s approach to spin outs. It will be important for the Army to clearly demonstrate the military utility of the spin outs to current Army forces, based on testing high-fidelity, production-representative prototypes, before a commitment is made to their low rate production. This is not the current plan, as the Army plans to use some surrogate equipment in the testing that will support the production decision for spin out 1. Finally, it is important that the production investments in the spin outs and NLOS-C do not create undue momentum for production of the FCS core systems. As noted above, commitment to production of the FCS core systems must be predicated on attaining high levels of knowledge, consistent with DOD policy. In our March 2008 reports, we made several recommendations to ensure that the 2009 FCS milestone review is positioned to be both well-informed and transparent. Specifically, we recommended that the Secretary of Defense establish objective and quantitative criteria that the FCS program will have to meet in order to justify its continuation and gain approval for the remainder of its acquisition strategy. The criteria should be set by at least July 30, 2008, in order to be prescriptive, and should be consistent with DOD acquisition policy and best practices. At a minimum, the criteria should include, among other things, the completion of the definition of all FCS requirements including those for the information network and the synchronization of FCS with all essential complementary programs. We also recommended that the Secretary of Defense, in advance of the 2009 milestone review, identify viable alternatives to FCS as currently structured that can be considered in the event that FCS does not measure up to the criteria set for the review. As we have previously reported, an alternative need not be a rival to the FCS, but rather the next best solution that can be adopted if FCS is unable to deliver the needed capabilities. For example, an alternative need not represent a choice between FCS and the current force, but could include fielding a subset of FCS, such as a class of vehicles, if they perform as needed and provide a militarily worthwhile capability. We further recommended that the Secretary of Defense (1) closely examine the oversight implications of the Army’s decision to contract with the LSI for early production of FCS spin outs, NLOS-C, and low rate production for the core FCS program; (2) take steps to mitigate the risks of the Army’s decisions, including the consideration of the full range of alternatives for contracting for production; and (3) evaluate alternatives to the LSI for long-term sustainment support of the FCS system of systems. Finally, regarding the FCS network and software development and demonstration efforts, we recommended that the Secretary of Defense (1) direct the FCS program to stabilize network and software requirements on each software build to enable software developers to follow disciplined software practices; (2) establish a clear set of criteria for acceptable network performance at each of the key program events; and (3) in setting expectations for the 2009 milestone review, include a thorough analysis of network technical feasibility and risks, synchronization of network development and demonstration with that of other FCS elements, and a reconciliation of the differences between independent and Army estimates of network and software development scope and cost. DOD concurred with our recommendations and stated that criteria for the 2009 FCS Defense Acquisition Board review will be established and will be reviewed and finalized at the 2008 Defense Acquisition Board review. The results of the analyses and assessments planned to support the 2009 review will inform DOD’s acquisition and budget decisions for FCS. These are positive steps toward informing the 2009 Defense Acquisition Board review. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions you or members of the subcommittee may have. For future questions about this statement, please contact me on (202) 512- 4841 or [email protected]. Individuals making key contributions to this statement include William R. Graveline, Assistant Director; Martin G. Campbell; Ronald N. Dains; Tana M. Davis; Marcus C. Ferguson; John A. Krump, John M. Ortiz; and Carrie R. Wilson. 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 Future Combat System (FCS) program--which comprises 14 integrated weapon systems and an advanced information network--is the centerpiece of the Army's effort to transition to a lighter, more agile, and more capable combat force. The substantial technical challenges, the Army's acquisition strategy, and the cost of the program are among the reasons why the program is recognized as needing special oversight and review. This testimony is based on GAO's two March 2008 reports on FCS and addresses (1) how the definition, development, and demonstration of FCS capabilities are proceeding, particularly in light of the go/no-go decision scheduled for 2009; (2) the Army's plans for making production commitments for FCS and any risks related to the completion of development; and (3) the estimated costs for developing and producing FCS. Today, the FCS program is about halfway through its development phase, yet it is, in many respects, a program closer to the beginning of development. This portends additional cost increases and delays as FCS begins what is traditionally the most expensive and problematic phase of development. In the key areas of defining and developing FCS capabilities, requirements definition is still fluid, critical technologies are immature, software development is in its early stages, the information network is still years from being demonstrated, and complementary programs are at risk for not meeting the FCS schedule. It is not yet clear if or when the information network that is at the heart of the FCS concept can be developed, built, and demonstrated. Yet, the time frame for completing FCS development is ambitious; even if all goes as planned, the program will not test production-representative prototypes or fully demonstrate the system of systems until after low rate production begins. Even though the development of FCS will finish late in its schedule, commitments to production will come early. Production funding for the first spinout of FCS technologies and the early version of the FCS cannon begin in fiscal years 2008 and 2009. Production money for the core FCS systems will be requested beginning in February 2010, with the DOD fiscal year 2011 budget request--just months after the go/no-go review and before the stability of the design is determined at the critical design review. In fact, by the time of the FCS production decision in 2013, a total of about $39 billion, which comprises research and development and production costs, will already have been appropriated for the program, with another $8 billion requested. Also, the Army plans to contract with its lead system integrator for the initial FCS production, a change from the Army's original rationale for using an integrator. This increases the burden of oversight faced by the Army and the Office of the Secretary of Defense. While the Army's cost estimates for the FCS program remain about the same as last year--$160.9 billion--the content of the program has been reduced, representing a reduction in buying power for the Army. The level of knowledge for the program does not support a confident estimate, and cost estimates made by two independent organizations are significantly higher. Competing demands from within the Army and DOD limits the ability to fund higher FCS costs. Thus, the Army will likely continue to reduce FCS capabilities in order to stay within available funding limits. Accordingly, FCS's demonstrated performance, the reasonableness of its remaining work, and the resources it will need and can reasonably expect will be of paramount importance at the 2009 milestone review for the FCS program. |
In an effort to strengthen homeland security following the September 11, 2001, terrorist attacks on the United States, President Bush issued the National Strategy for Homeland Security in July 2002 and signed legislation creating DHS in November 2002. The strategy set forth the overall objectives, mission areas, and initiatives to prevent terrorist attacks within the United States; reduce America’s vulnerability to terrorism; and minimize the damage and assist in the recovery from attacks that may occur. DHS, which began operations in March 2003, represented a fusion of 22 federal agencies to coordinate and centralize the leadership of many homeland security activities under a single department. Although the National Strategy for Homeland Security identified that many other federal departments (and other nonfederal stakeholders) are involved in homeland security activities, DHS has the dominant role in implementing the strategy. The strategy identified 6 mission areas and 43 initiatives. DHS was designated as the lead federal agency for 37 of the 43 initiatives, and has activities under way in 40 of the 43 initiatives. The Homeland Security Act of 2002, which created DHS, represented a historic moment of almost unprecedented action by the federal government to fundamentally transform how the nation thinks of homeland security, including how it protects itself from terrorism. Also significant was the fact that many of the 22 departments brought together under DHS were not focused on homeland security missions prior to September 11, 2001. Rarely in the country’s past had such a large and complex reorganization of government occurred or been developed with such a singular and urgent purpose. The creation of DHS represented a unique opportunity to transform a disparate group of agencies with multiple missions, values, and cultures into a strong and effective cabinet department whose goals are to, among other things, protect U.S. borders and infrastructure, improve intelligence and information sharing, and prevent and respond to potential terrorist attacks. Together with this unique opportunity, however, came a significant risk to the nation that could occur if the department’s implementation and transformation efforts were not successful. Mission areas designated as high risk have national significance, while other areas designated as high risk represent management functions that are important for agency performance and accountability. The identified areas can have a qualitative risk that may be detrimental to public health or safety, national security, and economic growth, or a fiscal risk due to the size of the program in question. Examples of high-risk areas include federal governmentwide problems, like human capital management; large programs, like Social Security, Medicaid, and Medicare; and more narrow issues, such as contracting at a specific agency. The DHS transformation is unique in that it involves reorganization, management, and program challenges simultaneously. We first designated DHS’s transformation as high risk in January 2003 based on three factors. First, DHS faced enormous challenges in implementing an effective transformation process, developing partnerships, and building needed management capacity because it had to effectively combine 22 agencies with an estimated 170,000 employees into one department. Second, DHS faced a broad array of operational and management challenges that it inherited from its component legacy agencies. For example, many of the major components that were merged into the department, including the Immigration and Naturalization Service, the Transportation Security Administration, the Customs Service, the Federal Emergency Management Agency, and the Coast Guard, brought with them existing challenges in areas such as strategic human capital, information technology, and financial management. Finally, DHS’s national security mission was of such importance that the failure to effectively address its management challenges and program risks could have serious consequences on our intergovernmental system, our citizens’ health and safety, and our economy. Our prior work on mergers and acquisitions, undertaken before the creation of DHS, found that successful transformations of large organizations, even those faced with less strenuous reorganizations than DHS, can take 5 to 7 years to achieve. On the basis of the need for more progress in its transformation efforts, DHS’s implementation and transformation stayed on our high-risk update for 2005. Further, in November of 2006, we provided the congressional leadership a listing of government programs, functions, and activities that warrant further congressional oversight. Among the issues included were DHS integration and transformation efforts. Managing the transformation of an organization of the size and complexity of DHS requires comprehensive planning, integration of key management functions across the department, and partnering with stakeholders across the public and private sectors. DHS has made some progress in each of these areas, but much additional work is required to help ensure sustainable success. Apart from these integration efforts, however, a successful transformation will also require DHS to follow through on its initial actions of building capacity to improve the management of its financial and information technology systems, as well as its human capital and acquisition efforts. Thorough planning is important for DHS to successfully transform and integrate the management functions of 22 disparate agencies into a common framework that supports the organization as a whole. Our past work has identified progress DHS has made in its planning efforts. For example, the DHS strategic plan addresses five of six Government Performance and Results Act required elements and takes into account its non-homeland security missions, such as responding to natural disasters. Furthermore, several DHS components have developed their own strategic plans or strategic plans for missions within their areas of responsibility. For example, U.S. Immigration and Custom’s Enforcement (ICE) has produced an interim strategic plan that identifies its goals and objectives, and the U.S. Customs and Border Protection (CBP) developed a border patrol strategy and an anti terrorism trade strategic plan. However, deficiencies in DHS’s planning efforts remain. A DHS-wide transformation strategy should include a strategic plan that identifies specific budgetary, human capital, and other resources needed to achieve stated goals. The strategy should also involve key stakeholders to help ensure that resource investments target the highest priorities. DHS’s existing strategic plan lacks these linkages, and DHS has not effectively involved stakeholders in the development of the plan. DHS has also not completed other important planning-related activities. For example, some of DHS’s components have not developed adequate outcome-based performance measures or comprehensive plans to monitor, assess, and independently evaluate the effectiveness of their plans and performance. Integrating core management functions like financial, information technology, human capital, and procurement is also important if DHS is to transform itself into a cohesive, high-performing organization. However, DHS lacks a comprehensive management integration strategy with overall goals, a timeline, and a dedicated team to support its management integration efforts. In 2005, we recommended that DHS establish implementation goals and a timeline for its management integration efforts as part of a comprehensive integration strategy, a key practice to help ensure success for a merger or transformation. Although DHS has issued guidance and plans to assist management integration on a function by function basis, it has not developed a plan that clearly identifies the critical links that should occur across these functions, the necessary timing to make these links occur, how these interrelationships will occur, and who will drive and manage them. In addition, although DHS had established a Business Transformation Office that reported to the Under Secretary for Management to help monitor and look for interdependencies among the individual functional management integration efforts, that office was not responsible for leading and managing the coordination and integration itself. In addition to the Business Transformation Office, we have suggested that Congress should continue to monitor whether it needs to provide additional leadership authorities to the DHS Under Secretary for Management or create a Chief Operating Officer/Chief Management Officer position which could help elevate, integrate, and institutionalize DHS’s management initiatives. Finally, DHS cannot successfully achieve its homeland security mission without working with other entities that share responsibility for securing the homeland. Partnering for progress with other governmental agencies and private sector entities is central to achieving its missions. Since 2005, DHS has continued to form necessary partnerships and has undertaken a number of coordination efforts with private sector entities. These include, for example, partnering with (1) airlines to improve aviation passenger and cargo screening, (2) the maritime shipping industry to facilitate containerized cargo inspection, (3) financial institutions to follow the money trail in immigration and customs investigations, and (4) the chemical industry to enhance critical infrastructure protection at such facilities. In addition, FEMA has worked with other federal, state, and local entities to improve planning for disaster response and recovery. However, partnering challenges continue as DHS seeks to form more effective partnerships to leverage resources and more effectively carry out its homeland security responsibilities. For example, because DHS has only limited authority to address security at chemical facilities, it must continue to work with the chemical industry to ensure that it is assessing vulnerabilities and implementing security measures. Also, while TSA has taken steps to collaborate with federal and private sector stakeholders in the implementation of its Secure Flight program, these stakeholders stated that TSA has not provided them with the information they would need to support TSA’s efforts as they move forward with the program. DHS has made limited improvements in addressing financial management and internal control weaknesses and continues to face significant challenges in these areas. For example, since its creation, DHS has been unable to obtain an unqualified or “clean” audit opinion on its financial statements. The independent auditor’s report cited 10 material weaknesses—i.e., significant deficiencies in DHS’s internal controls— showing no decrease from fiscal year 2005. These weaknesses included financial management oversight, financial reporting, financial systems security, and budgetary accounting. Furthermore, the report found two other reportable conditions and instances of non-compliance with eight laws and regulations, including the Federal Managers’ Financial Integrity Act of 1982, the Federal Financial Management Improvement Act of 1996, and the Federal Information Security Management Act of 2002. While there continue to be material weaknesses in its financial management systems, DHS has made some progress in this area. For example, the independent auditor’s fiscal year 2006 report noted that DHS had made improvements at the component level to improve financial reporting during fiscal year 2006, although many challenges were remaining. Also, DHS and its components have reported developing corrective action plans to address the specific material internal control weaknesses identified. In addition to the independent audits, we have done work to assess DHS’s financial management and internal controls. For example, in 2004, we reviewed DHS’s progress in addressing financial management weaknesses and integrating its financial systems. Specifically, we identified weaknesses in the financial management systems DHS inherited from the 22 component agencies, assessed DHS progress in addressing these weaknesses, identified plans DHS had to integrate its financial management systems, and reviewed whether the planned systems DHS was developing would meet the requirements of relevant financial management improvement legislation. On the basis of our work, we recommended that DHS (1) give sustained attention to addressing previously reported material weaknesses, reportable conditions, and observations and recommendations; (2) complete development of corrective action plans for all material weaknesses, reportable conditions, and observations and recommendations; (3) ensure that internal control weaknesses are addressed at the component level if they were combined or reclassified at the departmentwide level; and (4) maintain a tracking system of all auditor-identified and management-identified control weaknesses. These recommendations are still relevant today. A departmentwide information technology (IT) governance framework— including controls (disciplines) aimed at effectively managing IT-related people, processes, and tools—is vital to DHS’s transformation efforts. These controls and disciplines include having and using an enterprise architecture, or corporate blueprint, as an authoritative frame of reference to guide and constrain IT investments; defining and following a corporate process for informed decision making by senior leadership about competing IT investment options; applying system and software development and acquisition discipline and rigor when defining, designing, developing, testing, deploying, and maintaining systems; establishing a comprehensive information security program to protect its information and systems; having sufficient people with the right knowledge, skills, and abilities to execute each of these areas now and in the future; and centralizing leadership for extending these disciplines throughout the organization with an empowered Chief Information Officer. In early 2006, we testified on DHS’s progress regarding its IT management controls. At the time, we reported that DHS had made efforts during the previous 3 to 4 years, to establish and implement IT management controls and disciplines, but progress in these key areas had been uneven, and more remained to be accomplished. Specifically, DHS had made improvements in its enterprise architecture by establishing departmentwide technology standards. It had also developed and initiated the implementation of a plan to introduce a shared services orientation to the architecture, particularly for information services, such as data centers and e-mail. In addition, to strengthen IT investment management, DHS established an acquisition project performance reporting system, aligned its investment management cycle and associated milestones with the department’s annual budget preparation process, and linked investment management systems to standardize and make consistent the financial data used to make investment decisions. Further, to develop more effective information security management, DHS completed a comprehensive inventory of its major information systems and implemented a departmentwide tool that incorporates the guidance required to adequately complete security certification and accreditation for all systems. We have ongoing work that will update the status of DHS’s IT management controls. Despite these efforts, DHS must do more before each of these management controls and capabilities is fully mature and institutionalized. For example, our reviews of key nonfinancial systems shows that DHS has not consistently employed reliable cost-estimating practices, effective requirements development and test management, meaningful performance measurement, strategic workforce management, and proactive risk management, among other recognized program management best practices. In addition, DHS has not fully implemented a comprehensive information security program; and goals related to consolidating networks and e-mail systems, for example, remain to be fully accomplished. More work also remains in deploying and operating IT systems and infrastructure in support of DHS’s core mission operations. For example, although a system to identify and screen visitors entering the country has been deployed and is operating, a related exit capability largely is not. In addition, the Automated Commercial Environment program has not yet demonstrated that it can accurately measure progress against its commitments because the data it uses are not consistently reliable. DHS must also ensure that the Chief Information Officer is sufficiently empowered to extend management discipline and implement common IT solutions across the department. Until DHS fully establishes and consistently implements the full range of IT management disciplines embodied in its framework and related federal guidance and best practices, it will be challenged in its ability to effectively manage and deliver programs. DHS has made some progress in transforming its human capital systems, but more work remains. Some of the most pressing human capital challenges at DHS include (1) successfully completing its ongoing transformation, (2) forging a unified results-oriented culture across the department (line of sight), (3) linking daily operations to strategic outcomes, (4) rewarding individuals based on individual, team, unit, and organizational results, (5) obtaining, developing, providing incentives to, and retaining needed talent, and (6) most importantly, leadership both at the top, to include a chief operating officer (COO) or chief management officer (CMO). A strategic workforce plan is integral to defining the level of staffing, identifying the critical skills needed to mission achievement, and eliminating gaps to prepare the agency for future needs. In 2005, we reported that DHS had initiated strategic human capital planning efforts and published proposed regulations for a modern human capital management system. We also reported that DHS’s leadership was committed to the human capital system design process and had formed teams to implement the resulting regulations. Since our report, DHS has finalized its human capital regulations, and although certain labor management provisions are the subject of litigation, it is vital that DHS implement its human capital system effectively because strategic human capital management is the centerpiece of any transformation effort. Further, since our 2005 update, DHS has taken some actions to integrate the legacy agency workforces that make up its components. For example, it standardized pay grades for criminal investigators at ICE and developed promotion criteria for investigators and CBP officers that equally recognize the value of the experience brought to ICE and CBP by employees of each legacy agency. DHS also made progress in establishing human capital capabilities for the US-VISIT program, which should help ensure that it has sufficient staff with the necessary skills and abilities to implement the program effectively. CBP also developed training plans that link its officer training to CBP strategic goals. Despite these efforts, however, DHS must still (1) create a clearer crosswalk between departmental training goals and objectives and DHS’s broader organizational and human capital goals, (2) develop appropriate training performance measures and targets for goals and strategies identified in its departmentwide strategic training plan, and (3) address our earlier recommendations that its new human capital system be linked to its strategic plan. We have also made recommendations to specific program offices and organizational entities to help ensure that human capital resources are provided to improve the effectiveness of management capabilities, and that human capital plans are developed that clearly describe how these components will recruit, train, and retain staff to meet their growing demands as they expand and implement new program elements. We are completing an updated review of DHS’s human capital efforts and plan to report on our results soon. This report will discuss information on selected human capital issues at DHS: attrition rates at DHS; senior-level vacancies at DHS; DHS’s use of human capital flexibilities, the Intergovernmental Personnel Act, and personal services contracts; and DHS’s compliance with the Vacancies Reform Act. DHS continues to face challenges in creating an effective, integrated acquisition organization. Since its inception in March 2003, DHS has made progress in implementing a strategic sourcing program to increase the effectiveness of its buying power and in creating a small business program. These programs have promoted an environment in which there is a collaborative effort toward the common goal of an efficient, unified organization. Strategic sourcing allows DHS components to formulate purchasing strategies to leverage buying power and increase savings for a variety of products like office supplies, boats, energy, and weapons, while its small business program works to ensure small businesses can compete effectively for the agency’s contract dollars. However, DHS’s progress toward creating a unified acquisition organization has been hampered by policy decisions. In March 2005, we reported that an October 2004 management directive, Acquisition Line of Business Integration and Management, while emphasizing the need for a unified, integrated acquisition organization, relies on a system of dual accountability between the chief procurement officer and the heads of the departments to make this happen. This situation has created ambiguity about who is accountable for acquisition decisions. We also found that the various acquisition organizations within DHS are still operating in a disparate manner, with oversight of acquisition activities left primarily up to each individual component. Specifically, we reported that (1) there were components exempted from the unified acquisition organization, (2) the chief procurement officer had insufficient staff for departmentwide oversight, and (3) staffing shortages led the office of procurement operations to rely extensively on outside agencies for contracting support. In March 2005, we recommended that, among other things, the Secretary of Homeland Security provide the Office of the Chief Procurement Officer with sufficient resources and enforcement authority to enable effective departmentwide oversight of acquisition policies and procedures, and to revise the October 2004 management directive to eliminate reference to the Coast Guard and Secret Service as being exempt from complying with the directive. Unless DHS addresses these challenges, it is at risk of continuing to exist as a fragmented acquisition organization. Because some of DHS’s components have major, complex acquisition programs—for example, the Coast Guard’s Deepwater program (designed to replace or upgrade its cutters and aircraft) and CBP’s Secure Border Initiative—DHS needs to improve the oversight of contractors and should adhere to a rigorous management review process. DHS continues to face challenges, many of which were inherited from its component legacy agencies, in carrying out its programmatic activities. These challenges include enhancing transportation security, strengthening the management of U.S. Coast Guard acquisitions and meeting the Coast Guard’s new homeland security missions, improving the regulation of commercial trade while ensuring protection against the entry of illegal goods and dangerous visitors at U.S. borders and ports of entry, and improving enforcement of immigration laws, including worksite immigration laws, and the provision of immigration services. DHS must also effectively coordinate the mitigation and response to all hazards, including natural disaster planning, response, and recovery. DHS has taken actions to address these challenges, for example, by strengthening passenger and baggage screening, increasing the oversight of Coast Guard acquisitions, more thoroughly screening visitors and cargo, dedicating more resources to immigration enforcement, becoming more efficient in the delivery of immigration services, and conducting better planning for disaster preparation. However, challenges remain in each of these major mission areas. Despite progress in this area, DHS continues to face challenges in effectively executing transportation security efforts. We have recommended that the Transportation Security Administration (TSA) more fully integrate a risk management approach—including assessments of threat, vulnerability, and criticality—in prioritizing security efforts within and across all transportation modes; strengthen stakeholder coordination; and implement needed technological upgrades to secure commercial airports. DHS has made progress in all of these areas, particularly in aviation, but must expand its security focus more towards surface modes of transportation and continue to seek best practices and coordinated security efforts with the international community. DHS and TSA have taken numerous actions to strengthen commercial aviation security, including strengthening passenger and baggage screening, improving aspects of air cargo security, and strengthening the security of international flights and passengers bound for the United States. For example, TSA increased efforts to measure the effectiveness of airport screening systems through covert testing and other means and has worked to enhance passenger and baggage screener training. TSA also improved its processes for identifying and responding to threats onboard commercial aircraft and has modified airport screening procedures based on risk. Despite this progress, however, TSA continues to face challenges in implementing a program to match domestic airline passenger information against terrorist watch lists, fielding needed technologies to screen airline passengers for explosives, and strengthening aspects of passenger rail security. In addition, TSA has not developed a strategy, as required, for securing the various modes of transportation. As a result, rail and other surface transportation stakeholders are unclear regarding what TSA’s role will ultimately be in establishing and enforcing security requirements within their transportation modes. We have recommended that TSA more fully integrate risk-based decision making within aviation and across all transportation modes, strengthen passenger prescreening, and enhance rail security efforts. We have also recommended that TSA work to develop sustained and effective partnerships with other government agencies, the private sector, and international partners to coordinate security efforts and seek potential best practices, among other efforts. The Coast Guard needs to improve the management of its acquisitions and continue to enhance its security mission while meeting other mission responsibilities. We recommended that the Coast Guard improve its management of the Deepwater program by strengthening key management and oversight activities, implementing procedures to better ensure contractor accountability, and controlling future costs by promoting competition. In April 2006, we reported the Coast Guard had made some progress in addressing these recommendations. For example, the Coast Guard has addressed our recommendation to ensure better contractor accountability by providing for better input from U.S. Coast Guard performance monitors. However, even with these improvements, some Deepwater assets have recently experienced major setbacks due to design concerns in two classes of replacement cutters. Further, other Coast Guard acquisition programs—such as the Rescue 21 emergency distress and communications system—have experienced major cost increases, schedule delays, and performance shortfalls. The Coast Guard has made progress in balancing its homeland security and traditional missions. The Coast Guard is unlike many other DHS components because it has substantial missions not related to homeland security. These missions include maritime navigation, icebreaking, protecting the marine environment, marine safety, and search and rescue for mariners in distress. Furthermore, unpredictable natural disasters, such as Hurricane Katrina, can place intense demands on all Coast Guard resources. The Coast Guard must continue executing these traditional missions and balance those responsibilities with its homeland security obligations, which have increased significantly since September 11. DHS has made some progress but still faces an array of challenges in securing the border while improving the regulation of commercial trade. Since 2005, DHS agencies have made some progress in implementing our recommendations to refine the screening of foreign visitors to the United States, target potentially dangerous cargo, and provide the personnel necessary to effectively fulfill border security and trade agency missions. As of January 2006, DHS had a pre-entry screening capability in place in overseas visa issuance offices, and an entry identification capability at 115 airports, 14 seaports, and 154 land ports of entry. Furthermore, the Secretary of Homeland Security has made risk management at ports and all critical infrastructure facilities a key priority for DHS. In addition, DHS developed performance goals and measures for its trade processing system and implemented a testing and certification process for its officers to provide better assurance of effective cargo examination targeting practices. However, efforts to assess and mitigate risks of DHS’s and the Department of State’s implementation of the Visa Waiver Program remain incomplete, increasing the risk that the program could be exploited by someone who intends harm to the United States. Further, many of DHS’s border-related performance goals and measures are not fully defined or adequately aligned with one another, and some performance targets are not realistic. For example, CBP has not yet put key controls in place to provide reasonable assurance that its screening system is effective at targeting oceangoing cargo containers with the highest risk of containing smuggled weapons of mass destruction, nor has it found a way to incorporate inspection results back into the targeting system. Other trade and visitor screening systems have weaknesses that must be overcome to better ensure border and trade security. For example, deficiencies in the identification of counterfeit documentation at land border crossings into the United States create vulnerabilities that terrorists or others involved in criminal activity could exploit. We also reported that DHS’s Container Security Initiative to target and inspect high-risk cargo containers at foreign ports before they leave for the United States has not achieved key goals because of staffing imbalances, the lack of minimum technical requirements for inspection equipment used at foreign ports, and insufficient performance measures to assess the effectiveness of targeting and inspection activities. DHS has taken some actions to improve enforcement of immigration laws, including worksite immigration laws, but the number of resources devoted to enforcing immigration laws is limited given that there are an estimated 12 million illegal aliens residing in the United States. DHS has strengthened some aspects of immigration enforcement, including allocating more investigative work years to immigration functions than the Immigration and Naturalization Service did prior to the creation of DHS. Nevertheless, effective enforcement will require more attention to efficient resource use and updating outmoded management systems. In April 2006, ICE announced an interior enforcement strategy to bring criminal charges against employers who knowingly hire unauthorized workers. ICE has also reported increases in the number of criminal arrests and indictments for these violations since fiscal year 2004. In addition, ICE has plans to shift responsibility for identifying incarcerated criminal aliens eligible for removal from the United States from the Office of Investigations to its Office of Detention and Removal, freeing those investigative resources for other immigration and customs investigations. ICE has also begun to introduce principles of risk management into the allocation of its investigative resources. However, enforcement of immigration enforcement laws needs to be strengthened and significant management challenges remain. DHS’s ability to locate and remove millions of aliens who entered the country illegally or overstayed the terms of their visas is questionable, and implementing an effective worksite enforcement program remains an elusive goal. ICE’s Office of Investigations has not conducted a comprehensive risk assessment of the customs and immigration systems to determine the greatest risks for exploitation by criminals and terrorists. This office also lacks outcome- based performance goals that relate to its objective of preventing the exploitation of systemic vulnerabilities in customs and immigration systems, and it does not have sufficient systems in place to help ensure systematic monitoring and communication of vulnerabilities discovered during its investigations. Moreover, the current employment verification process used to identify workers ineligible for employment in the United States has not fundamentally changed since its establishment in 1986, and ongoing weaknesses have undermined its effectiveness. We have recommended that DHS take actions to help address these weaknesses and to strengthen the current process by issuing final regulations on changes to the employment verification process which will reduce the number of documents suitable for proving eligibility to work in the United States. Some other countries require foreign workers to present work authorization documents at the time of hire and require employers to review these documents and report workers’ information to government agencies for collecting taxes and social insurance contributions, and conducting worksite enforcement actions. Although DHS has made progress in reducing its backlog of immigration benefit applications, improvements are still needed in the provision of immigration services, particularly by strengthening internal controls to prevent fraud and inaccuracy. Since 2005, DHS has enhanced the efficiency of certain immigration services. For example, U.S. Citizenship and Immigration Services (USCIS) estimated that it had reduced its backlog of immigration benefits applications from a peak of 3.8 million cases to 1.2 million cases from January 2004 to June 2005. USCIS has also established a focal point for immigration fraud, outlined a fraud control strategy that relies on the use of automation to detect fraud, and is performing fraud assessments to identify the extent and nature of fraud for certain benefits. However, DHS still faces significant challenges in its ability to effectively provide immigration services while at the same time protecting the immigration system from fraud and mismanagement. USCIS may have adjudicated tens of thousands of naturalization applications without alien files, and adjudicators were not required to record whether the alien file was available when they adjudicated the application. Without these files, DHS may not be able to take enforcement action against an applicant and could also approve an application for an ineligible applicant. In addition, USCIS has not implemented important aspects of our internal control standards or fraud control best practices identified by leading audit organizations. Such best practices would include (1) a comprehensive risk management approach, (2) mechanisms for ongoing monitoring during the course of normal activities, (3) clear communication agencywide regarding how to balance production-related goals with fraud-prevention activities, and (4) performance goals for fraud prevention. We have reported that DHS needs to more effectively coordinate disaster preparedness, response, and recovery efforts. Since FEMA became part of DHS in March 2003, its responsibilities have been dispersed and its role has continued to evolve. Hurricane Katrina severely tested disaster management at the federal, state, and local levels and revealed weaknesses in the basic elements of preparing for, responding to, and recovering from any catastrophic disaster. Our analysis showed the need for (1) clearly defined and understood leadership roles and responsibilities; (2) the development of the necessary disaster capabilities; and (3) accountability systems that effectively balance the need for fast and flexible response against the need to prevent waste, fraud, and abuse. In September 2006, we recommended that Congress give federal agencies explicit authority to take actions to prepare for all types of catastrophic disasters when there is warning. We also recommended that DHS (1) rigorously re-test, train, and exercise its recent clarification of the roles, responsibilities, and lines of authority for all levels of leadership, implementing changes needed to remedy identified coordination problems; (2) direct that the National Response Plan (NRP) base plan and its supporting Catastrophic Incident Annex be supported by more robust and detailed operational implementation plans; (3) provide guidance and direction for federal, state, and local planning, training, and exercises to ensure such activities fully support preparedness, response, and recovery responsibilities at a jurisdictional and regional basis; (4) take a lead in monitoring federal agencies’ efforts to prepare to meet their responsibilities under the NRP and the interim National Preparedness Goal; and (5) use a risk management approach in deciding whether and how to invest finite resources in specific capabilities for a catastrophic disaster. DHS has made revisions to the NRP and released its Supplement to the Catastrophic Incident Annex—both designed to further clarify federal roles and responsibilities and relationships among federal, state and local governments and responders. However, these revisions have not been tested. DHS has also announced a number of actions intended to improve readiness and response based on our work and the work of congressional committees and the Administration. For example, DHS is currently reorganizing FEMA as required by the fiscal year 2007 DHS appropriations act. DHS has also announced a number of other actions to improve readiness and response. However, there is little information available on the extent to which these changes are operational. Finally, in its desire to provide assistance quickly following Hurricane Katrina, DHS was unable to keep up with the magnitude of needs to confirm the eligibility of victims for disaster assistance, or ensure that there were provisions in contracts for response and recovery services to ensure fair and reasonable prices in all cases. We recommended that DHS create accountability systems that effectively balance the need for fast and flexible response against the need to prevent waste, fraud, and abuse. We also recommended that DHS provide guidance on advance procurement practices (pre-contracting) and procedures for those federal agencies with roles and responsibilities under the NRP so that these agencies can better manage disaster-related procurement, and establish an assessment process to monitor agencies’ continuous planning efforts for their disaster-related procurement needs and the maintenance of capabilities. For example, we identified a number of emergency response practices in the public and private sectors that provide insight into how the federal government can better manage its disaster-related procurements. These include both developing knowledge of contractor capabilities and prices and establishing vendor relationships prior to the disaster and establishing a scalable operations plan to adjust the level of capacity to match the response with the need. To be removed from our high-risk list, agencies need to develop a corrective action plan that defines the root causes of identified problems, identifies effective solutions to those problems, and provides for substantially completing corrective measures in the near term. Such a plan should include performance measures, metrics and milestones to measure their progress. Agencies should also demonstrate significant progress in addressing the problems identified in their corrective action plan. This should include a program to monitor and independently validate progress. Finally, agencies, in particular top leadership, must demonstrate a commitment to sustain initial improvements. This would include a strong commitment to address the risk(s) that put the program or function on the high-risk list and provide for the allocation of sufficient people and resources (capacity) to resolve the risk(s) and ensure that improvements are sustainable over the long term. In the spring of 2006, DHS provided us a draft corrective action plan for addressing its transformation challenges. This plan addressed major management areas we had previously identified as key to DHS’s transformation—management integration through the DHS management directorate and financial, information, acquisition, and human capital management. The plan identified an overall goal to develop and implement key department wide processes and systems to support DHS’s transformation into a department capable of planning, operating, and managing as one effective department. In the short term, the plan sought to produce significant improvements over the next 7 years that further DHS’s ability to operate as one department. Although the plan listed accomplishments and general goals for the management functions, it did not contain (1) objectives linked to those goals that are clear, concise, and measurable; (2) specific actions to implement those objectives; (3) information linking sufficient people and resources to implement the plan; or (4) an evaluation program to monitor and independently validate progress toward meeting the goals and measuring the effectiveness of the plan. In addition to developing an effective corrective action plan, agencies must show that significant progress has taken place in improving performance in the areas identified in its corrective action plan. While our work has noted progress at DHS, for us to remove the DHS implementation and transformation and from our high-risk list, we need to be able to independently assure ourselves and Congress that DHS has implemented many of our past recommendations, or has taken other corrective actions to address the challenges we identified. However, DHS has not made its management or operational decisions transparent enough so that Congress can be sure it is effectively, efficiently, and economically using the billions of dollars in funding it receives annually, and is providing the levels of security called for in numerous legislative requirements and presidential directives. Our work for Congress assessing DHS’s operations has been significantly hampered by long delays in granting us access to program documents and officials, or by questioning our access to information needed to conduct our reviews. We are troubled by the impact that DHS’s processes and internal reviews have had on our ability to assess departmental programs and operations. Given the problems we have experienced in obtaining access to DHS information, it will be difficult for us to sustain the level of oversight that Congress has directed and that is needed to effectively oversee the department, including the level of oversight needed to assess DHS’s progress in addressing the existing transformation, integration, and programmatic challenges identified in this statement. Finally, to be removed from our high-risk list, any progress that occurs must be sustainable over the long term. DHS’s leaders need to make and demonstrate a commitment to implementing a transformed organization. The Secretary has stated such a commitment, most prominently as part of his “second stage review” in the summer of 2005, and more recently in remarks made at George Washington University’s Homeland Security Policy Institute. However, appropriate follow-up is required to assure that transformation plans are effectively implemented and sustained, to include the allocation of adequate resources to support transformation efforts. In this regard, we were pleased when DHS established a Business Transformation Office, but we believe that the office’s effectiveness was limited because the department did not give it the authority and responsibility needed to be successful. We understand that this office has recently been eliminated. Further, department leaders can show their commitment to transforming DHS by acting on recommendations made by the Congress, study groups, and accountability organizations such as its Office of the IG and GAO. Although we have also seen some progress in this area, it is not enough for us to conclude that DHS is committed to and capable of quickly incorporating corrective actions into its operations. Therefore, until DHS produces an acceptable corrective action plan, demonstrates progress reforming its key management functions, and dedicates the resources necessary to sustain this progress, it will likely remain on our high-risk list. Mr. Chairman and members of the subcommittee, this completes my prepared statement. I would be happy to respond to any questions that you or other members of the subcommittee may have at this time. For information about this testimony, please contact Norman Rabkin, Managing Director, Homeland Security and Justice Issues, at (202) 512-8777, or [email protected]. Other individuals making key contributions to this testimony include Cathleen Berrick, Paul Jones, Christopher Conrad, Anthony DeFrank, Nancy Briggs, and Aaron Stern. High-Risk Series: An Update. GAO-07-310. Washington, D.C.: January 31, 2007. Suggested Areas for Oversight for the 110th Congress. GAO-07-235R. Washington, D.C.: November 17, 2006. Homeland Security: DHS Is Addressing Security at Chemical Facilities, but Additional Authority Is Needed. GAO-06-899T. Washington, D.C.: June 21, 2006. Homeland Security: Guidance and Standards Are Needed for Measuring the Effectiveness of Agencies’ Facility Protection Efforts. GAO-06-612. Washington, D.C.: May 31, 2006. Homeland Security: DHS Needs to Improve Ethics-Related Management Controls for the Science and Technology Directorate. GAO-06-206. Washington, D.C.: December 22, 2005. Critical Infrastructure Protection: Department of Homeland Security Faces Challenges in Fulfilling Cybersecurity Responsibilities. GAO-05-434. Washington, D.C.: May 26, 2005. Homeland Security: Overview of Department of Homeland Security Management Challenges. GAO-05-573T. Washington, D.C.: April 20, 2005. Results-Oriented Government: Improvements to DHS’s Planning Process Would Enhance Usefulness and Accountability. GAO-05-300. Washington, D.C.: March 31, 2005. Department of Homeland Security: A Comprehensive and Sustained Approach Needed to Achieve Management Integration. GAO-05-139. Washington, D.C.: March 16, 2005. Homeland Security: Further Actions Needed to Coordinate Federal Agencies’ Facility Protection Efforts and Promote Key Practices. GAO-05-49. Washington, D.C.: November 30, 2004. Highlights of a GAO Forum: Mergers and Transformation: Lessons Learned for a Department of Homeland Security and Other Federal Agencies. GAO-03-293SP. Washington, D.C.: November 14, 2002. Determining Performance and Accountability Challenges and High Risks. GAO/OGC-00-12. Washington, D.C.: August 2000. Financial Management Systems: DHS Has an Opportunity to Incorporate Best Practices in Modernization Efforts. GAO-06-553T. Washington, D.C.: March 29, 2006. Financial Management: Department of Homeland Security Faces Significant Financial Management Challenges. GAO-04-774. Washington, D.C.: July 19, 2004. Information Technology: Customs Has Made Progress on Automated Commercial Environment System, but It Faces Long-Standing Management Challenges and New Risks. GAO-06-580. May 31, 2006. Information Sharing: DHS Should Take Steps to Encourage More Widespread Use of Its Program to Protect and Share Critical Infrastructure Information. GAO-06-383. Washington, D.C.: April 17, 2006. Homeland Security: Progress Continues, but Challenges Remain on Department’s Management of Information Technology. GAO-06-598T. Washington, D.C.: March 29, 2006. Information Technology: Management Improvements Needed on Immigration and Customs Enforcement’s Infrastructure Modernization Program. GAO-05-805. Washington, D.C.: September 7, 2005. Information Technology: Federal Agencies Face Challenges in Implementing Initiatives to Improve Public Health Infrastructure. GAO-05-308. Washington, D.C.: June 10, 2005. Information Technology: Customs Automated Commercial Environment Program Progressing, but Need for Management Improvements Continues. GAO-05-267. Washington, D.C.: March 14, 2005. Border Security: Stronger Actions Needed to Assess and Mitigate Risks of the Visa Waiver Program. GAO-06-854. Washington, D.C.: July 28, 2006. Information on Immigration Enforcement and Supervisory Promotions in the Department of Homeland Security’s Immigration and Customs Enforcement and Customs and Border Protection. GAO-06-751R. Washington, D.C.: June 13, 2006. Homeland Security: Visitor and Immigrant Status Program Operating, but Management Improvements Are Still Needed. GAO-06-318T. Washington, D.C.: January 25, 2006. Department of Homeland Security: Strategic Management of Training Important for Successful Transformation. GAO-05-888. Washington, D.C.: September 23, 2005. Homeland Security: Challenges in Creating an Effective Acquisition Organization. GAO-06-1012T. Washington, D.C.: July 27, 2006. Homeland Security: Success and Challenges in DHS’s Efforts to Create an Effective Acquisition Organization. GAO-05-179. Washington, D.C.: March 29, 2005. Homeland Security: Further Action Needed to Promote Successful Use of Special DHS Acquisition Authority. GAO-05-136. Washington, D.C.: December 15, 2004. Transportation Security Administration: Oversight of Explosive Detection Systems Maintenance Contracts Can Be Strengthened. GAO-06-795. Washington, D.C.: July 31, 2006. Aviation Security: TSA Oversight of Checked Baggage Screening Procedures Could Be Strengthened. GAO-06-869. Washington, D.C.: Jul. 28, 2006. Rail Transit: Additional Federal Leadership Would Enhance FTA’s State Safety Oversight Program. GAO-06-821. Washington, D.C.: July 26, 2006. Aviation Security: Management Challenges Remain for the Transportation Security Administration’s Secure Flight Program. GAO-06-864T. Washington, D.C.: June 14, 2006. Aviation Security: Enhancements Made in Passenger and Checked Baggage Screening, but Challenges Remain. GAO-06-371T. Washington, D.C.: April 4, 2006. Aviation Security: Progress Made to Set Up Program Using Private- Sector Airport Screeners, but More Work Remains. GAO-06-166. Washington, D.C.: March 31, 2006. Aviation Security: Significant Management Challenges May Adversely Affect Implementation of the Transportation Security Administration’s Secure Flight Program. GAO-06-374T. Washington, D.C.: February 9, 2006. Aviation Security: Federal Air Marshal Service Could Benefit from Improved Planning and Controls. GAO-06-203. Washington, D.C.: November 28, 2005. Aviation Security: Federal Action Needed to Strengthen Domestic Air Cargo Security. GAO-06-76. Washington, D.C.: October 17, 2005. Passenger Rail Security: Enhanced Federal Leadership Needed to Prioritize and Guide Security Efforts. GAO-05-851. Washington, D.C.: September 9, 2005. Aviation Security: Flight and Cabin Crew Member Security Training Strengthened, but Better Planning and Internal Controls Needed. GAO-05-781. Washington, D.C.: September 6. 2005. Aviation Safety: Oversight of Foreign Code-Share Safety Program Should Be Strengthened. GAO-05-930. Washington, D.C.: August 5, 2005. Homeland Security: Agency Resources Address Violations of Restricted Airspace, but Management Improvements Are Needed. GAO-05-928T. Washington, D.C.: July 21, 2005. Aviation Security: Secure Flight Development and Testing Under Way, but Risks Should Be Managed as System Is Further Developed. GAO-05-356. Washington, D.C.: March 28, 2005. Aviation Security: Systematic Planning Needed to Optimize the Deployment of Checked Baggage Screening Systems. GAO-05-365. Washington, D.C.: March 15, 2005. United States Coast Guard: Improvements Needed in Management and Oversight of Rescue System Acquisition. GAO-06-623. Washington, D.C.: May 31, 2006. Coast Guard: Changes to Deepwater Plan Appear Sound, and Program Management Has Improved, but Continued Monitoring is Warranted. GAO-06-546. Washington, D.C.: April 28, 2006. Risk Management: Further Refinements Needed to Assess Risks and Prioritize Protective Measures at Ports and Other Critical Infrastructure. GAO-06-91. Washington, D.C.: December 15, 2005. Maritime Security: Enhancements Made, but Implementation and Sustainability Remain Key Challenges. GAO-05-448T. Washington, D.C.: May 17, 2005. Cargo Security: Partnership Program Grants Importers Reduced Scrutiny with Limited Assurance of Improved Security. GA0-05-404. Washington, D.C.: March 11, 2005. Coast Guard: Station Readiness Improving, but Resource Challenges and Management Concerns Remain. GAO-05-161. Washington, D.C.: January 31, 2005. Contract Management: Coast Guard’s Deepwater Program Needs Increased Attention to Management and Contractor Oversight. GAO-04-380. Washington, D.C.: March 9, 2004. Border Security: US-VISIT Program Faces Strategic, Operational, and Technological Challenges at Land Ports of Entry. GAO-07-248. Washington, D.C.: December 6, 2006. Border Security: Stronger Actions Needed to Assess and Mitigate Risks of the Visa Waiver Program. GAO-06-854. Washington, D.C.: July 28, 2006. Information Technology: Customs Has Made Progress on Automated Commercial Environment System, but It Faces Long-Standing Management Challenges and New Risks. GAO-06-580. Washington, D.C.: May 31, 2006. Border Security: Key Unresolved Issues Justify Reevaluation of Border Surveillance Technology Program. GAO-06-295. Washington, D.C.: February 22, 2006. Homeland Security: Recommendations to Improve Management of Key Border Security Program Need to Be Implemented. GAO-06-296. Washington, D.C.: February 14, 2006. Border Security: Strengthened Visa Process Would Benefit from Improvements in Staffing and Information Sharing. GAO-05-859. Washington, D.C.: September 13, 2005. Border Security: Opportunities to Increase Coordination of Air and Marine Assets. GAO-05-543. Washington, D.C.: August 12, 2005. Border Security: Actions Needed to Strengthen Management of Department of Homeland Security’s Visa Security Program. GAO-05-801. Washington, D.C.: July 29, 2005. Border Patrol: Available Data on Interior Checkpoints Suggest Differences in Sector Performance. GAO-05-435. Washington, D.C.: July 22, 2005. Immigration Enforcement: Weaknesses Hinder Employment Verification and Worksite Enforcement Efforts. GAO-06-895T. Washington, D.C.: June 19, 2006. Information on Immigration Enforcement and Supervisory Promotions in the Department of Homeland Security’s Immigration and Customs Enforcement and Customs and Border Protection. GAO-06-751R. Washington, D.C.: June 13, 2006. Homeland Security: Contract Management and Oversight for Visitor and Immigrant Status Program Need to Be Strengthened. GAO-06-404. Washington, D.C.: June 9, 2006. Homeland Security: Better Management Practices Could Enhance DHS’s Ability to Allocate Investigative Resources. GAO-06-462T. Washington, D.C.: March 28, 2006. Immigration Enforcement: Weaknesses Hinder Employment Verification and Worksite Enforcement Efforts. GAO-05-813. Washington, D.C.: August 31, 2005. Immigration Benefits: Additional Efforts Needed to Help Ensure Alien Files Are Located when Needed. GAO-07-85. Washington, D.C.: October 27, 2006. Immigration Benefits: Additional Controls and a Sanctions Strategy Could Enhance DHS’s Ability to Control Benefit Fraud. GAO-06-259. Washington, D.C.: March 10, 2006. Immigration Benefits: Improvements Needed to Address Backlogs and Ensure Quality of Adjudications. GAO-06-20. Washington, D.C.: November 21, 2005. Immigration Services: Better Contracting Practices Needed at Call Centers. GAO-05-526. Washington, D.C.: June 30, 2005. Catastrophic Disasters: Enhanced Leadership, Capabilities, and Accountability Controls Will Improve the Effectiveness of the Nation’s Preparedness, Response, and Recovery System. GAO-06-618. Washington, D.C.: September 6, 2006. Disaster Relief: Governmentwide Framework Needed to Collect and Consolidate Information to Report on Billions in Federal Funding for the 2005 Gulf Coast Hurricanes. GAO-06-834. Washington, D.C.: September 6, 2006. Disaster Preparedness: Limitations in Federal Evacuation Assistance for Health Facilities Should be Addressed. GAO-06-826. Washington, D.C.: July 20, 2006. Expedited Assistance for Victims of Hurricanes Katrina and Rita: FEMA’s Control Weaknesses Exposed the Government to Significant Fraud and Abuse. GAO-06-655. Washington, D.C.: June16, 2006. Hurricane Katrina: Comprehensive Policies and Procedures Are Needed to Ensure Appropriate Use of and Accountability for International Assistance. GAO-06-460. Washington, D.C.: April 6, 2006. Continuity of Operations: Agency Plans Have Improved, but Better Oversight Could Assist Agencies in Preparing for Emergencies. GAO-05-577. Washington, D.C.: April 28, 2005. 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 Homeland Security (DHS) plays a key role in leading and coordinating--with stakeholders in the federal, state, local, and private sectors--the nation's homeland security efforts. GAO has conducted numerous reviews of DHS management functions as well as programs including transportation and border security, immigration enforcement and service delivery, and disaster preparation and response. This testimony addresses why GAO designated DHS's implementation and transformation as a high-risk area, management challenges facing DHS, programmatic challenges facing DHS, and actions DHS should take to strengthen its implementation and transformation efforts. GAO designated implementing and transforming DHS as high risk in 2003 because DHS had to transform 22 agencies--several with existing program and management challenges--into one department, and failure to effectively address its challenges could have serious consequences for our homeland security. Despite some progress, this transformation remains high risk. Managing the transformation of an organization of the size and complexity of DHS requires comprehensive planning and integration of key management functions. DHS has made some progress in these areas, but much additional work is required to help ensure success. While DHS has developed a strategic plan, the plan does not link resource requirements to goals and objectives, and its creation did not involve key stakeholders to ensure resource investments target the highest priorities. DHS has also issued guidance and plans to assist management integration on a function by function basis, but lacks a comprehensive management integration strategy with overall goals, a timeline, and a dedicated team to support its integration efforts. The latest independent audit of DHS's financial statements revealed 10 material internal control weaknesses and confirmed that DHS's financial management systems still do not conform to federal requirements. DHS has also not institutionalized an effective strategic framework for information management, and its human capital--the centerpiece of its transformation efforts--and acquisition systems will require continued attention to ensure that DHS allocates its resources efficiently and effectively. Since GAO's January 2005 high-risk update, DHS has taken actions to strengthen program activities. However, DHS continues to face programmatic and partnering challenges. To help ensure that its missions are achieved, DHS must overcome continued challenges related to cargo, transportation, and border security; systematic visitor tracking; efforts to combat the employment of illegal aliens; and outdated Coast Guard asset capabilities. Further, DHS and the Federal Emergency Management Agency need to continue to develop clearly defined leadership roles and responsibilities; necessary disaster response capabilities; accountability systems to provide effective services while protecting against waste, fraud, and abuse; and the ability to conduct advanced contracting for goods and services necessary for emergency response. DHS has not produced a final corrective action plan specifying how it will address its existing management challenges. Such a plan should define the root causes of known problems, identify effective solutions, have management support, and provide for substantially completing corrective measures in the near term. It should also include performance metrics and milestones, as well as mechanisms to monitor progress. It will also be important for DHS to become more transparent and minimize recurring delays in providing access to information on its programs and operations so that Congress, GAO, and others can independently assess its efforts. |
In fiscal year 1997, IRS collected more than $1.6 trillion in tax revenue. Most of this revenue was collected by intermediaries, such as financial depository institutions, and transferred directly to the Treasury general fund. However, the remainder—estimated at over $100 billion in fiscal year 1997—was collected directly by IRS through its many service centers and district offices. Receipts IRS collected directly consist primarily of cash and checks mailed to IRS service centers with accompanying tax returns or payment vouchers and payments made in person at one of the service centers or district offices. While adequate physical safeguards over receipts should exist throughout the year, it is especially important during the peak filing season. Each year, during the weeks before and immediately after April 15, an IRS service center may receive and process daily over 100,000 pieces of mail containing returns, receipts, or both. The dollar value of receipts each service center processes increases to hundreds of millions of dollars a day during this time period. In addition, the number of staff increases significantly to handle and process the additional volume. For example, IRS hired over 20,000 seasonal employees nationwide for the 1998 filing season. The increased number of seasonal staff IRS employs to handle and process this large volume of receipts and returns increases IRS’ vulnerability to theft. In addition to adequately safeguarding taxpayer receipts, it is equally important for IRS to protect sensitive taxpayer data. Tax returns, schedules, and supporting documentation contain sensitive identifying information such as name, address, social security number, and details on the taxpayer’s financial holdings. Although none of the financial crimes and identity fraud incidents we noted in our previous report on identity fraud were reported as being linked to data stolen from IRS, sensitive information similar to that processed by IRS has been used to commit such crimes nationwide. Commonly reported financial crimes and identity fraud include using someone’s personal information to fraudulently establish credit, run up debt, or take over and deplete existing financial accounts. According to a Secret Service official, identified losses to victimized individuals and institutions due to financial crimes involving identity fraud increased from $442 million in fiscal year 1995 to $745 million in fiscal year 1997. IRS has also suffered losses due to various financial crime schemes. Between October 1995 and September 1997, IRS closed investigations on 22 cases involving theft of receipts at its district offices. In addition, between January 1995 and July 1997, IRS investigated 80 thefts of receipts totaling $5.3 million that occurred at its service centers. Of this amount, $4.6 million was attributable to one individual who stole not only checks but also original tax returns. This individual sent the checks to members of an organized crime ring in New York, who then altered or in some cases, “cloned” the checks for subsequent negotiation. For example, one taxpayer’s check was cloned by the perpetrators into multiple smaller checks and negotiated in England and Germany. The cloning scheme was discovered when the taxpayer’s accountants noticed that the check written to IRS was never cashed and that there were multiple additional checks cashed for amounts for which they had no supporting documentation. Financial crimes and identity fraud committed through the theft of receipts and tax return data can cause damage to many parties. Banks suffer financial loss when held accountable for damages resulting from cloned checks. The federal government may suffer losses in cases involving IRS’ failure to safeguard receipts and taxpayer data. Taxpayers can suffer injury to their reputations when credit is fraudulently established and debts incurred in their names. Bad credit could in turn lead to difficulties in obtaining loans or jobs and require a lengthy and expensive process to clear one’s personal records. While IRS inspectors have identified thefts of receipts and taxpayer data, the true magnitude of such crimes that have occurred within IRS will likely never be known. An IRS inspector stated that the $5.3 million of investigated thefts at service centers is understated for several reasons. For example, during investigations, prosecuted individuals confessed that they had stole other checks but could not remember the full amount. With the weaknesses and vulnerabilities identified, there are likely many thefts that have gone undetected. Furthermore, although IRS has identified instances of original tax returns stolen from service centers, the extent to which criminals have taken advantage of stolen taxpayer information is less measurable and thus largely unknown. However, the potential for using such data to commit identity fraud is great. Instances of financial crimes committed at IRS and their possible consequences demonstrate the importance of establishing and maintaining adequate physical controls over receipts and taxpayer data. We recognize that due to the high volume and sensitive nature of IRS’ activities, particularly during the peak filing season, no system of internal control can eliminate the vulnerability of receipts and sensitive taxpayer information to theft. However, a sound system of internal control should minimize the extent of this vulnerability to ensure that the government and taxpayers are not unduly exposed to loss of funds and misuse of taxpayer data, both of which could undermine the public’s trust in IRS’ ability to safeguard taxpayer funds and personal information. The objectives of our review were to (1) follow-up on cash receipt weaknesses identified in our audit of IRS’ fiscal year 1997 Custodial financial statements, and (2) observe operations during the peak filing season as part of our fiscal year 1998 financial statement audit. We conducted our visits from April 20 through April 23, 1998, at the Atlanta, Georgia, Austin, Texas, Ogden, Utah, and Philadelphia, Pennsylvania, service centers. These service centers were selected based on the dollar amount of receipts processed during fiscal year 1997 and on the dollar amount of reported thefts that occurred between January 1995 and July 1997. We also conducted observation work at the Los Angeles, Northern California, and North Texas district offices. Two of these three district offices were selected because they had teller units responsible for making deposits of walk-in payments to the banks via courier. We also selected one district office that did not have a teller unit and therefore sent all receipts, along with tax returns, to a service center to be processed. We conducted observations of the activities and the physical controls over the processing of receipts and tax returns at these service centers and district offices, and had limited discussions with IRS personnel at these sites. As agreed with IRS’ Chief Financial Officer, we limited our inquiry of IRS employees during these visits so we would not hinder operations during the peak filing season. However, we subsequently followed-up with IRS service center and national office personnel to obtain clarification and further explanation of IRS procedures. We reviewed internal audit reports and interviewed IRS internal auditors and inspectors at the Philadelphia and Ogden service centers to supplement our understanding and to obtain additional information and insight. We interviewed the Regional Inspector for the Northeast Region to obtain details on incidents of thefts at IRS service centers. We also reviewed IRS’ Summary Action Plan: Protection of Monetary Instruments, dated May 20, 1998, to consider IRS’ proposed actions on previously identified control weaknesses over monetary instruments, as well as IRS’ action plan dated June 4, 1998, to address control deficiencies over recruitment, background, and security investigations. We have not performed subsequent site visits to verify completed corrective actions reported by IRS. However, we intend to follow up on the status of these corrective actions as part of our fiscal year 1998 financial statement audit. We performed our work from April 1998 through August 1998 in accordance with generally accepted government auditing standards. We requested written comments on a draft of this report from the Commissioner of Internal Revenue or his designee. The Commissioner provided us with written comments, which are discussed in the “Agency Comments and Our Evaluation” section and are reprinted in appendix I. Despite the sensitivity of taxpayer data, we recognize that fully limiting access to such data is not feasible given the nature of IRS’ operations. Because the primary nature of IRS operations is to process tax returns, most of the units within the service center work with tax returns or other forms of tax data. Therefore, sensitive taxpayer information is accessible all over the service center. As a result, the vulnerability of this data to theft or misuse is heightened. This vulnerability thus underscores the need for effective deterrent controls to aid in reducing the exposure of tax data to such theft or misuse. To reduce the inherent risk in this exposure, IRS’ policy is to screen out job applicants that may pose a potential threat to IRS operations. IRS requires a fingerprint check on all permanent, seasonal, and temporary employees hired to identify any prior arrests and convictions. In addition, IRS requires a background investigation on all employees with a 90-day appointment or longer. However, IRS internal auditors reported that, in at least some instances, and for numerous reasons which we discuss later in this report, the results of these checks were not completed before the individuals were placed in positions responsible for handling cash receipts and taxpayer data. The Comptroller General’s Standards for Internal Controls in the Federal Government calls for employees to have personal and professional integrity and to maintain a level of competence that allows them to accomplish their assigned duties. Because IRS employees are entrusted with handling sensitive taxpayer information of a financial and personal nature, as well as billions of dollars in receipts, ensuring worker integrity through a carefully managed recruiting and hiring process is an area demanding special attention from IRS management. One way to assist in determining worker integrity is to ensure that background investigations of an appropriate level are performed on IRS employees. A background investigation may involve contacting prior employers, schools, and law enforcement agencies to inquire about the applicant’s qualifications, character, and other pertinent factors. The extent of the investigation depends on the employing agency’s risk assessment of the sensitivity of the position to be occupied based on guidelines defined by the Office of Personnel Management (OPM). Currently, IRS classifies some Receipt and Control Branch employees as occupying “low risk” positions. These “low risk” employees handle thousands of taxpayer receipts and sensitive taxpayer information which require a high degree of public confidence and trust. Because “low risk” positions require the least comprehensive type of investigation, background investigations for such employees may fail to uncover all pertinent information regarding the suitability of an individual to process taxpayer data and receipts. However, background investigations are lengthy. According to OPM, even limited investigations take an average of 75 calendar days to complete. Because of the length of time it takes, IRS only requires a background investigation for employees hired for periods of 90 days or more. To help screen individuals, such as seasonal and temporary employees who are hired for less than 90 days, and to more quickly identify potential problems with long-term employees before their background investigations are completed, IRS initiates fingerprint checks of all newly hired staff prior to employment. IRS submits candidates’ fingerprints and preliminary background information on each individual to OPM. OPM then inputs the demographic information into its database and transmits the information with the fingerprints to the Federal Bureau of Investigations (FBI) to check against national records. According to IRS, OPM indicated that results of fingerprint checks can be provided within 21 workdays. However, extensive delays in receiving fingerprint check results prevented IRS from obtaining such pertinent information promptly. The IRS internal audit review mentioned previously reported that the turnaround time for fingerprint checks averaged 68 days, with some fingerprint checks taking as long as 141 days, instead of the 21 days indicated by OPM. The internal audit review also found that some service centers did not take fingerprints of applicants or did not submit fingerprints in a timely manner. Furthermore, the review found that one service center did not prescreen any 30-day temporary employees, while another service center did not follow procedures requiring that service centers prescreen employees prior to sending background investigation packages for processing. The review also found that IRS personnel offices were reluctant to use the fingerprint prescreening process because the results were not received before employees reported to work. In February 1998, IRS convened a task team to study the service center prescreening process. The task team found that the delays with fingerprint checks are due to a number of causes that are partially attributable to IRS and partly to the FBI. According to the task team, not all service centers were fingerprinting applicants at the earliest possible point. Additionally, in some instances, fingerprints had to be retaken because of their poor quality and thus could not be processed by the FBI. The task team also found that the FBI’s manual processing of fingerprints is labor intensive, particularly for those prints that result in a possible match to the FBI’s database of arrest records. The task team found that the FBI had a backlog of 600,000 cases to process as of the date of their study and that the FBI places a higher priority on processing law enforcement requests for fingerprint checks than on requests related to personnel investigations. The delays in fingerprint checks are particularly serious when they are applied to seasonal and temporary employees. According to IRS data, a total of more than 20,000 seasonal employees were employed in 1998, of which more than 5,000 were new seasonal employees. These seasonal and temporary employees work an average of 8 to 10 weeks during the peak filing season, and may have already finished their term of employment before IRS receives the results of these fingerprint checks. In fact, the internal audit review discussed above found that in four service centers where information was available, as many as 5 percent of the 3,059 temporary and seasonal employees hired and placed in the Receipt and Control Branch during fiscal years 1996 and 1997 had backgrounds that contained arrests or convictions. If the results of fingerprint checks are not received promptly by IRS, these individuals can be placed in positions to steal receipts and taxpayer data. The failure to ensure that background investigations and fingerprint checks are completed before employment in sensitive areas increases the vulnerability of billions of dollars of cash and checks, as well as taxpayer data, to theft and fraud. According to the internal audit review, of the 80 thefts of receipts at service centers reported between January 1995 and July 1997, 12 were committed by employees with previous arrest records for theft, assault, or drug charges that were not identified prior to employment. The fingerprint prescreening results were not received before six of these employees reported for work and fingerprint prescreenings were not performed for the other six employees. To help address the slow turnaround time in receiving the results of fingerprint checks, the Philadelphia Service Center (PSC) has negotiated with local law enforcement to provide police checks on prospective IRS employees. Due to technical problems, PSC missed its August 1998 target date to establish a working, on-line connection between its fingerprinting machine and the local law enforcement’s fingerprint database. However, once these problems are resolved, the connection should enable PSC to transmit electronic fingerprint images so that the local law enforcement’s database can be checked and PSC alerted of arrest records on IRS applicants within 24 hours. While this should result in a marked improvement, the database can only identify crimes committed locally. On a nationwide basis, IRS has begun to address the fingerprint check problem. In response to a long-term solution recommended by the IRS task team, IRS is in the process of procuring equipment that will be compatible with the FBI’s Integrated Automated Fingerprint Identification System. This system will allow for an automated fingerprint classification. According to IRS, the electronic fingerprints, demographic information, and results from the FBI’s search will be channeled through OPM so that OPM can upload the information into its database. The FBI’s goal with this system is to process civil fingerprint checks within 24 hours. IRS expects to receive the results of the fingerprint check within 5 days. IRS’ target date for implementation of this system is August 1999. In the meantime, IRS is exploring short-term solutions recommended by the IRS task team to address problems with delayed fingerprint results. According to IRS’ action plan, it has retrained employees to take better quality fingerprints. Other planned short-term actions include 1) developing a policy to take fingerprints of filing season applicants upon their first contact with IRS, 2) issuing guidelines for service centers to contact local police agencies to determine if they will provide police checks on prospective employees, 3) determining the feasibility of moving employees from other units so that only employees with completed fingerprint checks are assigned to process receipts, and 4) bringing all service center personnel offices on-line with OPM so that the offices can receive background checks from OPM as soon as the results from FBI are uploaded to OPM’s database. These additional actions, however, have not yet been implemented. To ensure that employees assigned to process receipts and sensitive taxpayer data are subjected to the appropriate level of background check, we recommend that the Commissioner reevaluate the risk classification of all positions in IRS’ Receipt and Control Branch and reclassify such positions where appropriate. To reduce the incidence of applicants not subjected to fingerprint checks, we recommend that the Commissioner (1) establish procedures to review the applications and associated documents for all applicants given job offers to ensure that fingerprint checks are initiated on these individuals and (2) implement procedures to provide supervisory feedback on these reviews as necessary to ensure that personnel staff are aware of and follow IRS’ policy requiring fingerprint checks. To assist in the prompt receipt of fingerprint results of applicants, we recommend that the Commissioner continue with the agency’s plans to develop and implement a policy to fingerprint filing season applicants at the earliest possible time in the job application process. We also recommend that until the problems with delays in fingerprint checks are resolved, the Commissioner develop and implement a policy prohibiting new employees from being assigned to process receipts until results of fingerprint checks are received and reviewed by management. To obtain background information on a more timely basis, we recommend that the Commissioner continue the agency’s efforts to explore the feasibility of obtaining local police checks on IRS applicants and evaluate the efficiency and effectiveness of PSC’s electronic fingerprinting system in order to supplement FBI fingerprint checks. In the long term, to decrease the turnaround time for FBI fingerprint check results, we recommend that the Commissioner continue the agency’s efforts to negotiate with OPM and the FBI and procure the necessary equipment so that it can participate in the FBI’s Integrated Automated Fingerprint Identification System program by August 1999. The Comptroller General’s Standards for Internal Controls in the Federal Government requires that access to resources and records, such as IRS receipts and taxpayer data, be limited to authorized individuals in order to reduce the risk of unauthorized use or loss to the government. However, at the service centers and district offices we visited, we identified internal control weaknesses that allowed unauthorized access to such resources and records. Specifically, we found that IRS service centers did not (1) have adequate controls to limit unauthorized access to receipts and accompanying tax returns and (2) implement adequate safeguards over returned refund and unmatched checks. At district offices, we found that IRS did not (1) adequately secure receipts as required by the Internal Revenue Manual (IRM) and (2) perform necessary reconciliations to ensure accountability for district office receipts. Because IRS service centers and district offices directly collected over $100 billion in fiscal year 1997 and are responsible for processing all taxpayer data submitted by taxpayers, such weaknesses increase the vulnerability of receipts and taxpayer data to theft or misuse. During the peak filing season, the processing of receipts and returns occurs 24 hours a day. IRS handles and processes taxpayer receipts and returns in several stages. The Receipt and Control Branch at each IRS service center is responsible for the receipt and initial processing of mail containing receipts and returns delivered to the service centers. The branch is to be located in a restricted access area limited to authorized personnel. Staff extract the contents of envelopes mailed by taxpayers, post the payment data to credit taxpayers’ accounts for the amounts received, and then endorse and prepare the checks for deposit. After the payments are processed, units outside the Receipt and Control Branch review the tax returns and post the tax return data to taxpayers’ accounts. The units that post the tax return data are not located in restricted areas and are thus accessible to all employees and nonemployees who have access to an IRS service center. IRM 1(16)41 Physical Security Handbook, section 257.4, requires that the mail extraction operation—the first stage of processing—take place in a secured and restricted access area. However, at the four service centers we visited, mail that contained tax returns and receipts was left in carts in open, unrestricted corridors or rooms. Because of limited space at the service centers, these areas served as overflow storage when the units responsible for extracting mail could not accommodate all the mail received during the peak filing season. At two of the service centers, both unopened mail and opened mail that had been separated and clearly labeled as either “with remittances” or “without remittances” were stored in these areas. These overflow areas were not located in restricted access areas and, thus, were easily accessible to anyone in the service center, such as employees not authorized to process receipts or visitors who had no need to access receipts or taxpayer data. In fact, at one service center, the corridor used as an overflow area was a heavily travelled corridor used by employees carrying gym bags to access a fitness center. During our observations, no guards patrolled these areas in three of the four service centers visited. Although one service center used surveillance cameras to monitor activities in the corridor, the cameras’ views of activities were obstructed by 7-foot-high carts used to store unsorted and sorted mail. At the end of the extraction process, IRS staff illuminate, or “candle,” all envelopes which have already gone through the extraction process to ensure that all contents are actually removed prior to the envelopes’ destruction. The final candling activity at one service center was located in an unsecured room off an unrestricted corridor. Since the final candling activity is an extension of the extraction of receipts and taxpayer data, this operation should be located in a secured and restricted access area, as required by IRM 1(16)41 Physical Security Handbook section 257.4. Because many checks are found during the candling process, the lack of security over the candling area increases IRS’ vulnerability to theft or loss of checks. We also found that receipts discovered outside the Receipt and Control Branch were not adequately accounted for and secured. IRM 38(43)3.2, section (10), Service Center Deposit Activity, requires that “discovered remittances” not delivered immediately to the units responsible for depositing these receipts are to be held in locked containers. “Discovered remittances” are cash and/or checks that were either erroneously overlooked during the extraction process or that bypassed extraction because the receipts were sent unopened to other units, such as the Offer-in-Compromise Unit. The IRM further requires that as each such receipt is discovered, it is to be recorded by a supervisor on a control log. At two service centers, we observed numerous checks left on desks, shelves, or file folders in unsecured areas, such as the Code and Edit Unit and the Offer-in-Compromise Unit. At one of the service centers where we performed additional work, we found that these checks were not recorded on control logs until they were ready to be taken for receipt processing and deposit. We were informed that during the peak filing season, these checks were recorded on control logs and submitted to the appropriate unit for receipt processing on an hourly basis. However, prior to doing so, unsecured and unattended checks outside restricted areas were susceptible to theft by any individual who had access to the service center. Prior IRS internal audits and other internal reviews have identified other weaknesses in controls over the safeguarding of receipts. In response to these findings, each service center provided IRS management with its respective corrective action plan, which was then incorporated into IRS’ Summary Action Plan: Protection of Monetary Instruments, dated May 20, 1998. The plan reported corrective actions pending and some completed for weaknesses noted at specific service centers. However, the plan did not specifically address the use of overflow areas for storing receipts, nor did it address the weaknesses over “discovered remittances”. Additionally, the plan addressed the candling issue only at sites other than the one where we noted the weakness. Certain receipts that are particularly vulnerable to theft, such as “unmatched” and returned refund checks, were not properly secured. Unmatched checks are those checks that were inadvertently separated from their accompanying vouchers or tax returns or were mailed to the service center without any instructions from the taxpayers as to how the payments should be applied. Without such instructions, such checks must be set aside until they can be researched to determine which taxpayers’ accounts should be credited. At all service centers, unmatched checks are not subject to additional security but are stored in open baskets accessible to all who have access to the Receipt and Control Branch. As a result, these unmatched checks are particularly vulnerable to theft because they are not immediately processed and are stored in open baskets for long periods of time. Returned refund checks are Treasury refund checks that are sent to taxpayers and subsequently returned uncashed to IRS as payment against other tax liabilities. IRM 3.8.43, Service Center Direct Receipts - Service Center Deposit Activity, section 43.4.2.47, requires refund checks returned to IRS by taxpayers to be stamped “non-negotiable.” Although the IRM does not state when the returned refund checks should be voided, some of these checks were already endorsed by the taxpayers, making them highly negotiable. Consequently, they should be voided as soon as they are extracted. However, at two service centers, returned refund checks discovered by the Extraction Unit were handled by several employees before they were voided. These returned refund checks were left in unsecured bins or file folders on desks prior to being stamped “non-negotiable,” significantly increasing the risk of theft. According to internal auditors at one service center, seven returned refund checks totalling $300,000 were stolen from that service center. This demonstrates the susceptibility of these refund checks to theft. IRS internal audit similarly identified weaknesses over the handling of returned refund checks and recommended establishing tighter controls over these instruments. According to IRS’ Summary Action Plan: Protection of Monetary Instruments, IRS is pursuing a plan of action to address this weakness. However, no changes have yet been implemented. Although district offices do not receive the same volume of receipts as service centers, it is nonetheless important for such offices to diligently control access to and accountability for their receipts. However, as in the service centers, we found weaknesses in the internal controls over district office receipts that expose them to risk of theft or loss. Procedures for handling receipts at district offices vary slightly depending on whether the district office has a teller function. In all cases, however, the Customer Service Unit at the district office collects walk-in payments and tax returns from the taxpayers. If the district office has a teller function, walk-in payments are submitted to the Teller Unit, which posts receipt data into the IRS database in the same way the service centers do.These district offices use couriers to deliver their checks for deposit to the bank and to deliver any accompanying tax returns to the service centers for processing. If the district office does not have a teller function, the Customer Service Unit collects walk-in payments and returns and transmits all the documents via courier to the service center for processing. IRM 1(16)(41), Physical Security Handbook, section 500, “Minimum Protection Standards,” establishes a nationwide, uniform method of protecting items which require safeguarding. Specifically, it requires that checks and currency be stored in locked containers and that the keys to access those containers also be stored in a locked container. At the three district offices visited, we observed receipts stored in unlocked containers during the day and, at two district offices, in containers accessible to numerous employees overnight. Specifically, we found the following: At one district office, Customer Service employees left their desks unattended during the day, even though receipts were stored in drawers and the keys were still in the locks. At the end of the day, employees emptied their desk drawers of receipts in order to store them in a file cabinet overnight. If an employee left early, another employee would empty the drawer of receipts for overnight storage. The key to the file cabinet was accessible to all employees assigned to that unit. At another district office, Customer Service employees stored receipts in an unlocked cash box. The Customer Service area was accessible to all IRS employees at the district office. The receipts were locked in a file cabinet at the Teller Unit area overnight, and the key to the cabinet was stored in an unlocked desk. Several employees in the unit were aware of where the key was stored. In the third district office, receipts were stored in an open bin during the day. These receipts were stored overnight in a locked cabinet. At this district office, access to the cabinet was limited to two people in the unit. The use of unsecured containers to store receipts, or the failure to limit storage container accessibility to employees designated to open such containers, increases the potential for theft. To ensure proper access to and accountability for resources, the Comptroller General’s Standards for Internal Controls in the Federal Government specifies that periodic comparisons should be made between resources and records and that the frequency of such comparisons be determined by the vulnerability of the asset. However, at all three district offices we visited, receipts were not recorded in control logs or transmittal sheets until a few hours after receipt or even the following day. Additionally, no one reconciled the receipts against the control logs prior to or after overnight storage and prior to submitting them to the district office teller unit or to the service centers for processing. Given the weaknesses in securing receipts discussed above, the failure to immediately record receipts in control logs and to reconcile these control logs to receipts on hand decreases the likelihood of the timely detection of theft of receipts. Under current practices, incidents of theft may not come to IRS’ attention until taxpayers receive erroneous default notices or identify anomalies in their cancelled checks or bank statements and contact IRS. To ensure that the mail extraction process takes place in a secure and restricted access area, as required by the IRM, we recommend that the Commissioner improve the physical security controls over receipts and returns stored in unsecured overflow areas. These controls might include limiting unnecessary traffic by temporarily designating these overflow areas as restricted access areas and/or posting additional security guards over such areas during the peak filing season. To limit exposure to theft and provide adequate monitoring in accordance with IRM requirements, we recommend that the Commissioner ensure that all final candling activities are consistently located in a restricted access area. To reduce the vulnerability of receipts found outside restricted access areas, we recommend that the Commissioner provide secure containers for service center employees to store “discovered remittances” prior to inventory and submission to the Receipt and Control Branch. Immediately upon discovery, the receipts should be recorded into a control log, the receipts secured in a locked container, and the discovered receipts reconciled to the control log prior to submission for processing. To reduce the vulnerability of receipts that are especially susceptible to theft and misuse, we recommend that the Commissioner ensure that all unmatched checks are stored in locked containers until they can be researched and processed for deposit. To reduce the vulnerability of returned refund checks to theft, we recommend that the Commissioner ensure that all returned refund checks are stamped “non-negotiable” as soon as they are extracted. To better safeguard receipts at district offices, we recommend that the Commissioner require district office employees to store walk-in payments in secure containers in accordance with IRM 1(16)(41), section 500. District office management should ensure that this policy is followed and should limit the number of employees with access to the keys or combination to these containers. To improve accountability for walk-in payments received, we recommend that the Commissioner ensure that these receipts are recorded in a control log prior to depositing the receipts in the locked container and ensure that the control log information is reconciled to receipts prior to the submission of the receipts to another unit for payment processing. To ensure proper segregation of duties, the reconciliation should be performed by an employee not responsible for logging receipts in the control log. Proper safeguarding of assets requires that IRS ensure adequate security over receipts from the time they are received at the service center until the time they are deposited at financial depository institutions. However, at all four service centers we visited, receipts for deposits were picked up from the service centers by a single unarmed, plain-clothes courier for delivery to the depositing bank. During our visits, these couriers were entrusted with transporting peak season deposits ranging from $100 million to almost $200 million for each deposit twice a day. At one district office, we observed that the courier was a bicycle messenger entrusted with over $1 million of receipts during nonpeak season to more than $100 million per deposit during the peak season. Deposits were also improperly safeguarded during pickup. At one service center, we observed that the courier left deposits unattended in the car while he returned inside the service center to pick up another batch of deposits. At another service center, we observed that the courier left deposits worth over $200 million unattended in the vehicle with the window open while he returned a borrowed cart to the interior of the service center. Onlookers at this service center were aware of the nature of the courier’s visit. According to a commercial bank and courier company officials, banking industry practice is generally to use unarmed couriers to transport checks and armored vehicles to transport currency. Therefore, IRS’ current practice of transporting checks via unarmed couriers is similar to current banking industry practices. However, because of the magnitude of IRS’ deposits, both in dollars and the number of checks, and the sensitivity of taxpayer information contained on the checks, the security provided by the unarmed courier services may be inadequate to meet IRS’ responsibility to protect government assets and personal taxpayer information. During the peak filing season, one service center deposit typically has tens of thousands of checks. If a deposit were lost or stolen, IRS would have to expend substantial efforts to initiate actions to recover stolen checks and prevent them from being negotiated. However, even if stolen checks are not cashed, they can be used for check cloning schemes, and sensitive personal information on these checks can be used to perpetrate identity fraud. Such an incident of loss or theft could result in the loss of funds and financial damage and could impose considerable burden on the taxpayers. Any such incident would greatly reduce the taxpayer’s confidence in IRS’ ability to safeguard tax receipts and the taxpayer’s personal data. Due to differences in courier contracts, IRS is not consistently covered in the event of deposits being lost, stolen, or damaged in transit. In some contracts, the bank provides the courier service and the liability insurance for deposits in transit. In these instances, the bank is liable for the loss, theft, or destruction of any deposit from the time it is picked up from IRS by the bank’s courier. If the deposits are stolen, the bank is liable for any loss that IRS cannot recover after IRS has notified the taxpayers, issued stop payment orders, and received replacement checks. However, in other cases where IRS directly contracts with the courier service, the courier service is only liable up to the limit specified in the contract. This limit varies between $350,000 in a contractual agreement for one service center to $1 million for another service center, while other contracts did not specifically refer to liability coverage. Because of the high dollar value and the volume of checks involved in one peak season shipment of deposits, the government could be exposed to losses which exceed the courier’s contractual liability if all the lost or stolen checks cannot be recovered. We also observed inconsistencies in the physical access rights to service centers that IRS provided to the couriers. At three of the service centers, IRS employees delivered the daily deposits from the Receipt and Control Branch to the couriers in the lobby or outside the building. However, at one service center, the courier was provided a restricted access area badge after checking in with the guard. This type of badge provided the courier greater access within the service center than most service center employees because it entitled the courier access to both unrestricted and restricted areas within the service center. This courier then proceeded to walk unescorted through the service center where tax returns were processed and entered the payment processing area through one of the restricted access doors not guarded by a door monitor. Because tax returns were stored unsecured and sometimes unattended throughout the service center and unprocessed receipts were stored in open baskets throughout the payment processing area, taxpayer data and checks were accessible to an individual who did not have a need to access them. To ensure that IRS meets its responsibility to protect government assets and taxpayer information, we recommend that the Commissioner study the feasibility of improving security for its deposits in transit. In conducting this study, IRS should consider a number of alternatives, including the use of depositories in closer proximity to its various field locations and employing security guards to accompany couriers to the depositories. To limit exposure to losses of deposits in transit, we recommend that the Commissioner develop a policy to ensure that contracts related to courier services do not unduly expose the government to losses in the event of lost, stolen, or damaged deposits in transit. To limit courier access to sensitive taxpayer information and unguarded receipts in the Receipt and Control Branch, we recommend that the Commissioner ensure that courier access is limited to service center premises. Deposit unit employees should deliver the deposits to couriers waiting at the guard station instead of providing couriers badges allowing them unnecessary service center access. In commenting on this report, the Commissioner of Internal Revenue generally agreed with our findings and recommendations and noted that IRS has or would be taking action to address the issues raised in the report. These actions include conducting an analysis of risk classifications of positions in the Receipt and Control Branch to ensure background checks are commensurate with the level of risk associated with the position; ensuring IRS has the necessary equipment to participate in the FBI’s Integrated Automated Fingerprint Identification System program by August 1999; working with each service center to determine appropriate methods for securing overflow areas and ensuring all final candling areas are located in restricted access areas; exploring various options for security containers for unmatched checks and implementing a process for such storage by August 1999; revising procedures to require stamping all returned refund checks “non-negotiable” as soon as they are extracted from envelopes; revising procedures for safeguarding receipts received in walk-in facilities and for maintaining a control log of receipts received and deposited or transferred to another unit by January 1999; and studying alternative methods for transporting deposits to depositories and service center practices for limiting courier access to service centers. These actions are generally consistent with the recommendations contained in our report and, if effectively implemented, would assist IRS in reducing the risk of loss or misuse of receipts and taxpayer information. However, there are a number of our recommendations for which IRS’ responses do not appear to adequately address. Specifically, IRS stated it would work with the Office of Personnel Management and IRS’ General Legal Services to determine when job applicants can be fingeprinted and would, to the extent possible, prohibit new employees from processing receipts until the results of fingerprint checks are received and reviewed by management. However, IRS noted that to wait for the results of fingerprint checks before hiring seasonal employees in the service centers would adversely affect IRS’ ability to collect and process tax returns. IRS also stated that it would not always be possible to prohibit new employees from processing receipts during its April peak returns processing period. However, it is particularly during these peak periods when receipts and taxpayer information are most susceptible to theft. Consequently, we believe that to further reduce such risk, IRS should carefully consider the need to have fingerprint checks performed prior to hiring new employees and have the results of all fingerprint checks reviewed prior to allowing personnel to handle taxpayer receipts and data. With regard to our recommendation that IRS provide secure containers for service center employees to store discovered remittances prior to inventory and submission to the Receipt and Control Branch and to maintain an inventory of these remittances on a control log, IRS noted that it currently has procedures which require service centers to store such remittances in a secure container and to record remittance information. However, we found that these procedures were not uniformly followed by the service centers. Consequently, IRS will need to be proactive in providing secure containers to the service centers and in ensuring records are maintained of discovered remittances. This report contains recommendations to you. The head of a federal agency is required by 31 U.S.C. 720 to submit a written statement on actions taken on these recommendations. You should send your statements to the Senate Committee on Governmental Affairs and the House Committee on Governmental Reform and Oversight within 60 days after the date of this letter. A written statement also must be sent to the House and Senate Committees on Appropriations with the agency’s first request for appropriations made over 60 days after the date of this letter. We are sending copies of this report to the Secretary of the Treasury and the Director of the Office of Management and Budget. We are also sending it to the Chairmen and Ranking Minority Members of the Senate Committee on Appropriations and its Subcommittee on Treasury and General Government; Senate Committee on Finance and its Subcommittee on Taxation and IRS Oversight; Senate Committee on Governmental Affairs; Senate Committee on the Budget; House Committee on Appropriations and its Subcommittee on Treasury, Postal Service, and General Government; House Committee on Ways and Means; House Committee on Government Reform and Oversight and its Subcommittee on Government Management, Information and Technology; House Committee on the Budget; and other interested congressional committees. Copies will be made available to others upon request. Please contact me at (202) 512-9505 or Steven J. Sebastian, Assistant Director, at (202) 512-9521 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix II. The following is GAO’s comment on the Internal Revenue Service’s letter dated October 29, 1998. 1. Discussed in the “Agency Comments and Our Evaluation” section. Doreen Eng, Assistant Director Delores Lee, Auditor-In-Charge Tuyet-Quan Thai, Auditor-In-Charge Pat Seaton, Senior Auditor The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a legislative requirement, GAO reviewed the Internal Revenue Service's (IRS) physical controls over receipts and taxpayer data. GAO noted that: (1) IRS' controls over receipts and taxpayer data do not adequately reduce the vulnerability of the federal government and taxpayers to loss from theft; (2) this condition existed because of the length of time required to conduct background investigations, delays in receiving results of fingerprint checks, and processing demands which required the hiring of thousands of employees during the peak filing season; (3) placing new hires in sensitive positions prior to, at a minimum, receiving the results of fingerprint check increases the vulnerability of receipts and taxpayer data to theft; (4) in fact, of the 80 thefts IRS investigated at service centers from January 1995 to July 1997, 12 were committed by individuals who had previous arrest records that were not identified prior to their employment; (5) GAO also noted weaknesses in the physical controls over service center and district office receipts; (6) while service center receipts are required to be processed only by authorized individuals in the Receipt and Control Branch, which is a restricted access area, numerous receipts were found in unrestricted areas accessible to other IRS employees and to non-employees not authorized to handle receipts; (7) receipts particularly vulnerable to theft also were not adequately secured; (8) while it is important to adequately protect cash and checks received at IRS facilities, it is similarly essential to ensure that these receipts are properly protected during transport to depository institutions; (9) GAO found that single, unarmed couriers in ordinary civilian vehicles were used to transport IRS deposits totalling hundreds of millions of dollars to the depository institutions during the peak filing season; (10) the theft of one peak season deposit could place a significant administrative burden on IRS to contact taxpayers and initiate stop payment orders on tens of thousands of checks; (11) although receipts and taxpayer information will always be vulnerable to theft, IRS has a responsibility to protect the government and taxpayers from such losses; (12) many of the actions GAO is recommending to minimize these vulnerabilities and thus better protect taxpayer receipts and data would not result in significant costs, and several other actions GAO is recommending are already required by IRS policy or are currently under consideration by IRS management; and (13) IRS has prepared two corrective action plans to reduce its vulnerability to theft or loss of receipts and taxpayer data. |
To assess IRS’s 2007 filing season performance in the key filing season activities compared to goals and past performance, and identify and assess potential improvements or efficiencies in filing season operations, we reviewed and analyzed IRS reports, testimonies, budget submissions, and other documents and data, including workload data, data related to IRS’s performance measures and goals, and data on taxpayer usage and other statistics such as the number of paid preparers; observed operations at IRS’s Atlanta, Ga. and Andover, Ma. paper processing centers, the Atlanta and Andover call sites, the Joint Operations Center (which manages IRS’s telephone services) in Atlanta, and several of IRS’s walk-in locations in Atlanta and Baltimore, Md. and selected these offices for a variety of reasons, including the location of key IRS managers, such as those responsible for telephone and walk-in site services; tested for statistically significant differences between annual performance measures based on IRS sample data; analyzed staffing data for paper and electronic filing, telephone assistance, reviewed information from organizations, such as Keynote Systems, that evaluate Internet performance; interviewed IRS officials about current operations, performance relative to 2007 performance goals and prior filing season performance, trends, significant factors and initiatives that affected or were intended to improve performance, monitoring and oversight of paid tax preparers, and research conducted or planned to examine links between taxpayer service and compliance; interviewed representatives of some of the larger private and nonprofit organizations that prepare tax returns, including H&R Block and trade organizations that represent both individual paid preparers, tax preparation companies, and professional associations, including the American Institute of Certified Public Accountants; reviewed TIGTA reports and interviewed TIGTA officials about IRS’s performance and initiatives; and reviewed prior GAO reports and followed up on our recommendations made in prior filing season and related reports. This report discusses numerous filing season performance measures and data that cover the quality, accessibility, and timeliness of IRS’s services that, based on our prior work, we consider sufficiently objective and reliable for purposes of this report. To the extent possible, we corroborated information from interviews with documentation and data and where not possible, we report the information as attributable to IRS officials. We reviewed IRS documentation, interviewed IRS officials about computer systems and data limitations, and compared those results to GAO standards of data reliability. Data limitations are discussed where appropriate. Finally, we conducted our work primarily at IRS headquarters in Washington, D.C., the Wage and Investment Division headquarters in Atlanta, Ga., as well as the other sites mentioned earlier. IRS’s filing season is an enormous and critical undertaking that consists of two primary activities, processing individual income tax returns and providing taxpayer assistance. It consumes more than $3 billion annually. Taxpayers can file their returns by mailing paper returns to one of IRS’s five paper processing centers or submitting the returns electronically. Electronic filing has provided IRS with significant cost savings. Electronic filing is faster, which allows taxpayers to receive refunds faster, and is less error prone—IRS does not have to transcribe electronic tax return information and built-in checks eliminate many errors that IRS has to address when processing paper tax returns, such as correcting computational mistakes and SSNs. In addition, taxpayers below an income ceiling can access the Free File program offered through IRS’s Web site by a consortium of 19 tax preparation companies that offer free online tax preparation and filing services. IRS’s Business Systems Modernization (BSM) program, which began eight years ago, is a high-risk, highly complex effort critical to supporting IRS’s taxpayer service goals, such as increasing electronic filing and providing more accurate and timely responses to taxpayer inquiries. To date, IRS has deployed releases of modernized systems that have delivered substantial benefits to taxpayers and the agency, including e-Services (a new Web portal and services for paid preparers) and parts of CADE, which is the new taxpayer information database that facilitates faster refund processing and provides IRS with more up-to-date account information. CADE is intended to eventually replace IRS’s antiquated Individual Master File legacy processing system, which is the agency’s repository of taxpayer account information, and therefore, is the BSM program’s cornerstone and highest priority project. IRS also provides a variety of taxpayer services, including tax law assistance, account resolution, limited return preparation, tax forms and publications distribution, outreach, and education, mainly through its telephone operations, Web site, and face-to-face assistance sites. Taxpayers can call IRS’s toll-free assistance telephone lines with questions about tax law or their refunds. Depending on how taxpayers respond to menu choices, questions are answered by an automated message or calls are routed to telephone assistors located at 24 call sites around the country. Calls are routed to the next available assistor assigned to answer specific questions, e.g., tax law, account, or refund questions. IRS provides many services through its Web site, including “Where’s My Refund,” which enables taxpayers to use the Web site to determine whether the agency received their tax returns and processed their refunds. Taxpayers can also download forms, instructions, and publications, research their own tax law issues through Frequently Asked Questions or Tax Topics, and receive help with specific tax law questions and procedural questions via e-mail. IRS’s volunteer program has become an increasingly important part of IRS’s face-to-face assistance. It expanded to 66 national partners that include financial, social service, corporate, educational, and government organizations and helps IRS serve traditionally underserved taxpayer segments, including the elderly, low-income, disabled taxpayers, taxpayers with limited-English proficiency, Native Americans, and rural taxpayers. Additionally, IRS has 401 walk-in sites where taxpayers can ask basic tax law questions, get account information, receive assistance with their accounts, and have returns prepared if their annual income is $39,000 or less. In April 2007, IRS released its final TAB report, a 5-year plan designed to assist the agency in providing, evaluating, and improving taxpayer services at lower costs. As part of its research into the costs of taxpayer services, IRS developed estimates of the cost-per-service contact for providing different types of taxpayer services and conducted preliminary research about the effect of taxpayer service on compliance. We have reported that IRS lacks quantitative estimates of the impact of taxpayer service and its enforcement efforts on voluntary compliance; TAB should help IRS obtain better estimates. We also have long supported IRS’s research efforts to measure the tax gap, which is the difference between what is paid voluntarily and on time and what is owed, and help reduce it. As we previously reported, despite the 2007 filing season being characterized as high-risk, in large part because of the Telephone Excise Tax Refund (TETR), the impact of TETR on taxpayer services has been much less than IRS anticipated. In addition to IRS, paid preparers are a critical part of the nation’s tax administration system because of the wide variety of services they offer and their unique relationship with taxpayers. Paid preparers may combine several taxpayer services, including help understanding tax obligations, answering tax law questions, and providing tax forms and publications, return preparation, and electronic filing. In previous reports and testimony, we have reported that paid preparers have made serious errors, although undoubtedly many do their best to provide their clients with quality service. Electronic filing and CADE both have the potential to further reduce IRS’s costs and improve processing speed and accuracy. Many tax returns are still filed on paper, which increases processing cost, and limits information readily available for IRS’s enforcement programs. As of September 14, 2007, IRS processed approximately 135 million individual income tax returns. Of those returns, approximately 79 million (58 percent) were filed electronically and the remaining 56 million were filed on paper. The number of returns filed electronically increased 9 percent over last year, which is greater than last year’s increase and more than IRS projected. One factor contributing to the growth in electronic filing is mandates. Thirteen states now mandate electronic filing of state returns, which has increased electronic filing of both state and federal tax returns. Despite the overall increase in electronic filing, taxpayer’s use of the Free File program continued to decline. For example, as of June 21, IRS processed about 3.8 million returns filed through the Free File program, 2 percent less than last year. IRS officials attributed this decline in part to companies offering free electronic online filing separate from the Free File program. Growth in electronic filing generates savings for IRS by reducing staff needed for labor-intensive paper processing. In 2006, IRS used almost 1,700 (36 percent) fewer staff for processing tax returns than in 1999. IRS estimates that this saved the agency $78 million in salary, benefits, and overtime in 2006. In addition, IRS has achieved ancillary space cost savings from the closing of submission processing centers. IRS estimated the cost savings as a result of closing the Brookhaven and Memphis paper processing centers to be $24.9 million in 2007. IRS closed its Philadelphia paper processing center at the end of September 2007, and plans to close its Andover paper processing center in 2009. IRS issued over 103 million refunds, totaling almost $233 billion, as of September 14, 2007. Nearly 60 percent of the refunds were directly deposited, almost 7 percent over the same period last year, which is important because direct deposit is faster, more convenient for taxpayers, and less expensive for IRS than mailing paper checks. IRS met or exceeded seven out of nine processing performance goals and continues a trend of improvement (see app. I for details). For example, IRS met or exceeded its goals for the percentage of errors included in letters, notices, and refunds. For eight of its nine measures, IRS met or exceeded its previous year’s performance. IRS did not meet one goal and paid more interest on delayed refunds than expected, because of problems with a computer system that processes some taxpayer identification numbers and the inexperience of new staff. IRS did not meet its efficiency goal because it received fewer easy to process TETR returns than expected. Groups and organizations we spoke with, including the National Association of Enrolled Agents, the American Institute of Certified Public Accountants, and large tax preparation and tax preparation software companies, corroborated what the processing performance data showed, saying the filing season went smoothly. Similarly, TIGTA recently reported that IRS had a successful filing season. IRS was late in delivering its latest version of CADE, its new tax return database, intended to replace the legacy Individual Master File. CADE Release 2.2 started processing returns in early March but did not become fully operational until late May, nearly 5 months behind schedule, because of problems identified during testing. IRS originally intended CADE to post 33 million taxpayer returns during 2007, more than four times the 7.4 million posted by CADE last year. With the delay IRS revised its estimate down to approximately 17 to 19 million returns, then down to 11 to 12 million returns. As of early August, CADE had posted 11 million returns, or about one-third of what IRS expected, and disbursed 11 million refunds totaling over $11 billion. A major benefit of CADE is that it is faster than the legacy Individual Master File system. According to IRS officials, direct deposit refunds are issued by CADE 1 to 5 business days faster than the current legacy system, and paper check refunds are issued 4 to 8 business days faster. Because of the delays in CADE millions of taxpayer refunds were not issued as fast as IRS planned. Even with the latest version of CADE deployed, last year IRS estimated that over $500 million more would be required to fully implement the individual income tax processing part of the system. Moreover, the CADE setback adversely affected IRS’s ability to deliver the functionality planned for the next release, such as processing the earned income tax credit schedule, and has caused IRS to reconsider the functionality of other future CADE releases. IRS expects future releases of CADE to be linked with its Account Management System (AMS) releases, requiring increased attention to issues of synchronization and coordination between the two systems. According to IRS officials, CADE and AMS working together will enable IRS to process tax returns and address many taxpayer issues, such as address changes, in a near real-time manner, which benefits both IRS and taxpayers. Further complicating matters, IRS has additional plans for CADE, such as processing tax returns claiming the earned income tax credit, during the 2008 filing season. IRS is aware of these challenges and is working on a revised Release Content Master Plan, which it plans to complete by November 2007, detailing the capabilities and interdependencies associated with future releases of CADE and AMS and the plans for replacing the legacy Individual Master File system. Paper returns cost IRS tens of millions of dollars to process. In all of 2006, IRS received about 63 million paper returns. Of these, 60 percent (38 million) were prepared on a computer, but then printed and mailed to IRS. IRS codes such returns with a “V.” IRS estimates that a paper return costs $2.36 more to process than an electronically filed return. This difference implies that, if IRS could convert all v-coders to electronic filing, IRS could save roughly $90 million annually. Furthermore, if all v-coders could be converted to electronic filing, the number of paper returns remaining and needing to be transcribed would be greatly reduced. Paper returns also limit the effectiveness of IRS’s enforcement programs. To control costs, IRS does not transcribe all the lines on paper tax returns into its computer databases, such as taxpayers’ telephone numbers, limiting the amount of information available electronically for enforcement purposes. As we previously reported, even small changes in the amount of information IRS transcribes can consume substantial resources that might offset some potential savings from electronic filing. Further, to avoid disadvantaging taxpayers who file electronically, IRS has a policy of posting the same information from electronic and paper returns to its databases. Consequently, if a line is not transcribed from paper returns, it is not posted from electronic returns either. Only information posted to computer databases is readily available for use in IRS’s automated compliance checking programs. These programs include matching tax return entries with information returns from third parties, such as Form W-2s from employers or Form 1099s from financial institutions, and selecting suspicious returns for audit. According to IRS officials, transcribing and posting more comprehensive information from individual income tax returns could facilitate the audit process, expedite contacts for faster resolution, reduce handling costs, allow for improved case selection, and potentially better define specific tax gap issues. Although we have not independently verified IRS’s methodology, for one of its main enforcement programs—the Automated Underreporter Program—IRS officials estimate that having all tax return information available electronically would result in a $175 million increase in tax revenue annually, while at the same time, reduce its “no-change” rate, making it less likely that IRS would select taxpayers for further contact where no additional tax was assessed, thus lowering taxpayer burden. State experiences provided some corroboration of IRS’s views, as officials we spoke with reported that greater electronic access to return information allowed them to verify information on state returns and improved their enforcement programs while reducing the number of compliant taxpayers who were contacted. At least two options exist to increase electronic filing—mandates and bar coding. Last year we suggested that the Congress mandate electronic filing by paid preparers meeting certain criteria, such as a threshold number of returns. Mandating electronic filing would not convert all v-coders, because it would not apply to taxpayers who prepare their own returns on a computer. Still, most v-coders use a paid preparer (68 percent in 2006). Another option to increase electronic filing is bar coding of all printed returns prepared using commercial software. IRS has done preliminary research showing that 100 percent of the information on a return could be condensed into a bar code, which could be read by hand-held scanners. Consequently, bar coding produces some of the efficiencies of electronic filing by replacing the labor-intensive transcription process and eliminating transcription errors. However, bar coding would still require some processing of paper such as receiving and opening paper mail. Several states already require bar coding on their printed returns and there is an industry standard among developers and vendors for creating bar codes. Moreover, many of the largest software providers already support bar coding. IRS’s Wage and Investment Operating Division staff developed a proposal for bar coding. However, Wage and Investment officials rejected that proposal in June 2007, in part because it involved upgrading a legacy system. Wage and Investment officials told us they are developing a new funding proposal for no earlier than 2010, which would likely include bar coding. IRS, however, lacks several pieces of information that would help it make a decision about whether the benefits exceed the costs of bar coding and transcribing the residual paper returns. Actions required: IRS does not know the actions needed to require commercial software vendors to include bar codes on printed returns. IRS officials told us that they have not conferred with the software vendors about the actions that would be necessary. Nor have they conferred with the states about the actions they took to mandate bar coding. Without knowing the necessary actions, IRS cannot estimate the costs and time frames for a bar code program. Benefits: While IRS has estimates of the savings from converting from paper to electronic filing, it does not have estimates of the savings from converting paper to bar coded returns. Although it estimated the increased revenue possible from the Automated Underreporter Program, IRS does not have a complete estimate of the revenue gains across all its enforcement programs that would be realized if all tax return information were transcribed and posted. Breakeven: IRS does not know how much electronic filing would have to increase, through either mandated electronic filing or bar coding, before transcribing the residual paper returns would pass a benefit/cost test. Gathering the above information would have some costs to IRS. However, the cost savings to IRS and increased revenue could be in the range of hundreds of millions of dollars. Additionally, taxpayer compliance burden might be reduced. Although they are an important part of the tax administration system, IRS has limited information about paid preparers. However, IRS has research and other initiatives under way intended to gain more information. As shown in figure 2, paid preparers have filed an increasing majority of all individual income tax returns over the last decade. During the 2006 filing season, paid preparers prepared nearly 78 million (61 percent) of the 127 million individual income tax returns. Of the preparer returns, nearly 70 percent were filed electronically. As we said in past reports, paid preparers are a critical quality-control checkpoint for the tax system and, as with IRS, the quality of the service they provide is important. However, we also said that some paid preparers made serious errors. For example, in 2006 we found that all 19 of the commercial preparers we visited made errors completing returns. Some of the most serious errors involved not reporting business income and failing to itemize deductions. Our limited work did not permit generalizing about the quality of all paid preparers’ work and undoubtedly, many preparers do their best to prepare returns that are compliant with tax laws. We also previously reported that, while many taxpayers believe they benefited from using a paid preparer, millions may have been poorly served. IRS has some information on paid preparers. For example, IRS requires paid preparers to identify themselves on all income tax returns they prepare by entering their SSN or PTIN. However, IRS does little to monitor or track basic information about individual paid preparers. For example, IRS does not collect information on the type of preparers, such as whether the preparer is an enrolled agent or part of a commercial chain, or the number or types of returns filed by preparers. Having such information could allow IRS to better identify filing errors and target its outreach to specific preparers or preparer groups. IRS currently has efforts under way intended to begin remedying the lack of information about paid preparers. One important step was the Return Preparer Summit, which took place in late September 2007. According to IRS, the Summit included officials from multiple IRS offices who discussed how to better coordinate and communicate between offices with paid preparer responsibilities. IRS officials expect to present their findings and potential recommendations in March 2008 when IRS updates its recent report on voluntary compliance and the tax gap. IRS is exploring the development of a database that will serve as a centralized repository of paid preparer information. IRS envisions that such a database could facilitate more robust compliance efforts and allow taxpayers to access information on the status of an enrolled agent. Additionally, the database could potentially be expanded to operate as a tracking system if proposed legislation mandating universal enrollment and testing of preparers was to be passed by the Congress. In the meantime, IRS is working to better utilize and potentially improve existing databases to share preparer information across its offices with paid preparer responsibilities. Further, according to IRS, the agency plans to conduct research on paid preparers as outlined in TAB. Paid preparer initiatives include studying how taxpayers select a paid preparer, evaluating the scope and nature of paid preparer errors, assessing IRS’s outreach strategy to paid preparers, and observing paid preparers’ business models in order to better understand how to provide effective services to reduce errors. Paid preparers can support IRS’s efforts to improve compliance. They assist the majority of individual income tax filers, and the assistance they offer can potentially help taxpayers avoid errors. Having additional information on paid preparers could help the agency identify and possibly prevent systematic errors and noncompliance, and could be important in guiding IRS’s outreach and education strategies for paid preparers. TAB and other initiatives IRS has planned are steps that should give the Congress and IRS a better basis for making decisions about the future oversight of paid preparers. Access and accuracy are key measures of IRS’s telephone performance, because IRS received 69 million calls during the filing season. At the same time, reducing excess capacity at call sites is important, because of the magnitude of IRS’s telephone operations. Taxpayers’ access to IRS’s telephone assistors was comparable to last year and IRS’s goal, as measured by level of service which is the percentage of taxpayers who wanted to talk with an assistor and actually got through and received service (see table 1). For two other access measures, average speed of answer—the length of time taxpayers wait to get their calls answered—and taxpayer disconnects—the rate at which taxpayers waiting to speak with an assistor abandoned their calls to IRS—IRS’s performance weakened somewhat compared to the same period last year, but the comparison is complicated by a policy change. As of June 30, average speed of answer increased about 15.4 percent and was slightly higher than IRS’s goal, and the taxpayer disconnect rate also increased. According to IRS officials, both increases were due, in part, to a decision by IRS to disconnect fewer taxpayers waiting to speak with an assistor. This decision resulted in taxpayers having the option of either waiting to speak with an assistor or hanging up rather than IRS deciding for them by disconnecting the call, resulting in increased taxpayer choice along with increases to both the average speed of answer and the taxpayer disconnect rate. Finally, IRS officials noted that Customer Voice Portal, a new call queuing process that routes calls directly to available assistors instead of to call sites, resulted in a more equalized wait-time for taxpayers calling to speak with an assistor this year. IRS estimates that the accuracy of telephone assistors’ responses to tax law and account questions was comparable to the same time period last year and met IRS’s goals. Moreover, as noted in table 2, since 2005, accuracy has been about 90 percent or more and was significantly better than in 2001. IRS received about 69 million calls on its toll-free telephone lines through June 2007, which was less than expected, but slightly more than in 2006. IRS’s automated service handled roughly the same number of calls as those handled by IRS assistors, although the number of automated calls received was fewer than last year (22.1 million), while the calls answered by assistors was equivalent to last year. Of the calls received by IRS, 28.8 million calls were from taxpayers trying to obtain information on the status of their tax refunds, despite increasing use of IRS’s Web site feature, “Where’s My Refund.” Another 22.2 million were about account questions, and 13.1 million were about tax law questions. Because millions of taxpayers continue to depend on IRS’s telephone assistance, it remains a critical part of taxpayer services. Moreover, IRS and our prior reports have noted that assisting taxpayers with tax questions reduces burdensome notices and inadvertent noncompliance. As part of TAB and other initiatives, IRS plans to conduct more research into the effect of telephone assistance on compliance. IRS’s telephone operations consume most of IRS’s taxpayer service budget. According to TAB, assisted telephone services accounted for 65 percent and automated assistance accounted for 2 percent of the nearly $1 billion total costs to the agency for providing taxpayer assistance in 2005. At this time IRS does not have plans to automate more calls, since the agency has already shifted easier calls to automation and Web assistance, leaving the more difficult and time-consuming account and tax law calls that require the attention of assistors. In addition to answering telephones, IRS devotes resources to processing paper inventory, such as amended returns and taxpayer correspondence at some of its call sites. Because of limited TETR call demand, IRS closed more paper inventory than anticipated, meaning that taxpayer issues were resolved more quickly. As seen in figure 4, call volume has not declined and accordingly, resources devoted to answering telephones have not declined noticeably since 2001, while resources devoted to paper inventory have declined almost 14 percent since 2001. IRS has initiatives to expand and improve on telephone services including Centralized Customer Contact Forecasting and Scheduling to modernize the current system of workload forecasting, scheduling, and tracking workload and training requirements. Working groups looking into ways of improving taxpayer services, such as developing ways to synchronize telephone message information with Web site services to better link different service channels. IRS’s goal is to revise the messages heard by taxpayers calling to speak with assistors after business hours, during holidays, or when telephone lines are too crowded to accommodate them, so that taxpayers are told not only when to try back, but are also referred to IRS’s Web site for further information. Last year we recommended that IRS timely develop, validate, and implement a plan to consolidate call sites because, at the filing season’s peak, IRS determined that it had 850 unused assistor workstations spread across its 24 call sites. According to IRS officials, the number of unused workstations has not changed. IRS completed a workload analysis designed to evaluate changes in telephone staff resources and call demand and used business criteria, such as the types of calls answered at call sites and facility and employee costs, to identify call sites for potential closure. IRS plans to conduct an extensive cost-analysis review of different options for reducing excess capacity prior to potentially closing any sites, has secured funding for the analysis, and is in the process of obtaining a contractor to assist with the review. Web site performance remains high, which is important because IRS’s Web site is used by millions of taxpayers, is available to taxpayers 24 hours a day, is much less costly than other types of assistance, and will remain important as more taxpayers use self-assistance. Use of IRS’s Web site increased this filing season compared to prior years’ except for downloads of files such as tax forms and publications, as shown in table 3 below. According to IRS officials, one reason for the decrease in downloads is the conversion of IRS publications and instructions from file format to another format, which IRS does not count as part of downloads. Additionally, the increased use of electronic filing and tax preparation software reduces the need for taxpayers to download tax forms and publications. However, because of the decline, IRS will continue to monitor the number of downloads and identify possible issues associated with downloading files. Evidence that IRS’s Web site is performing well includes the following: According to the American Customer Satisfaction Index, for the 2007 filing season, January 1 through April 17, 2007, IRS’s Web site scored above other government agencies, nonprofits, and private sector firms for customer satisfaction (74 for IRS versus 72 for all government agencies versus 71 for all business surveyed), and better than during the 2006 filing season. An independent weekly study by Keynote Systems, Inc., a company that evaluates Web sites, reported that, as of July 16, 2007, IRS’s Web site repeatedly ranked in the top 6 out of 40 government agency Web sites evaluated in terms of average download time. According to IRS, the number of e-mails and telephone calls to the Web site HelpDesk decreased compared to the 2006 filing season, and average page views per visit decreased, indicating that visitors to the Web site are finding information more quickly. Additionally, this year IRS implemented a new sales tax deduction calculator, which IRS wants to use as a standard for developing other online calculators, and updates to the Free File, Alternative Minimum Tax, and Earned Income Tax Credit applications. Also, this year the “Where’s My Refund” feature allowed taxpayers to check on the status of split refunds, and told the taxpayer if one or more deposits were returned from the bank because of an incorrect routing or account number. IRS has initiatives to expand and improve on its Web site services. Tax Law Support Tools will provide Web site self-assistance tools to taxpayers and other external stakeholders, allowing users to conduct keyword and natural language queries. The first release of Internet Customer Account Services will allow individual taxpayers to view their account information online and is expected to be deployed in July 2008. A Spanish version of “Where’s My Refund” will enable Spanish speaking taxpayers to check refund status and receive account information. Volunteer sites play an increasingly important role in the tax system and are part of IRS’s and the Department of Treasury’s integrated multiyear strategy to reduce the tax gap by better identifying and recruiting partners that are more skilled than IRS at reaching underserved taxpayers, including the elderly, disabled, low-income, Native American, and rural taxpayers. Volunteer sites prepared 2.4 million returns, an increase of 17 percent over last year and higher than projected through April 21, 2007. As illustrated in figure 5, this is consistent with previous trends for volunteer and walk-in sites. Return preparation at volunteer sites has more than doubled since 2001, while return preparation at IRS’s walk-in sites has declined by almost 74 percent during the same period. Increased return preparation assistance at volunteer sites, rather than at walk-in sites, allows IRS to devote more resources to services such as account assistance, which can only be provided by IRS staff. Further, TAB data show return preparation assistance provided at walk-in sites is four times more expensive per return than at volunteer sites. Moreover, TAB data show that walk-in sites are used by a small percentage of taxpayers, yet account for over 20 percent or, $201 million, of the almost $1 billion spent on taxpayer assistance in 2005. Despite an increase in the number of returns prepared at volunteer sites, the quality of volunteer-prepared returns remains largely unknown and what is known is not statistically reliable. IRS’s current initiative to monitor the quality of returns at volunteer sites is in its second year of implementation and includes mystery shopping, site and return reviews. However, according to IRS officials, volunteer sites had advanced notice of site and return reviews, but not mystery shopping. Consequently, IRS acknowledged that the advance notice of these reviews was likely to bias the results. While IRS plans to continue to perform site and return reviews in 2008, officials said that following a sampling plan that would yield results that could be generalized to the universe of volunteer sites would be too costly. Instead, IRS plans to conduct unannounced return reviews, continue site reviews, and increase the number of mystery shopping visits from the 39 done in 2007 to 100. According to IRS officials, mystery shopping yields the best evaluative result of the three reviews IRS uses to assess the quality of volunteer-prepared returns. We agree that having unannounced visits and increasing the number of mystery shopping visits is likely to yield a better evaluative result than the potentially biased methods previously used for monitoring return preparation. Furthermore, we and TIGTA acknowledge the difficulties in collecting statistically valid information about return preparation assistance at volunteer sites. In addition to quality, IRS uses some other measures to monitor the performance of its volunteer program, such as the number of returns prepared, percentage prepared electronically, and the satisfaction of its partners, such as financial, social service, corporate, and government organizations. While useful, these measures do not reflect the extent to which the volunteer program improves taxpayer compliance and participation in programs such as the earned income tax credit. IRS has increased its reliance on the volunteer program and plans to commit more resources. However, as we testified earlier this year, IRS’s budget submission did not include basic performance information about the program. More specifically, IRS does not know the extent to which the program influences the taxpaying behavior of its target populations. Regarding IRS’s walk-in sites, IRS recently started implementing contact recording intended to better measure the accuracy of tax law and account assistance. As shown in figure 6, contact recording automatically captures the audio portion of a taxpayer contact and synchronizes it with an IRS walk-in site assistor’s computer screen activity. With the exception of a microphone that sits atop the desk of the walk-in site assistor, contact recording is similar to the system IRS uses to monitor and assess the quality of telephone interaction between taxpayers and telephone assistors. IRS has deployed contact recording at 127 of its 401 walk-in sites, which represents 46 percent of walk-in site contacts. As of May 26, 2007, IRS data show accuracy rates of 85 percent for accounts assistance and 80 percent for tax law assistance, and IRS officials expect accuracy rates to improve as IRS deploys contact recording at more sites. Although IRS currently has plans to fully deploy the contact recording systems to all walk-in sites by 2009, contact recording is not included in its plans to assess the quality of return preparation assistance. IRS intends on relying on managerial observation of employee/taxpayer interactions while providing return assistance. We have previously reported that employees’ performance could be influenced by the knowledge that they are being observed by managers, biasing the results. Additionally, managers were not consistently coding employee performance. Consequently, without an unbiased method, IRS lacks reliable information to assess performance, establish obtainable goals, and measure progress toward goals. According to IRS officials, contact recording used to measure the accuracy of tax law and account assistance could be extended to include return preparation assistance. For example, the equipment is already at many of the sites—it is used to measure the accuracy of tax law and account assistance, but turned off for return assistance. IRS officials said that IRS had not yet determined the feasibility of using contact recording for return assistance. IRS officials were concerned that contact recording, as it is currently configured, might miss some aspects of return preparation assistance, such as verifying taxpayers’ documents. Further, IRS officials noted that because it takes longer to prepare a return than answer a tax law or account question, managerial review of return preparation takes longer than for tax law or account assistance. However, officials also noted that managers would be likely to spend the same amount of time using the manager observation method as with contact recording but manager observation would not yield reliable results. Without fully determining the feasibility of using contact recording for return assistance, IRS will not know if the concerns could be addressed and the existing equipment could be more fully utilized. TAB is a data-driven strategy that includes the results of extensive research designed to assist IRS in better understanding taxpayers’ service needs. For example, TAB research included several surveys that provided IRS with information about the services that taxpayers use or would use. TAB also provides plans to improve taxpayer services and a multiyear portfolio of research designed to provide information on the value of IRS services to taxpayers and partners and the effect of taxpayer service on compliance. According to IRS officials, with TAB, they now have more information about taxpayers than ever before. IRS developed estimates of the cost-per-service contact for providing different types of taxpayer services, although there were qualifications to those estimates. According to TAB, these estimates will provide a baseline methodology for computing and comparing the costs of services in the future. Having reliable cost information, together with a better understanding of taxpayers’ preferences, needs, and expectations, will assist IRS in determining whether it can provide taxpayers with the same services and benefits at lower cost through alternative methods. As table 4 shows, these costs vary widely depending on the type of service provided. TAB has potential value. In the past, we have stressed the importance of reconsidering the level and types of services IRS provides to taxpayers, such as whether to maintain the same number of walk-in sites. While we support IRS’s efforts to develop a data-driven strategy, the value of TAB will depend on several factors, such as Quantifying the linkage between taxpayer service and voluntary compliance. As noted above, TAB outlines a research portfolio that includes additional research on the impact of taxpayer service on voluntary compliance, which is consistent with the Department of Treasury tax gap report. According to TAB, a better understanding of the causes of noncompliance and the impact of specific taxpayer services on compliance would allow IRS to focus investments in taxpayer service to positively impact compliance. However, TAB recognizes that previous research has shown that quantifying this linkage is difficult. Coordinating and managing oversight responsibilities for TAB initiatives. IRS recently established a TAB Program Management Office responsible for facilitating, coordinating, and integrating TAB activities. The Program Management Office currently does not have authority to allocate funding for initiatives, and TAB officials said that it could be difficult to develop initiatives that require funding or coordination between different organizations without such authority. Obtaining funding. While some of the initiatives under TAB are funded mostly as extensions of existing efforts, most are not yet funded, and TAB does not contain any information related to how much, as a whole, it will cost. According to IRS, unfunded and future initiatives will have to compete with other IRS projects for funding within approved annual budgets. Including submission processing services. IRS officials acknowledge that submission processing is a significant component of service delivery and must be integrated into TAB. The timely processing of returns supports tax compliance and possibly reduces the need for taxpayer services. Over the last decade, IRS has improved its performance processing tax returns and providing taxpayer assistance. We see value in two IRS initiatives intended to further improve this performance. TAB, besides being a data-driven strategy for further improving service, may provide IRS with a better understanding of the effect of taxpayer service on compliance and thus of the return on IRS’s large investment in service. Similarly, obtaining more information about paid preparers is valuable because doing so should give the Congress and IRS a better basis for making decisions about the future oversight of paid preparers. In addition to these initiatives, we have identified other potential means for improving service. One opportunity is to increase electronically filed returns, either through mandates or bar coding, and transcribing the remaining lines on residual paper returns. However, IRS does not have the benefit/cost estimates that would be useful to make decisions about how to proceed. In particular, IRS does not know the actions needed to require software vendors to include bar codes on printed individual income tax returns and the cost of those actions; the benefits, in terms of processing costs and improved enforcement, of having all information available electronically; and how much electronic filing would have to increase for the benefits of transcribing all remaining paper returns to exceed the costs. Such information would allow IRS to compare the costs of additional transcription to the benefits of processing costs savings, additional enforcement revenues and reduced taxpayer burden. Additionally, despite increasing reliance on volunteer organizations to target underserved taxpayer groups, IRS lacks information on the effectiveness of its efforts. Finally, while IRS has been implementing contact recording at walk-in sites to monitor the accuracy of tax law and account assistance, it has not determined the feasibility of extending contact recording to its low-income return preparation assistance program. In both cases, the missing information impedes IRS’s ability to make data-based decisions about how to improve assistance to underserved taxpayers. We recommend that the Acting Commissioner of Internal Revenue direct the appropriate officials to determine actions needed to require software vendors to include bar codes on printed individual income tax returns and the cost of those actions; determine the benefits, in terms of processing costs and improved enforcement, of having all return information available electronically; determine how much electronic filing would have to increase, either through electronic filing mandates or bar coding, for the benefits of transcribing all remaining paper returns to exceed the costs; develop estimates of the effectiveness of IRS’s volunteer program at targeting underserved populations; and determine the feasibility of using contact recording as a method of monitoring and improving the quality of return preparation assistance at IRS’s walk-in sites. The Acting Commissioner of Internal Revenue provided written comments in a November 7, 2007 letter in which she agreed with all our recommendations and outlined IRS’s actions to address those recommendations. With respect to reducing processing costs and improving enforcement, IRS plans on specifically addressing these recommendations in a report to the Congress. With respect to assessing the effectiveness and quality of IRS’s face-to-face services, IRS reported it plans to develop methods of estimating how it can provide better face-to- face assistance. 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 date. At that time, we will send copies of this report to the Secretary of the Treasury; the Acting Commissioner of Internal Revenue; the Director, Office of Management and Budget; relevant congressional committees; and other interested parties. This report is available at no charge on GAO’s web site at http://www.gao.gov. For further information regarding this testimony, please contact James R. White, Director, Strategic Issues, on 202-512-9110 or [email protected]. Contacts for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Joanna Stamatiades, Assistant Director; Amy Dingler; Evan Gilman; Timothy D. Hopkins; Jennifer McDonald; Paul B. Middleton; Emily Norman; Karen O’Conor; Cheryl Peterson; Neil Pinney; and Lerone Reid. If you or your staffs have any questions, please contact me at (202) 512- 9110 or [email protected]. As of June 30, the Internal Revenue Service met or exceeded seven out of nine processing performance goals and continues a general trend of improvement. As shown in table 6 below, IRS met or exceeded its goals for the percentage of errors included in letters, notices, refunds, and deposits; deposit timeliness (i.e., interest foregone by untimely deposits); and productivity. IRS met its goal for refund timeliness but did not meet its goals for refund interest paid and Individual Master File efficiency. IRS officials said that the lighter than expected TETR volume meant that IRS’s goal for Individual Master File efficiency could not be achieved because TETR returns were the easiest to process. Additionally, problems with a computer system that processes some taxpayer identification numbers and the inexperience of new staff adversely affected performance on refund interest paid. Table 5 also shows that IRS’s processing performance has significantly improved in some areas, such as the deposit and refund error rates, since 2001. | In 2007, the Internal Revenue Service (IRS) will spend over $3 billion to process returns and provide taxpayer service. Effective service can reduce taxpayers' burden of complying with tax laws and, many tax experts believe, may improve compliance. GAO was asked to assess IRS's performance relative to 2007 goals and prior years' performance including identifying actions that might generate efficiencies and increase compliance. GAO analyzed IRS performance data, reviewed IRS operations at various locations, and interviewed IRS and paid preparer representatives. IRS improved most filing season services during 2007, continuing a longer-term trend. Tax return processing exceeded last year's performance by most measures. Electronic filing grew at a faster rate than IRS anticipated and continued to generate savings. Access to IRS telephone assistors was comparable to last year, and the accuracy of responses to questions remained at about 90 percent. The performance of IRS's Web site improved in several measures, such as customer satisfaction. Continuing past trends, more taxpayers used volunteer sites, which are less costly than IRS's walk-in sites. Despite these improvements, IRS could reduce the number of paper tax returns processed and also transcribe all lines from the residual paper returns, making that data more available for enforcement. Two options for reducing paper processing are electronic filing mandates, previously suggested by GAO, and bar coding, which could be required for paper returns prepared on computers and reduces processing costs. Currently, because of the cost, IRS does not transcribe all lines from paper returns. Further, IRS policy is to post the same lines from electronic and paper returns to its enforcement databases. As a result, IRS does not use all tax return information in its automated compliance checking programs. However, IRS does not know the actions needed to require software vendors to include bar codes on printed tax returns; the benefits, in terms of processing savings and improved enforcement, of having all return data available electronically; or how much electronic filing would have to increase, either through mandates or bar coding, for the benefits of transcribing all residual paper returns to exceed the costs. Despite more reliance on its volunteer program, IRS has not evaluated its effectiveness at reaching underserved taxpayers. Further, IRS may be missing an opportunity to assess the quality of return preparation assistance at its walk-in sites through contact recording, a system IRS uses to record and assess the quality of other interactions between its employees and taxpayers. |
The Subcommittee’s November 1997 oversight hearing on DCIA’s implementation underscored the need for progress in referring delinquent nontax debts to Treasury for offset. At about the time of the hearing, agencies had referred $9.4 billion of nontax debt over 180 days delinquent to Treasury for administrative offset. Initially, agencies had been slow to refer delinquent nontax debt for administrative offset under DCIA largely because of uncertainty as to the delinquent nontax debt that should be referred. Also, Treasury had not made a concerted effort to identify delinquent nontax debt that could be offset or to develop time frames for agencies to refer the debt for offset. In January 1998, Treasury began actively working with agencies to reach agreement on the outstanding nontax debts over 180 days delinquent that can be referred for administrative offset and to obtain commitments from the agencies on referral of those debts. Treasury initially met with the five major credit agencies—the Departments of Agriculture, Education, Housing and Urban Development, and Veterans Affairs (VA) and the Small Business Administration. Later, Treasury expanded its work to include the other CFO Act agencies. As of April 1998, the CFO Act agencies had referred about $16.7 billion of delinquent nontax debt to Treasury for administrative offset—a 78 percent increase over about 7 months. Most of this increase resulted from Treasury’s work with the agencies to bring the nontax delinquent debts they submitted for the Internal Revenue Service’s (IRS) tax refund offset program into Treasury’s administrative offset database. Debts that agencies normally would have referred to IRS for tax refund offsets in calendar year 1998 were, instead, referred to Treasury’s Financial Management Service. These debts were incorporated into the database Treasury uses for matching debts for administrative offset and then referred to IRS, which maintains a separate database. In addition to the delinquent nontax debt that has been referred for offset, the CFO Act agencies also hold considerable delinquent nontax debt that has not been referred to Treasury. According to Treasury reports, in April 1998, these agencies held $43.1 billion of nontax debt over 180 days delinquent, including the $16.7 billion of referred debt. Treasury and the CFO Act agencies have determined that $19.4 billion, or almost 75 percent, of the $26.4 billion in unreferred nontax delinquent debt would not be referred for administrative offset, at least not in the near term, for the following reasons: about $12.3 billion relates to nontax delinquent debts that are involved with bankruptcies, foreclosures, statutory forbearance, or formal appeals. An automatic stay that generally prevents the government from pursuing collection against debtors in bankruptcy is provided by 11 U.S.C. Section 362. In addition, debts in foreclosure are governed by state laws that may preclude the government from pursuing foreclosure if collection is attempted through offset. Further, debts subject to forbearance generally are not legally enforceable, thus precluding collection of the debt until the forbearance process is completed. Also, agencies generally cannot certify debts under appeal as valid and legally enforceable until the appeal process is completed. Consequently, Treasury has agreed with agencies that these types of debts should be excluded from referral for offset. about $3.6 billion involves delinquent foreign debts. Treasury has stated that, for the most part, collecting these delinquent debts through administrative offsets is infeasible primarily due to foreign diplomacy considerations and affairs of state. about $3 billion of delinquent nontax debt has been referred by agencies to DOJ for litigation. (See footnote 3.) These debts are no longer under the control of the agencies and, therefore, Treasury does not hold the agencies responsible for referring such debt for administrative offset. Rather, DOJ is to determine if, and when, such debt is referred for offset. about $525 million of delinquent nontax debt owed to HUD, much of which will be scheduled for sale, is not being required to be referred for administrative offset at this time. In addition to these categories of unreferred debt, about $7 billion of outstanding nontax debt over 180 days delinquent remains. Most of this debt involves circumstances that may delay or preclude offset. For example, the vast majority of the Department of Education’s approximate $3.1 billion of unreferred nontax delinquent debt consists primarily of debts related to student loans, most of which were being serviced by state or private guaranty agencies. According to Education officials, although delinquent debt serviced by guaranty agencies is subject to referral for administrative offset, many referrals have not yet been made because the required due process for the debtors has not been completed. Another example involves delinquent debts related to the Department of Agriculture’s (USDA) state-administered food stamp program and farm loans. According to USDA officials, the food stamp program’s delinquent debts, which totaled about $775 million, must be further reviewed by the states to determine whether these debts are in repayment status or whether the debtors have been afforded due process. Also, according to USDA officials, statutory servicing rights normally require that the farm loan debtors be offered workout alternatives prior to collection by offset. As such, this debt, which totaled about $420 million, will not be made available for offset until this statutory process has been completed. Finally, according to a DOD official, DOD delinquent debts totaling about $2 billion are primarily in protest or dispute. Accordingly, these debts have not yet been referred to Treasury for offset. While referring all legally enforceable delinquent nontax debts for offset is an essential element of an effective administrative offset program, the program’s objectives cannot be achieved in the absence of another equally essential element—payments that can be offset. As discussed later, systems development problems have hampered Treasury’s ability to attempt to bring additional payments into its administrative offset program. Currently, payments that are available for administrative offset are limited to (1) vendor payments disbursed by Treasury and (2) retirement payments made by the Office of Personnel Management (OPM). These types of payments have been in the administrative offset program since 1996. Further, they comprised about 5 percent of the total number of disbursements made, and about 21 percent of the total dollars paid, by Treasury disbursing offices during fiscal year 1997. In addition, although almost all of the vendor payments disbursed by Treasury are currently available for administrative offset, many of these payments cannot be matched against debtor information in Treasury’s delinquent debtor database because the vendor records do not contain Taxpayer Identification Numbers (TIN). According to Treasury, during March 1998, about one-third of the payment requests submitted by the agencies for payment by Treasury did not include TINs. Further, Treasury does not yet know the total number of federal payments that may be available for administrative offset. In addition to federal payments made by Treasury, more than 50 Non-Treasury Disbursing Offices (NTDO) make federal payments. However, Treasury has not yet identified the total volume of NTDO payments, which include those made by DOD, the U.S. Postal Service (USPS), and numerous other federal agencies. Moreover, Treasury has not yet fully determined the extent to which payments will be exempt from administrative offset. Currently, Treasury has a request pending from the Pension Benefit Guaranty Corporation for discretionary exemption for a number of payment types, including those related to premium refunds to pension plans. In the future, other agencies may identify payments exempt by statute or request means-tested or discretionary exemption of payments. To date, Treasury has primarily relied on the agencies to identify potentially exempt payments. For example, VA informed Treasury that certain payments were exempted based on Section 5301(a) of Title 38, and Treasury confirmed the exemption. In addition, the Social Security Administration (SSA) and USDA requested and received exemptions for Supplemental Security Income and certain Food and Consumer Services payments, respectively, based on DCIA’s requirement that the Treasury Secretary exempt payments under means-tested programs. At this stage, Treasury does not know the total effect on the administrative offset program of payments that will be excluded from the program in accordance with DCIA, or other statutory provisions, and on the basis of requests for exclusions by heads of agencies. To facilitate implementation of payments into the administrative offset program, Treasury is developing several regulations applicable to payment issues. Some regulations have been published as Interim Rules (for example, those relating to federal salary offset), while others are currently being drafted or are with another agency for comment. For example, the rule for offset of federal benefit payments has been forwarded to SSA for consultation. Retirement and Survivors Benefits and Disability Insurance Benefits under the Social Security Program accounted for about 61 percent of the number of payments made by Treasury Disbursing Offices in fiscal year 1997. According to Treasury’s most recent DCIA Implementation Plan, it does not intend to publish a final rule for offsetting federal benefit payments, including Social Security payments, until October 1998. In addition, according to Treasury and SSA officials, even if the final rule were published, SSA will not be ready to make required systems changes until 1999 because of demands on its staff related to the Year 2000 computing crisis. One of the DCIA’s goals is to minimize debt collection costs by consolidating related functions and activities. To date, however, Treasury has not yet consolidated the administrative, tax refund, and federal salary offset programs. The Federal Tax Refund Offset Program (TROP) has been a cooperative effort of IRS and the federal program agencies. Legislation, beginning with the Deficit Reduction Act of 1984 (Public Law 98-369), authorized the use of tax refund offsets to recover delinquent federal nontax debts. The Emergency Unemployment Compensation Act of 1991 (Public Law 102-164) provided permanent authority to use tax refund offsets. Since TROP’s inception in 1986, approximately $8.5 billion of delinquent debt has been recovered through the program. The Debt Collection Act of 1982 authorized, but did not require, federal salary offsets and administrative offsets to liquidate delinquent nontax debt owed to federal agencies. The DCIA requires agencies to participate in an annual matching of records to identify federal employees delinquent on federal debts. Since 1987, the federal employee salary offset program has been a cooperative effort between the federal agencies and DOD’s Defense Manpower Data Center (DMDC). Under the program, DMDC performs the computer matching necessary to identify federal employees who are delinquent on their debts using delinquent nontax debtor files provided by the various creditor agencies. DMDC matches these files against active and retired civilian employment files provided by OPM, as well as against DOD’s active, retired, and reserve military personnel files. Under a similar program, creditor agencies submit delinquent nontax debtor files to USPS for matching against USPS personnel files. According to Treasury data, during fiscal year 1997, agencies collected over $42 million through these programs. Treasury’s lack of progress in consolidating the offset programs is primarily the result of its problems with the development of a new administrative offset system. I would now like to highlight these problems. Treasury does not have a system that can perform all the administrative offset functions envisioned as a result of DCIA. This can be directly attributed to problems Treasury has experienced in managing the development of such a system. Although Treasury has recently taken several actions to address systems development issues, it will be some time before enough information is available to accurately assess the effectiveness of those actions. In addition, we have identified several areas where additional actions must be taken immediately to reduce the risk of further system development problems. Prior to the passage of DCIA in April 1996, Treasury in conjunction with the Federal Reserve Bank of San Francisco (FRBSF), developed a pilot system to demonstrate the feasibility of conducting administrative offsets on a routine basis. The system, referred to as the Interim Treasury Offset Program (ITOP), is currently operational and is used to offset vendor payments disbursed by Treasury Disbursing Offices and OPM retirement payments. However, Treasury never intended the system, as it was originally developed, to perform all of the administrative offset functions envisioned as a result of DCIA. In September 1996, Treasury awarded a contract for the development and implementation of a new and expanded administrative offset system, known as the Grand Treasury Offset Program (GTOP). This system was to be used to consolidate the administrative, tax refund, and federal salary offset programs, and was to include all eligible delinquent federal nontax debt and federal payments. In addition, Treasury intended the system to be capable of incorporating state child support debts and other state debts, which DCIA authorizes to be recovered through federal payment offsets. GTOP was scheduled to be implemented in January 1998. However, because of systems development problems, it has not been placed into operation. Currently, Treasury is focusing its efforts on enhancing ITOP to handle all eligible debts and payments for the administrative offset program, as well as the consolidation of the administrative, tax refund, and federal salary offset programs. Treasury has concluded that it currently cannot use GTOP for the administrative offset program primarily because Treasury did not apply a disciplined system development process for that system. Treasury’s policies, including its systems life cycle methodology, and our guidancecall for the completion of a concept of operations and functional requirements in the development of a major system. The GTOP development effort was undertaken without (1) completing an overall concept of operations, which includes the high-level information flows for the system and (2) documenting the functional requirements that the system must meet. Treasury’s policies call for such generally accepted steps to be completed before a system is developed. We are unsure why the previous management team responsible for GTOP’s oversight allowed GTOP to be developed before these critical steps were completed. However, according to Treasury, the effect was that the completeness and usefulness of the software delivered by the GTOP contractor in October 1997 cannot be reasonably measured and the system cannot be tested to determine if it would meet Treasury’s needs. Thus, Treasury has not placed the system into operation. In December 1997, Treasury established a new management team for DCIA implementation, which includes managing a new systems development effort for the administrative offset program. The new management team has decided to halt all work on GTOP and enhance ITOP. Treasury recognizes that one of the disadvantages of this approach is that it may result in little or no return on the approximately $5 million it has paid to the contractor for development of the system software that has been delivered. However, it also believes that modifying ITOP is the most practical way to consolidate the administrative and tax refund offset programs for the 1998 tax year and to begin adding federal salary and benefit payment streams in the administrative offset program during calendar year 1998 or early 1999. According to Treasury officials, the enhancement of ITOP will comply with Treasury guidance for systems development efforts. Based on our review of documentation recently provided to us, there are indications that some of the critical system development requirements are being addressed. For example, Treasury has identified the information flows associated with several payment types and has begun to develop the corresponding functional requirements for those payment types. It has also developed a DCIA Implementation Plan that includes many of the steps necessary to enhance ITOP and projected completion dates for each step. This plan should enable Treasury management and others to promptly and objectively measure whether the ITOP enhancement is on schedule. In addition, Treasury’s Financial Management Service’s Debt Management Services is now routinely briefing the Under Secretary for Domestic Finance and other top Treasury officials on progress relating to the administrative offset program with the intention that such high-level oversight will facilitate keeping the implementation of DCIA on schedule and help to identify any significant problems early so that corrective actions can be taken promptly. While these efforts are positive steps, we have identified several areas where additional actions are needed. In reviewing Treasury’s plans and actions to date, we have identified several areas where additional actions must be taken immediately to adequately reduce the risk of costly modifications and further delays in the effective implementation of the administrative offset provisions of DCIA. First, a documented overall concept of operations has not yet been developed. A concept of operations includes high-level descriptions of information systems, their interrelationships, and information flows. It also describes the operations that must be performed, who must perform them, and where and how the operations will be carried out. According to Treasury officials, they understand the importance of such a document, but until recently, have not placed a high priority of completing it because they believe the individuals involved with the project have an overall view of how the offset processes should work. After we discussed this issue with Treasury officials, they have agreed to increase the priority associated with this effort and have projected completion of an overall concept of operations in July 1998. It is important for Treasury to place a high priority on ensuring that this effort is completed on schedule because it is the primary building block on which the entire systems development effort is based. Moreover, if personnel changes occur prior to completion of the project, it would be difficult to effectively complete the project promptly without such documentation. Second, overall functional requirements for the administrative offset system are not yet available. Functional requirements, which describe a system’s functional inputs, processes, and outputs, are derived from the concept of operations and serve as the rationale for a system’s detailed requirements. They are generally expressed in user terminology and are the foundation that guides the development process. Although Treasury has begun to develop and document functional requirements for several key processes, such as federal salary and tax refund offsets, it has not developed overall functional requirements for the administrative offset system. While the development of functional requirements for each key process is a necessary step in the incremental systems development approach being used, it does not replace the need for overall functional requirements. Until the functional requirements for the overall system are defined, the requirements for a given process may not be adequate. We discussed this issue with Treasury officials, and they have agreed to increase the priority associated with this effort and have projected completion of overall functional requirements by the end of August 1998. Treasury is in the process of preparing functional requirements for certain key processes. Treasury personnel stated that for each key process, the functional requirements would be clearly defined and that a requirements traceability matrix would be developed so that a test plan could be prepared. Treasury must place a high priority on (1) completing the overall functional requirements, (2) clearly defining the specific functional requirements as they are prepared for each key process, and (3) ensuring that the key process functional requirements are consistent with the applicable overall functional requirements. This is important because many system developers and program managers have identified ill-defined or incomplete requirements as one of the root causes of system failures. In addition, as previously stated, the lack of documented functional requirements is a major reason GTOP was not able to be tested. Third, Treasury’s DCIA Implementation Plan does not yet include all facets of the administrative offset program. The most recent version of the plan, dated May 1, 1998, includes the tasks and projected milestone dates involved with several of the key processes. However, the plan does not include information on handling certain payment types, such as payments made by NTDOs (other than USPS and DOD), miscellaneous payments, and salary payments made by payroll offices other than USDA’s National Finance Center (NFC), for which Treasury makes the disbursement.According to Treasury officials, because of the priorities they have put on merging the administrative and tax refund offset programs, processing salary payments from NFC, and processing Social Security Benefit payments, they have not as yet devoted time to fully developing an overall DCIA Implementation Plan. We recognize that Treasury’s current focus is largely directed toward consolidating existing payment offset programs to improve efficiency and attempt to minimize the costs of debt collection, which is an important objective of DCIA. In addition, the degree of specificity associated with a particular facet of the program may vary depending on the priority that Treasury assigns to it. However, a complete DCIA Implementation Plan is critical to the success of Treasury’s systems development efforts. Such a plan is needed for Treasury management and others to effectively evaluate (1) how the development and implementation of the overall system is progressing and (2) when corrective action is needed to ensure that major slippages do not occur. Treasury officials have agreed to more fully develop the DCIA Implementation Plan in the near future. Fourth, Treasury has not yet completed a risk management plan. A risk management plan is critical for the successful implementation of a systems development project because it provides management and others the ability to focus their efforts on the areas that pose the greatest risks. It also outlines the actions that Treasury will take to mitigate the risks identified. Treasury officials stated that although they have not developed such a plan for the overall system, they have developed a plan for the software development efforts. A risk management plan takes on even more importance when tight time frames are involved in a given effort because it outlines the actions that will be taken should the project miss key delivery dates. Treasury officials agreed that an overall risk management plan is needed and has projected completion in July 1998. Finally, Treasury has not yet evaluated the adequacy of the hardware and software platforms. Treasury has decided to use the hardware and software platforms that were selected for GTOP until it can conduct tests to determine if these platforms are adequate. Treasury officials acknowledge that this decision increased project risk because development efforts were being based on these platforms prior to knowing whether they were adequate for the requirements of the enhanced ITOP system. However, they believe the risk is justified because (1) the hardware has already been acquired and an evaluation of the adequacy of the platforms should be completed by June 30, 1998, and (2) some work had been performed to evaluate the adequacy of the platforms before they were selected for GTOP. Management must ensure that the evaluation of the hardware and software platforms is completed by the estimated completion date of June 30, 1998. Otherwise, Treasury runs a risk that the system it is developing cannot become operational without costly modification. Treasury’s commitment to address the systems development issues we have raised is encouraging. But it will be important for Treasury’s top management to ensure that the planned corrective actions are effectively and expeditiously completed prior to making any significant investment in the development of an administrative offset system. Otherwise, Treasury is significantly exposed to the risk of costly systems modifications and additional delay in developing a system to implement the administrative offset provision of DCIA. Mr. Chairman, this concludes my statement. I would be happy to respond to any questions that you or other members of the Subcommittee may have at this time. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO discussed the Department of the Treasury's implementation of the administrative offset provision of the Debt Collection Improvement Act (DCIA) of 1996, focusing on: (1) the status of referrals by agencies of delinquent nontax debts to Treasury for administrative offset; (2) actions Treasury has taken and plans to take to include all eligible federal payments in the administrative offset program; and (3) actions Treasury has taken, or plans to take, to consolidate the administrative, tax refund, and federal salary offset programs. GAO noted that: (1) Treasury has recently made progress in getting the 24 agencies covered by the Chief Financial Officers (CFO) Act of 1990 to refer nontax debt over 180 days delinquent for administrative offset; (2) as of April 1998, the CFO Act agencies had referred to Treasury about $16.7 billion in nontax debt over 180 days delinquent, and Treasury has entered these delinquencies into its debtor database; (3) this is a substantial increase over the $9.4 billion that had been referred to Treasury about 7 months earlier, at about the time the congressional subcommittee held DCIA oversight hearings in November 1997; (4) as of April 1998, about $26.4 billion of reported nontax debt over 180 days delinquent had not been referred to Treasury and is unlikely to be referred in the near future; (5) on the payment side, Treasury does not yet have a system capable of matching all federal payments against the delinquent debtor database; (6) as of April 1998, 2 years after DCIA's enactment, Treasury had collected about $1.2 million of delinquent nontax federal debt through its administrative offset program; (7) payments subject to offset through the administrative offset program are limited to those made by Treasury to vendors and to federal retirees by Treasury disbursing offices in fiscal year 1997; (8) also, Treasury has made little progress in fully determining the extent to which federal payments can be made available for offset; (9) Treasury has not yet consolidated the administrative, tax refund, and federal salary offset programs; (10) Treasury's systems development problems have also caused delay in consolidating these programs and thus, any debt collection efficiencies envisioned by such a consolidation have not yet been realized; (11) in developing an administrative offset system, Treasury did not apply a disciplined systems development process; (12) the resulting system, which was planned for implementation in January 1998, was not placed into operation, and a subsequent systems development effort is under way; (13) in efforts to develop an administrative offset system, Treasury has recently taken several actions to address systems development issues; (14) it will be important for Treasury's top management to ensure that the planned corrective actions are effectively and expeditiously completed prior to making any significant investment in the development of an administrative offset system; and (15) otherwise, Treasury is significantly exposed to risks that it may experience costly modifications and additional delays in developing a system for implementing the administrative offset provision of DCIA. |
Individuals with ESRD are eligible for Medicare benefits regardless of their age. In 2001, Medicare covered about 90 percent of the 406,000 individuals with the disease. ESRD occurs when an individual’s kidneys have regressed to less than 10 percent of normal baseline function. Without functioning kidneys, excess wastes and fluids in the body rise to dangerous levels, and certain hormones are no longer produced. The lack of one such hormone, erythropoietin, results in anemia, a condition in which an insufficient number of red blood cells are available to carry oxygen throughout the body. Diabetes and hypertension are the two principal causes of ESRD. The ESRD population has grown steadily over the years and is expected to continue to increase. From 1991 through 2001, the total number of individuals with ESRD increased from about 201,000 to 406,000, with an average annual growth rate of 7 percent. While the growth rate declined to about 5 percent in the late 1990s as a result of better preventive treatments, experts believe this decline to be temporary. Increases in the African-American and Hispanic populations, which have particularly high rates of diabetes, are expected to overwhelm this trend and lead to even greater growth rates in the future. In order to survive, individuals with ESRD require kidney transplantation or dialysis, a process in which excess fluids and wastes are removed from the blood. In 2001, about 292,000, or 72 percent, of all individuals with ESRD underwent dialysis, while the remaining 28 percent, or about 114,000 individuals, were transplant recipients. Transplantation is not a practical option for most individuals with ESRD because suitable donated organs are scarce. Also, many individuals are older and less healthy by the time they develop irreversible kidney failure, making them medically unsuitable for transplant. From 1991 through 2001, the total number of dialysis patients increased at an average annual growth rate of about 7 percent, the same as the ESRD population overall. In 2001, most dialysis patients received services from one of almost 4,000 hospital-based or freestanding dialysis facilities located in the 50 states and the District of Columbia. These facilities provide hemodialysis, as well as drugs and related clinical and support services for patients who dialyze at home or in a facility. In addition, some facilities provide training for home dialysis and may furnish the equipment and supplies necessary for home dialysis treatment. In 1973, when Medicare benefits were extended to individuals with ESRD, the majority of dialysis facilities were owned and operated by hospitals. By 2001, however, almost 84 percent of all dialysis facilities nationwide were freestanding. In addition, for-profit dialysis facility chains have represented an increasing share of the market. By 2001, the four largest for-profit chains accounted for about two-thirds of all freestanding facilities, and they provided treatment to about two- thirds of all dialysis patients. Dialysis can be administered using two methods: hemodialysis and PD. During hemodialysis, a dialysis machine pumps blood through an artificial kidney, called a hemodialyzer, and returns the cleansed blood to the body. Hemodialysis is usually administered three times a week at a dialysis facility, although patients may choose to undergo hemodialysis at home with the assistance of a caregiver. In-facility hemodialysis has become the dominant treatment method since the introduction of dialysis in the 1960s. In 2001, about 90 percent of all dialysis patients underwent in-facility hemodialysis, and less than 1 percent underwent hemodialysis at home. In PD, the peritoneal membrane, which surrounds a patient’s abdomen, acts as a natural blood filter, thus eliminating the need for blood to leave the body and filter through a machine. Patients remove the wastes and excess fluids from their abdomen manually throughout the day, or a machine automates the process while they sleep at night. Unlike hemodialysis, these patients generally dialyze at home. PD became an alternative to hemodialysis in the 1970s, and utilization peaked in the early 1990s, when more than 15 percent of all dialysis patients used this treatment method. By 2001, however, utilization had declined to about 8 percent of the dialysis population. Hemodialysis performed five to seven times per week, referred to as “daily hemodialysis,” more closely approximates the body’s continuous cleansing of the blood than the conventional regimen of three hemodialysis treatments per week. Between dialysis treatments, excess wastes and fluids build up in the patient’s blood, and many dialysis patients experience side effects such as hypertension, anemia, and low energy levels, which may adversely affect their clinical outcomes and quality of life. Because of these side effects, dialysis patients have high rates of hospitalization and often take several medications. Daily hemodialysis can take place either at home or in a facility, and proponents have asserted that it leads to improved quality of life, fewer hospitalizations, reduced use of medications, and overall cost savings to Medicare. Since 1983, Medicare has paid dialysis facilities a composite rate for each dialysis treatment it administers, generally up to a maximum of three treatments per beneficiary per week. The composite rate is a prospectively determined payment amount designed to cover the cost of services associated with a single dialysis treatment, including nursing and other clinical services, social services, supplies, equipment, and certain laboratory tests and drugs. Because the composite rate is prospectively determined, providers receive a fixed payment regardless of how much the services actually cost them to deliver. The initial fixed payment amount was derived from the median costs of providing medical services to beneficiaries across a sample of dialysis facilities. A prospective payment methodology encourages providers to control the costs and utilization of the services they provide, as they retain any difference between the payment and their costs. In 1972, 40 percent of all dialysis patients underwent hemodialysis at home. In 1981, the Congress passed legislation establishing a new system for the payment of outpatient dialysis services for Medicare beneficiaries. The changes were designed to reduce program costs by encouraging home dialysis rather than in-facility dialysis. Under the system, a single prospectively determined rate was implemented for home and in-facility dialysis. However, the percentage of patients who undergo dialysis at home has declined since 1983, the year the composite rate was implemented. In 1983, the proportion of dialysis patients dialyzing at home, whether with hemodialysis or PD, was 12 percent. By December 31, 2001, less than 9 percent of dialysis patients dialyzed at home. The composite rate has changed minimally since 1983, when the rate averaged about $131 for hospital-based facilities and $127 for freestanding facilities. The Congress passed legislation that decreased the rate by $2 in 1986 and increased it in 1991, 2000, and 2001 to about $135 for hospital- based facilities and $131 for freestanding facilities. From its implementation in 1983 through the end of 2003, the real dollar value of the composite rate declined by about 65 percent. The dialysis industry remained profitable under this relatively flat payment by increasing efficiency and productivity. However, industry representatives state that efficiency or productivity improvements can no longer make up for the lack of payment increases. They also state that although the number of dialysis facilities has been increasing throughout the last decade, declining profits may reverse that trend and eventually lead to decreased access for Medicare beneficiaries. While the composite rate was intended to pay for all services associated with dialysis treatment, Medicare pays separately for certain drugs and laboratory tests that have become routine treatments since 1983. These drugs include, but are not limited to, epoetin (EPO), vitamin D, and iron. Medicare’s payment for EPO, a bioengineered protein that substitutes for erythropoietin and is used to treat anemia, is statutorily set at $10 for every 1,000 units administered; all other separately billed drugs are paid at 95 percent of their average wholesale price (AWP). The Medicare composite rate includes payment for 16 laboratory tests deemed to be routine for dialysis patients. For any of the approximately 1,350 other laboratory tests that beneficiaries may receive, payment is made under a fee schedule to the clinical laboratory that performs the test. Although facilities are paid under a prospective payment system, CMS requires them to complete annual cost reports that are consistent with Medicare cost principles. These reports include cost information for separately billed drugs as well as items paid through the composite rate. Medicare cost principles were designed to ensure that Medicare pays for the expenses related to medical care for beneficiaries, and that those costs are reasonable and allowable. The agency periodically audits cost reports to remove unreasonable and nonallowable costs and, in the past, has calculated the difference between facility costs as reported on the cost reports and their allowable costs, referred to as an audit adjustment. The Balanced Budget Act of 1997 required the agency to audit dialysis facility cost reports, beginning in 1996, at least once every 3 years. In recent years, the Congress has moved toward a broader payment bundle for dialysis services. In 2000, BIPA required the Secretary of HHS to develop a payment system that includes clinical laboratory tests and drugs that are routinely used, but are currently billed separately from dialysis treatment. BIPA also required the Secretary to submit a report and recommendations on this system to the Congress. CMS issued the report in 2003, concluding that currently available data appear sufficient to expand the payment bundle to include those services. In December 2003, MMA mandated that effective January 1, 2005, a payment system be implemented combining the composite rate payment with the amount by which payments for separately billed drugs exceed their acquisition costs. Drugs that are currently paid separately will continue to be paid outside this system. This system must adjust for certain beneficiary characteristics and geographic differences in cost. In addition, the Secretary is required to submit a report to the Congress by October 1, 2005, that details the elements and features for the design and implementation of a bundled payment system including certain drugs that are currently billed separately. The Secretary is then required to establish a 3-year demonstration project, beginning January 1, 2006, using a payment system that accounts for patient characteristics identified in the report. From 1998 through 2001, the total number of hospital-based and freestanding dialysis facilities increased at about the same rate as the Medicare dialysis population, and the total number of dialysis stations, or treatment areas devoted to providing dialysis to patients, increased at a greater rate than the Medicare dialysis population. The dialysis industry opened facilities in more counties across the country, although the number of facilities available to beneficiaries living in urban counties was greater than in rural counties. In addition, while almost all facilities provided hemodialysis, fewer facilities provided home dialysis. Based on our analysis of the CMS Facility Survey files, the total number of hospital-based and freestanding dialysis facilities increased from 3,415 to 3,960, or about 16 percent, from December 31, 1998, through December 31, 2001. Over the same period, the number of ESRD beneficiaries on dialysis increased about 15 percent. While the annual growth in facilities slowed each year, this occurred primarily because of a decrease in new facilities, not because of an increase in closures. From 1998 through 2001, the number of facilities closing each year amounted to less than 1 percent of those that were operating at the end of that year. Because facilities vary in size, a more specific indicator of their capacity to provide hemodialysis is the number of dialysis stations in use at dialysis facilities. From December 31, 1998, through December 31, 2001, we estimate that the number of stations increased by over 24 percent, from about 53,100 to about 66,100, exceeding the growth rate of the dialysis population. The annual growth rate of stations was over 10 percent in 2001, much higher than the 5 percent growth rate of the Medicare dialysis population in that year. In addition, the dialysis industry expanded services to a larger portion of the country. The percentage of counties that had at least one dialysis facility increased from 41 to 47 percent, so that a total of 1,466 counties had at least one dialysis facility in 2001 (see fig. 1). While another 1,599 counties had at least one beneficiary on dialysis but no facility in 2001, most of these counties were adjacent to at least one other county that had a dialysis facility. Of the counties that were not adjacent to another county with a facility, many were concentrated in areas of the West and Midwest. Beneficiaries living in these counties either traveled to another facility or dialyzed at home. The supply of facilities in counties with beneficiaries on dialysis has remained stable. The percentage of beneficiaries on dialysis who resided in counties with at least one facility increased from 89 to 91 percent from 1998 through 2001. In addition, the average number of facilities per county, weighted by the number of beneficiaries in each county, increased from 11 to 12 from 1998 through 2001, as did the weighted average number of stations, which rose from 201 to 234. While overall beneficiary access to dialysis facilities remained stable, more facilities are available to beneficiaries on dialysis who reside in urban counties than to beneficiaries on dialysis in rural counties. From 1998 through 2001, the percentage of urban beneficiaries with at least one facility in their counties increased slightly from 97 to 98 percent, while the percentage of rural beneficiaries with at least one facility in their counties increased, but remained much lower, from 61 to 67 percent (see fig. 2). Furthermore, beneficiaries on dialysis residing in urban counties had more dialysis facilities available in their counties. From 1998 through 2001, the average number of facilities per urban county, weighted by the number of beneficiaries in each county, increased from 14 to 15 (see fig. 3), and the weighted average number of stations increased from 252 to 296 (see fig. 4). From 1998 through 2001, the weighted average number of facilities per rural county remained at 1, although the weighted average number of stations increased from 10 to 13. Across rural areas, substantial variation may exist in the supply of dialysis facilities. For example, 73 percent of beneficiaries on dialysis in Florida’s 33 rural counties had at least one facility in their counties in 2001, while only 39 percent of beneficiaries on dialysis in Michigan’s 58 rural counties had at least one facility in their counties. Although such differences could potentially be explained by differences in the geographic size of rural counties, rural counties in both Michigan and Florida average roughly 695 square miles. The number of dialysis facilities may be lower or nonexistent in certain geographic locations for certain reasons. The population of beneficiaries on dialysis is relatively small, and it may not be financially feasible to operate facilities in areas that do not have a sufficient number of beneficiaries needing dialysis. For example, while nearly 73 percent of counties were designated as rural in 2001, only 22 percent of beneficiaries on dialysis lived in those counties; about half of all rural counties were home to 15 or fewer beneficiaries on dialysis. Also, many industry representatives we interviewed stated that it was difficult to recruit and retain nurses to staff facilities. Shortages of nurses can hamper the industry’s ability to open facilities or keep facilities sufficiently staffed in certain geographic areas. Dialysis facilities provided in-facility hemodialysis almost universally, but the number of facilities providing home dialysis (PD and home hemodialysis) was much lower and declining. According to our analysis of the CMS Facility Survey files, 98 percent of dialysis facilities provided hemodialysis each year from 1998 through 2001. Over the same period, the percentage of dialysis facilities providing PD decreased from 46 to 40 percent, and the percentage of dialysis facilities providing home hemodialysis decreased from 10 to 8 percent. Beneficiaries on dialysis also had more facilities available in their counties that provided hemodialysis than home dialysis. The percentage of beneficiaries on dialysis who had a facility providing hemodialysis in their counties increased from 89 to 91 percent from 1998 through 2001 (see fig. 5). In contrast, the percentage of beneficiaries on dialysis who had a facility providing PD in their counties slightly decreased, from 76 to 75 percent, and the percentage of beneficiaries on dialysis who had a facility providing home hemodialysis in their counties declined from 47 to 45 percent. From 1998 through 2001, the average number of facilities providing hemodialysis per county, weighted by the number of beneficiaries in each county, increased slightly from 10 to 12 (see fig. 6). Over the same period, the weighted average number of facilities providing PD per county fell from 6 to 5, and on average, only 1 facility per county provided home hemodialysis. In rural counties, the number of facilities offering home dialysis remained low. From 1998 through 2001, the percentage of rural beneficiaries on dialysis with a facility providing hemodialysis in their counties increased from 61 to 67 percent (see fig. 7). In contrast, the percentage of rural beneficiaries on dialysis with a facility providing PD increased slightly from 27 to 28 percent, and the percentage of rural beneficiaries with a facility providing home hemodialysis increased from 3 to 4 percent. Beneficiaries on dialysis in rural counties had a weighted average of one facility providing hemodialysis per county and no facility providing PD or home hemodialysis. In addition, there were rural counties with beneficiaries on dialysis but no facilities. These beneficiaries dialyzed either in a neighboring county or at home. The number of facilities providing home dialysis may have been low for several reasons. Some providers and nephrologists we interviewed stated that many physicians are either unfamiliar with home dialysis or believe that patients have better outcomes with in-facility hemodialysis. They also reported that home programs are often not financially feasible for facilities unless there is a substantial number of patients receiving the treatment method, because facilities must hire staff to train and manage the care of these patients. Some providers and nephrologists also stated that facilities have a financial disincentive to provide home dialysis, because greater utilization of PD may result in unused hemodialysis stations and may reduce the need for certain profitable drugs like EPO. They also reported that PD may be favorable for beneficiaries in rural areas, where facilities can be more distantly located. We estimate that after adjusting to exclude nonallowable costs, total payments to freestanding dialysis facilities exceeded providers’ costs in 2001. Although payments were higher than costs overall, payments to small facilities were lower than costs. In addition, while composite rate payments were well below the costs of those services, separately billed drug payments far exceeded the costs of those services. Because of this imbalance in the payment structure, providers have an incentive to maximize the use of profitable separately billed drugs to compensate for inadequate payments under the composite rate. We estimate that Medicare payments to freestanding dialysis facilities exceeded their Medicare-allowable costs by 3 percent, on average. In order to calculate this percentage, we used costs as reported on dialysis facilities’ cost reports and used an adjustment to exclude nonallowable costs. Before the adjustment, we estimate that on average, payments were 1 percent below costs, a payment-to-cost ratio of 0.99, for composite rate services and separately billed drugs in 2001. Past agency audits have demonstrated that dialysis facilities have included nonallowable costs in their cost reports. The Health Care Financing Administration (HCFA) conducted audits of a random sample of 1988 and 1991 dialysis facility cost reports and found that providers’ allowable costs were about 90 percent and 89 percent, respectively, of reported costs. HCFA also audited the 1996 reports but did not calculate a similar percentage of reported costs that were allowable. When MedPAC compared the 1996 cost reports before and after auditing, it found that the allowable cost per treatment for composite rate services and separately billed drugs for freestanding facilities was about 96 percent of the reported cost per treatment. Because providers have historically included nonallowable costs on their cost reports, we applied MedPAC’s adjustment, which is the most conservative and most recent adjustment, to our payment-to-cost ratio of 0.99 and derived an adjusted payment-to-cost ratio of 1.03 for 2001. Although we calculated an overall payment-to-cost ratio for 2001 only, MedPAC has reported a decrease in these ratios from 1.14 in 1996 to 1.04 in 2001. Although payments exceeded costs overall in 2001, they did not exceed costs for all sizes of facilities. For example, payments were well below allowable costs for small facilities, with an adjusted payment-to-cost ratio of 0.91 (see table 1). Given the fixed costs a facility incurs in terms of staffing, equipment, supplies, and rent, revenue from the small patient base in these facilities may not be sufficient to meet costs. The Medicare payment methodology for dialysis services is not appropriate. In 2001, composite rate payments to freestanding facilities, intended to cover the costs of a variety of services associated with a dialysis treatment, such as nursing, supplies, social services, and certain laboratory tests, were well below the costs of those services. In addition, the composite rate does not include all the services beneficiaries on dialysis typically receive, and does not account for variation in service utilization and costs among beneficiaries. Separately billed drug payments, however, far exceeded the costs of those items. Because utilization of separately billed drugs is largely unconstrained, providers have an incentive to overutilize them to compensate for lower payments under the composite rate. In addition, composite rate payments for home dialysis treatments far exceeded the costs of those services, but payments for home dialysis training were well below the costs of those services. We estimate that from 1998 through 2001, composite rate payments were well below the costs of composite rate services. During these years, the unadjusted payment-to-cost ratio for composite rate services was below 1.00 and steadily decreased every year, falling from 0.94 to 0.89 (see table 2). Furthermore, the composite rate does not pay for all services routinely provided during a dialysis session. While the composite rate was designed to pay for services associated with a single dialysis session, certain items or services introduced since the creation of the rate are paid separately. We determined that three separately billed drugs, EPO, vitamin D, and iron, and drug-related supplies were provided to most dialysis beneficiaries and frequently accompanied hemodialysis treatments (see table 3). For example, 98 percent of beneficiaries received EPO in 2001 and, on average, at every dialysis treatment. The composite rate also does not adjust for factors that may affect the cost of providing dialysis services. Providers we interviewed told us that certain beneficiaries require more services than others because of the presence of conditions including diabetes, hypertension, vascular access problems, and other physical impairments. They stated that care for these beneficiaries may be more costly due to additional staff time, additional resources, or more frequent dialysis. There is currently no adjustment to the composite rate to account for variation in the costs of providing services to beneficiaries who consume more resources than average. While composite rate payments were well below costs, we estimate that payments for separately billed drugs far exceeded the costs of those drugs in 2001, with an unadjusted payment-to-cost ratio of 1.16. Because utilization of separately billed drugs is largely unconstrained and because payments for these items exceeded costs, providers have an incentive to overutilize them. Representatives from one of the largest chain providers and several nephrologists we interviewed reported that this incentive to overutilize exists because separately billed drug payments compensate for losses on composite rate services. However, several nephrologists and researchers we interviewed also reported that beneficiaries who undergo PD, or who otherwise dialyze more frequently than three times per week, have a reduced need for separately billed drugs. In addition to the imbalance in payment between composite rate services and separately billed drugs, an imbalance exists between payments for home dialysis treatments and home dialysis training. Two industry representatives and representatives of a patient advocacy organization we interviewed stated that Medicare payments for home dialysis training do not cover the costs of the service. We found that in 2001, the unadjusted payment-to-cost ratio for composite rate payments for home dialysis treatments was 1.11 and for home dialysis treatments and training combined was 1.04. The unadjusted payment-to-cost ratio for composite rate payments for home dialysis training alone was 0.38, indicating that payments were well below costs. A perception that facilities are losing money on the initial home dialysis training, even though payments are above costs for the training and treatment combined, may serve as a disincentive to offering the home dialysis treatment method. Daily hemodialysis, which is performed five to seven times per week, may improve patients’ clinical outcomes and quality of life because it more closely approximates the body’s continuous cleansing of the blood. The literature indicates that daily hemodialysis patients have a greater amount of toxin removed from their bodies, or a more adequate dialysis dosage, than conventional hemodialysis patients. Dialysis dosage is important because research suggests that inadequate dosage correlates with increased mortality. In addition, studies report that anemia and malnutrition, two serious conditions associated with increased morbidity and mortality, improve with daily hemodialysis, as does patient quality of life. For example, patients on daily hemodialysis experience less fatigue and enjoy a wider range of dietary choices. Studies also report that patients on daily hemodialysis have a reduced need for medication, including EPO and drugs to control blood pressure, and a reduced number of hospitalizations. Although studies on daily hemodialysis report improvements in patient outcomes, these studies are limited in size and scope. The daily hemodialysis patient base is extremely small, given that few dialysis facilities provide the treatment, and those that do have few patients using it. Although no national data exist on the utilization of daily hemodialysis, nephrologists we spoke with who provide daily hemodialysis estimate that approximately 200 patients are undergoing the treatment nationwide. Published studies are principally nonrandomized and have small sample sizes, typically fewer than 25 patients, and therefore do not provide definitive evidence supporting the treatment. Specifically, studies do not evaluate whether observed improvements in mortality can be attributed to the treatment itself or to some other factor. To definitively assess the treatment, more rigorous data are needed. Dialyzing more frequently has drawbacks. Although patients may experience better outcomes, daily hemodialysis increases the number of times a patient connects to the hemodialysis machine, and may increase transportation costs if a patient chooses to dialyze at a facility rather than at home. Such increased burdens may outweigh the benefits for a significant number of patients. Even so, providers and nephrologists we interviewed estimated that anywhere from 10 to 50 percent of the dialysis population would choose to undergo daily hemodialysis. Several studies, each of which evaluated the costs of one to two facilities, have found that facility costs increase upon implementation of daily hemodialysis. Industry representatives reported that despite the possible benefits of daily hemodialysis, it is not currently financially feasible to offer it to a large number of Medicare beneficiaries because Medicare does not routinely pay for more than three dialysis treatments per week. However, if beneficiaries who undergo daily hemodialysis have a reduced need for other Medicare services, such as drugs and inpatient stays, the Medicare program may realize overall cost savings. Research currently being conducted by the National Institutes of Health (NIH) may provide more rigorous data on daily hemodialysis, although it will not determine whether there is an overall cost savings to Medicare. With partial funding from CMS, NIH has funded four centers to test whether it is feasible to randomize a representative sample of patients into either conventional or daily hemodialysis. The trials will track a number of patient outcomes for at least 6 months, including anemia, nutritional status, blood pressure, medication use, and hospitalizations, but they are not designed to enroll enough patients to conclusively determine whether differences in mortality or hospitalizations are significant. Trial results, which will not be available until 2007, will determine whether NIH should continue with a large-scale trial that would measure the impact of more frequent dialysis on mortality or cardiovascular outcomes or both. From December 31, 1998, through December 31, 2001, beneficiary access to dialysis facilities and services appeared stable. The total number of dialysis facilities nationwide increased at about the same rate as the Medicare dialysis population, and the total number of stations nationwide increased at a faster rate than the Medicare dialysis population. Over the same period of time, the number of counties with at least one facility increased. On average, Medicare payments to freestanding dialysis facilities for composite rate and separately billed services combined exceeded providers’ estimated allowable costs by 3 percent in 2001. However, composite rate payments were well below the costs of composite rate services, and separately billed drug payments far exceeded the costs of separately billed drugs. The current payment methodology gives providers an incentive to overutilize separately billed drugs in order to compensate for losses on composite rate services and does not account for possible cost differences in treating beneficiaries. A payment methodology that bundled the services a facility provides into a prospective payment amount would encourage providers to control the costs and utilization of these items, as they retain the difference if their payments exceed their costs of providing necessary services. A system that is based on allowable costs and accounts for possible cost differences in treating beneficiaries would ensure that Medicare pays appropriately for the efficient delivery of services. As required by law, CMS is currently designing a bundled prospective payment system. In 2003, CMS reported to the Congress that currently available data appear sufficient to expand the payment bundle to include drugs and other services currently paid separately. MMA requires the Secretary of HHS to issue a second report by October 1, 2005, that details the elements and features for the design and implementation of a bundled system, and then implement a 3-year demonstration project beginning January 1, 2006, that is based on that system. We received written comments on a draft of this report from CMS (see app. II). We also received technical comments from NIH, which we incorporated where appropriate, and oral comments from seven external reviewers. The external reviewers represented industry and patient organizations. They included the American Association of Kidney Patients (AAKP); the Renal Physicians Association (RPA); Dialysis Clinic, Inc. (DCI), the largest nonprofit dialysis chain; Fresenius Medical Care (FMC), the largest for-profit dialysis chain; the National Kidney Foundation, a foundation for the prevention and treatment of kidney disease; the National Renal Administrators Association (NRAA), which represents employees at dialysis facilities; and the Renal Leadership Council (RLC), an association representing the four largest for-profit dialysis facility chains. In commenting on a draft of this report, CMS generally agreed with our findings and our conclusion that all outpatient dialysis services should be bundled into a single prospective payment amount based on facilities’ allowable costs. Although in the draft report we had also recommended that CMS redesign the prospective payment system for dialysis facilities to bundle the costs of services, including separately billed drugs, into one payment amount, in its comments CMS noted that it would not have the statutory authority to implement such a system. CMS also noted that MMA requires the Secretary of HHS to report to the Congress by October 1, 2005, on the elements and features necessary in the design and implementation of a broader payment system. The Secretary is also required to conduct a 3-year demonstration project, beginning January 1, 2006, using a payment system incorporating patient characteristics identified in the report. CMS also asked that we recognize its research on a bundled payment system that has been under way since October 2000. As a result of these comments, we deleted the recommendation in the draft report. In addition, although MMA was discussed in our draft report, we more prominently highlighted it and CMS’s research in the report. CMS also stated that while our findings on beneficiary access were reassuring, it is concerned that we did not specifically address access issues at the regional level. According to CMS, its staff has been told that hospitals in certain regions, such as New England and New York, are having difficulty discharging and placing ESRD patients in dialysis facilities in those areas. We acknowledged in the draft report that supply varied geographically and by treatment method. We based our findings on aggregate indicators, such as trends in numbers of stations and facilities relative to the beneficiary population, which all suggested that access had been stable from 1998 through 2001. We would not have been able to identify the extent to which supply has changed since 2001, as 2001 data were the most recent available at the time of our analysis. Comments from the industry representatives and patient organizations centered on three different areas: beneficiary access to dialysis, the data used in our analysis of Medicare payment adequacy, and the appropriateness of the current payment methodology. Many comments addressed our finding that beneficiary access to dialysis is stable. Five external reviewers stated that Medicare payments are currently inadequate, and due to inadequate payments, facilities are closing in areas where Medicare beneficiaries constitute a high percentage of dialysis patients. RPA specifically was concerned that facilities may try to maximize their numbers of private-pay patients and minimize their numbers of Medicare beneficiaries in the future. Three external reviewers asserted that access is currently decreasing due to staffing shortages at available facilities, particularly with respect to nurses. These reviewers also stated that certain minority populations, such as Native Americans, and certain areas of the country, such as rural and inner city areas, are currently experiencing access problems. Several external reviewers commented on access issues specifically related to home dialysis. NRAA agreed with our finding that payment for home training is inadequate and therefore serves as a barrier to home dialysis. RPA agreed that one reason for low utilization of PD is that PD patients use less of the profitable separately billed drugs. AAKP provided the same assertion and added that the lack of training for nephrologists serves as a barrier to home dialysis. Industry representatives expressed concerns regarding our payment analysis, specifically the use of data from 2000 and 2001 and our application of an audit adjustment to facility cost data. DCI stated that facility costs have risen since 2001; therefore, our analysis does not reflect current conditions. FMC, RLC, and NRAA stated that using an audit adjustment based on 1996 cost reports does not result in an accurate assessment of costs; they asserted that the amount of nonallowable costs that facilities include on their cost reports has decreased since 1996. Several groups commented on the appropriateness of the current payment methodology. Two industry representatives, DCI and RLC, acknowledged that an incentive exists to overutilize separately billed drugs in order to compensate for losses on composite rate services, and the physician association, RPA, acknowledged that there is excessive use of these drugs. However, another industry group, NRAA, stated that our assertion that an incentive to overutilize exists was extreme. In addition, four external reviewers were concerned that bundling costs would create an incentive for facilities to either underserve beneficiaries or to accept only those beneficiaries who use relatively few resources. Four external reviewers were concerned that there would be no regular update to the payment rate if a bundled rate was established, which could limit access to new technology. Concerning the comments that access is decreasing overall, for certain regions and certain populations and for home dialysis, we acknowledged in the draft report that supply may vary geographically and by treatment method. However, also as noted in the draft report, we based our finding that beneficiary access to dialysis is stable on aggregate indicators, such as trends in numbers of stations and facilities relative to the beneficiary population. In particular, we noted that few facilities closed from 1998 through 2001, with the number of facilities closing each year amounting to less than 1 percent of those operating at the end of the year. We were not able to analyze the adequacy of facility staffing due to a lack of adequate data. With respect to our adjustment of facility cost data, BIPA required that we use audited cost data when analyzing the adequacy of Medicare payment. Although CMS is currently auditing the 2001 cost reports, the agency’s last completed audit was of the 1996 cost reports. Given the increase in health care costs over time, we did not believe it was appropriate to assess the adequacy of Medicare payment using only 1996 cost reports. In order to satisfy the requirements of our mandate, we estimated the percentage of costs on the unaudited 2001 cost reports that were Medicare allowable. To do so, we relied on an audit adjustment calculated by MedPAC. MedPAC’s adjustment was based on the 1996 cost reports and was lower than the previous two audit adjustments calculated by HCFA in 1988 and 1991. We believe it is appropriate to apply MedPAC’s 1996 audit adjustment to 2001 costs because it is the most recent of the last three audit adjustments. We also noted in the draft report that it is the most conservative of the three adjustments. With respect to our conclusion that the current payment methodology is not appropriate, we acknowledge that a prospective payment could create an incentive to underserve beneficiaries, because providers retain the difference if their payments exceed their costs. However, this incentive exists under all prospective payment systems. If the bundled payment amount is based on facilities’ allowable costs of delivering services, and takes into account possible cost differences in treating beneficiaries, facilities will be financially better equipped to deliver the appropriate level of service to each beneficiary. Industry representatives and patient organizations also raised several issues that went beyond the scope of our report. These issues included whether Medicaid and physician payments are adequate and the Medicare definition of allowable costs. Reviewers also made technical comments, which we incorporated where appropriate. We are sending copies of this report to the Administrator of CMS and appropriate congressional committees. The report is available at no charge on GAO’s Web site at http://www.gao.gov. We will also make copies available to others on request. If you or your staffs have any questions, please call me at (202) 512-7119. Another contact and key contributors to this report are listed in appendix III. In conducting this study, we analyzed the Centers for Medicare & Medicaid Services (CMS) Facility Survey files, Medicare cost reports, and Medicare outpatient claims. We interviewed officials from CMS and the National Institute of Diabetes & Digestive & Kidney Diseases. We also interviewed representatives from the American Association of Kidney Patients, American Nephrology Nurses’ Association, Forum of End Stage Renal Disease (ESRD) Networks, National Kidney Foundation, National Renal Administrators Association, and Renal Physicians Association; representatives from five national dialysis facility chains, a national manufacturer of dialysis equipment, and several private health insurance companies; and nephrologists who provide daily hemodialysis. We conducted site visits at three dialysis facilities, one of which provides daily hemodialysis, and interviewed officials at these facilities. To analyze the supply of freestanding and hospital-based dialysis facilities, we used the Facility Survey files from 1998 through 2002, and to identify ESRD beneficiaries on dialysis, we used Medicare outpatient claims from 1998 through 2001, the most recent years for which data were available at the time of our analysis. From the Facility Survey files, we identified all dialysis facilities operating the entire year, opening during the year, and closing during the year, and the number of stations at each facility. We identified a facility as offering a treatment method if it provided at least one treatment or had at least one patient using that method. From the Medicare outpatient claims, we identified Medicare ESRD beneficiaries receiving dialysis each year, and their residence by ZIP code. We then calculated the number of dialysis facilities operating the entire year and the number of beneficiaries receiving dialysis for each county in the 50 states and in the District of Columbia, which we considered a county. We determined the average number of facilities and stations in each county, weighted by the number of beneficiaries in each county. We defined a county as urban if it was in a metropolitan statistical area and as rural if it was outside a metropolitan statistical area, as determined by the Office of Management and Budget. We assessed the reliability of the Facility Survey file and claims data by analyzing trends in the number of beneficiaries on dialysis and dialysis facilities over time and comparing these to trends reported by CMS. We determined that the data were reliable for our purposes. To calculate payment-to-cost ratios for composite rate services only, we used cost reports for freestanding renal dialysis facilities from 1998 through 2001, the most recent data available. The Medicare payment methodology is the same for freestanding and hospital-based dialysis facilities, but we did not analyze cost reports or claims for hospital-based facilities because their reported costs are affected by decisions in allocating costs between the hospital and the dialysis facility. In 2001, about 84 percent of all dialysis facilities nationwide were freestanding. We first edited the cost reports to exclude those facilities located outside the 50 states or the District of Columbia, those with cost reporting periods less than 300 days, and those that reported composite rates outside the range of possible rates from the Medicare program. We excluded 577 of the 2,983 cost reports, or about 19 percent. From the remaining cost reports, we calculated each provider’s total Medicare payments and total reported costs. We calculated the proportion of total cost attributable to Medicare beneficiaries using the proportion of each facility’s treatments that was furnished to Medicare beneficiaries. We summed payments and costs across all providers to obtain payment-to-cost ratios from 1998 through 2001 weighted by total Medicare payments received by each facility. Additionally, we stratified ratios by dialysis treatment method, as reported in the cost reports. We assessed the reliability of the cost report data by comparing our payment-to-cost ratios to those published by the Medicare Payment Advisory Commission. We determined that the data were reliable for our purposes. In order to calculate 2001 payment-to-cost ratios for overall costs, that is, composite rate services and separately billed drugs, we used 2001 cost reports for freestanding renal dialysis facilities and 2000 and 2001 Medicare outpatient claims data. We first edited the cost reports to exclude those facilities located outside the 50 states or the District of Columbia, those with cost reporting periods fewer than 300 days, and those that reported composite rates outside the range of possible rates from the Medicare program. Payment information for individual drugs is not available on Medicare outpatient claims prior to July 1, 2000, and therefore we did not calculate these ratios for years prior to 2001. We used the claims data to obtain payments for separately billed drugs, as they are not available in the cost reports. We obtained the total costs of separately billed drugs from the cost reports and calculated the proportion attributable to Medicare beneficiaries using the proportion of each facility’s treatments that was furnished to Medicare beneficiaries. We then added our previously calculated composite rate payments and costs and summed total payments and total costs for all providers to obtain an overall payment-to-cost ratio for 2001 weighted by total Medicare payments received by each facility. We stratified the ratios by size. We defined the size of the facility based on the 25th and 75th percentiles of total dialysis treatments each facility reported in its cost report. Small facilities are those reporting a number of dialysis treatments less than the 25th percentile, medium facilities are those reporting a number of dialysis treatments greater than or equal to the 25th percentile and less than or equal to the 75th percentile, and large facilities are those reporting a number of treatments greater than the 75th percentile. We could not calculate these ratios by treatment method, as separately billed drug costs are not reported by treatment method on the cost report. In order to identify separately billed items or services frequently billed in association with in-facility hemodialysis, we used 2001 Medicare outpatient claims data. We limited our claims population to those that reported only in-facility hemodialysis and no other treatment method. We defined “frequently billed” as those separately billed services that were billed over 100,000 times annually. We excluded laboratory services because these are typically billed directly to Medicare by the laboratory, not by the dialysis facility. Medicare instructs providers to record each drug administration on the claim separately, and accordingly, we defined one administration of a drug as one record on the claim. It is possible, however, that some providers aggregate the units of several administrations. To the extent this is the case, the billing frequencies for these specific drugs likely underestimate the actual administration frequencies. To review cost and clinical data on daily hemodialysis, we examined 25 articles obtained through a MEDLINE literature search for studies on daily hemodialysis published from 1998 through 2002. We examined an additional 11 articles referred to us during our interviews. We conducted our work from July 2002 through June 2004 in accordance with generally accepted government auditing standards. Kevin J. Dietz, Joanna L. Hiatt, Maria Martino, and Yorick F. Uzes made major contributions to this report. | Medicare covers about 90 percent of patients with end-stage renal disease (ESRD), the permanent loss of kidney function. Most ESRD patients receive regular hemodialysis treatments, a process that removes toxins from the blood, at a dialysis facility. A small percentage dialyzes-at home. From 1991 through 2001, the ESRD patient population more than doubled, from about 201,000 to 406,000. As the need for services grows, so do concerns about beneficiary access to and Medicare payment for dialysis services. The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 directed GAO to study beneficiaries' access to dialysis services. In this report, GAO (1) assessed the supply of dialysis facilities and the services they provide, overall and relative to beneficiary residence, and (2) assessed the extent to which Medicare payments for dialysis services are adequate and the methodology is appropriate. In order to assess the supply of dialysis facilities, GAO used Facility Surveys collected by the Centers for Medicare & Medicaid Services (CMS) and outpatient claims, the bills submitted to Medicare by providers of certain outpatient services from 1998 through 2001. To assess the adequacy of Medicare payment and the appropriateness of the payment methodology, GAO used 2001 Medicare cost reports and outpatient claims submitted by freestanding dialysis facilities. GAO found that from December 31, 1998, through December 31, 2001, the total number of dialysis facilities nationwide increased at about the same rate as the Medicare dialysis population, 16 and 15 percent, respectively, and the total number of stations (that is, treatment areas and equipment, including dialysis machines, needed to dialyze the patient) increased by over 24 percent, a rate greater than the growth in the Medicare dialysis population. The dialysis industry opened facilities in more counties across the country, although facilities were more likely to be available to beneficiaries in urban counties than in rural counties. In addition, while almost all facilities provided in-facility hemodialysis, fewer facilities provided home dialysis. GAO estimates that total payments to freestanding dialysis facilities exceeded providers' allowable costs by 3 percent in 2001. Although payments were higher than costs overall, payments did not meet costs for small facilities. In addition, composite rate payments, intended to cover the costs of dialysis services associated with a treatment, including nursing, supplies, social services, and certain laboratory tests, were 11 percent less than the costs of providing those services, while payments for separately billed drugs, drugs not included in the composite rate, exceeded the costs of those services by 16 percent. Because of this imbalance, providers have an incentive to maximize the use of profitable separately billed drugs to compensate for inadequate payments under the composite rate. CMS generally agreed with GAO's findings. The agency noted that it has been working to redesign the payment system since 2000. Under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), the Secretary of Health and Human Services is required to develop a report by October 1, 2005 detailing the elements and features necessary in the design and implementation of a broader payment system that includes separately billed drugs. MMA also requires the Secretary to conduct a 3-year demonstration project, beginning January 1, 2006, that uses a broader payment system incorporating patient characteristics identified in the report. |
The Uruguay Round and NAFTA included significant provisions to liberalize agricultural trade. Generally, these agreements comprised commitments for reducing government support, improving market access, and establishing for the first time rules on various aspects of global agricultural trade. As the largest exporter of agricultural commodities in the world, the United States was expected to benefit substantially from implementation of the reforms embodied in these agreements. The Uruguay Round represented the first time that GATT member countries established disciplines concerning international agricultural trade. The Uruguay Round agreements, including those on agriculture and SPS, included several key measures to liberalize agricultural trade. First, generally over a 6-year period beginning in 1995, member countries were required to make specific reductions in three types of support to agricultural producers: (1) import restrictions, (2) export subsidies, and (3) internal support. Second, member countries concluded an Agreement on the Application of Sanitary and Phytosanitary Measures that established guidelines on the use of import regulations to protect human, animal, and plant life and health. Third, countries established a Committee on Agriculture that would oversee implementation of WTO member countries’ commitments to reduce agricultural support and provide a forum for discussions on agricultural trade policies. Fourth, the Round provided a definition of STEs and implemented procedural measures designed to improve compliance with GATT rules. Finally, member countries agreed to enter a second phase of negotiations to further liberalize agricultural trade beginning in 1999. Under NAFTA, the three member countries—Canada, Mexico, and the United States—agreed to eliminate all tariffs on agricultural trade. Some of these tariffs were to be eliminated immediately; others would be phased out over a 5-, 10- or 15-year period. NAFTA also required the immediate elimination of all nontariff trade barriers, such as import restrictions, generally through their conversion either to tariff-rate quotas or tariffs. For example, Mexico’s import licensing requirements for bulk commodities, such as wheat, were terminated under NAFTA. In addition, the NAFTA charter’s chapter on agriculture included provisions on SPS. NAFTA also established a joint committee on agricultural trade and a committee on SPS measures, providing a channel for discussion of member countries’ ongoing concerns, in an effort to head off disputes. While forecasters have estimated that increases in agricultural trade would account for a sizable portion of the Uruguay Round and NAFTA accords’ projected benefits to the United States, challenges exist for ensuring their full implementation. In particular, our work on foreign SPS measures and STEs illustrates the complexity of the implementation challenges, particularly in organizing U.S. government efforts to assure effective enforcement and monitoring of member nations’ agricultural commitments under both agreements. For example, The U.S. Trade Representative (USTR) has found that as trade agreements begin to reduce tariffs on agricultural commodities, the United States must guard against the increasing use of SPS measures as the trade barrier of choice. The WTO Agreement on the Application of Sanitary and Phytosanitary Measures, and chapter 7 of NAFTA, established guidelines regarding the appropriate use of SPS measures in relation to trade. While these agreements are not identical, they are consistent in their guiding principles and rules. Both agreements recognize the right of countries to maintain SPS measures but stipulate that such measures (1) must not be applied arbitrarily or constitute a disguised restriction on trade and (2) must be based on scientific principles and an assessment of risk. In addition, the WTO and NAFTA agreements provided dispute settlement procedures to help resolve disagreements between member countries on SPS measures, including consultations and review by a dispute settlement panel. The WTO agreement also encourages progress toward achieving three objectives: (1) broad harmonization of SPS measures through greater use of international standards (harmonization), (2) recognition among members that their SPS measures may differ but still be considered “equivalent” provided they achieve the same level of protection (equivalency), and (3) adaptation of SPS measures to recognize pest- and disease-free regions (regionalization). Our work suggests open issues in the following areas: the lack of coordination of U.S. government efforts to address foreign SPS measures; the adequacy of the USDA’s process for balancing its regulatory and trade facilitation roles and responsibilities; and the potential benefits from WTO member countries’ progress toward achieving the longer-term objectives concerning harmonization, equivalency, and regionalization. Although USTR has identified some foreign SPS measures as key barriers to U.S agricultural exports, our recent report to Congress found several weaknesses in the federal government’s approach to identifying and addressing such measures. Because of these weaknesses, the federal government cannot be assured that it is adequately monitoring other countries’ compliance with the WTO or NAFTA SPS provisions and effectively protecting the interests of U.S. agricultural exporters. Specifically, we found that the federal structure for addressing SPS measures is complex and involves multiple entities. USTR and USDA have primary responsibility for addressing agricultural trade issues, and they receive technical support from the Food and Drug Administration (FDA), the Environmental Protection Agency (EPA), and the Department of State. Our review demonstrated that the specific roles and responsibilities of individual agencies within this complex structure are unclear and that effective leadership of their efforts has been lacking. During our review, USTR and USDA implemented certain mechanisms to improve their handling of SPS issues, but the scope of these mechanisms did not encompass the overall federal effort. In addition, we found that the various agencies’ efforts to address foreign SPS measures have been poorly coordinated and they have had difficulty determining priorities for federal efforts or developing unified strategies to address individual measures. Finally, we found that goals and objectives to guide the federal approach and measure its success had not been developed. We believe that a more organized, integrated, strategic federal approach for addressing such measures would be beneficial. Therefore, we recommended that USTR, USDA, and the other concerned agencies, such as FDA and EPA, work together to develop coordinated goals, objectives, and performance measurements for federal efforts to address foreign SPS measures. Outstanding questions derived from our work include the following: What steps have USTR and USDA taken to address the weaknesses found by our study, such as the lack of a process to prioritize federal efforts to address foreign SPS measures? How do USTR and USDA plan to improve coordination of their activities to address SPS measures? How do USTR and USDA plan to work more closely with other relevant agencies, such as FDA and EPA, in determining which SPS measures to address and how to address them? Specifically, at the executive branch level how does the administration intend to balance its trade facilitation and regulatory roles and responsibilities? Absent a coordinated approach for addressing foreign SPS measures, the specific role of USDA regulatory and research agencies in resolving SPS has not been clearly defined. Some of these regulatory agencies, such as the Animal and Plant Health Inspection Service and the Food Safety Inspection Service, whose primary responsibilities are to safeguard human, animal, and plant life or health, have increasingly assumed a role in efforts to facilitate trade. Several trade authorities and industry officials have expressed frustration that these regulatory agencies (1) seem to lack a sense of urgency regarding trade matters and (2) are sometimes willing to engage in technical discussions regarding foreign SPS measures for many months and even years. These groups expressed concerns that regulatory authorities lack negotiating expertise, which sometimes undermined efforts to obtain the most advantageous result for U.S. industry regarding foreign SPS measures. U.S. regulatory officials, in turn, believe that at times trade authorities and industry groups fail to appreciate that deliberate, and sometimes lengthy, technical and scientific processes are necessary to adequately address foreign regulators’ concerns about the safety of U.S. products. Government and industry officials have stated that regulatory and research agencies’ responsibilities for dealing with foreign SPS measures have not been clearly defined. The tension in balancing the regulatory and trade facilitation activities of some USDA agencies underlines the need to more clearly define their role in addressing SPS measures. Questions resulting from our work include the following: What steps has USDA taken to use its strategic planning process for integrating disparate agency efforts to address SPS measures? What progress is USDA making in using the Working Group on Agricultural Trade Policy to strengthen USDA’s SPS efforts? Has this initiative, or any other, begun to deal with the tensions that have arisen over the dual roles of some USDA agencies as both regulatory and trade facilitation entities? Has USDA provided guidance to regulatory agency officials to assist in promoting a more consistent effort to balance their competing goals and policies? Is there outreach to agricultural producers to clarify the new roles that increased foreign trade has required these regulatory agencies to adopt? WTO and USTR officials suggest that member countries appear to have focused on implementing provisions of the SPS agreement that enable them to resolve SPS disputes as they arise, such as the requirement that SPS measures be based on scientific evidence, but have paid less attention to other key provisions. Specifically, member countries have been less concerned with provisions regarding harmonization, equivalency, and regionalization of SPS measures. The practices these principles encourage are not currently widespread. Progress in implementing harmonization, equivalency, and regionalization could be time consuming. For example, the United States and the European Union negotiated for 3 years before reaching a partial agreement about the equivalence of their respective inspection systems for animal products. Nevertheless, these provisions could help minimize trade disputes in the long run by creating a more structured approach to SPS measures. Our work raises the following questions regarding the SPS agreement’s long-term objectives: Is there a sufficient balance in efforts to implement the Uruguay Round SPS agreement so as to promote the goals of harmonization, equivalency, and regionalization as envisioned in the framework of the agreement? What factors limit cooperation among WTO member countries in pursuit of these three long-term objectives? How are USDA and USTR working to promote international harmonization of SPS measures based on U.S. standards that would facilitate U.S. industry access to foreign agricultural and agriculture-related markets? The agricultural and SPS agreements of the Uruguay Round were intended to move member nations toward establishing a market-oriented agricultural trading system by minimizing government involvement in regulating agricultural markets. Some member nations continue to use STEs to regulate imports and/or exports of selected products. For example, STEs have long been important players in the international wheat and dairy trade. As a result of the Uruguay Round, the WTO officially defined STEs and addressed procedural weaknesses of GATT’s article XVII by improving the process for obtaining and reviewing information. In the past, GATT required that STEs (1) act in a manner consistent with the principles of nondiscriminatory treatment, (2) make purchases and/or sales in accordance with commercial considerations that allow foreign enterprises an opportunity to compete, and (3) notify the WTO secretariat about their STEs’ activities (for example, WTO members who have STEs are required to report information on their operations). Subsequently, the Uruguay Round established an STE working party which is now incorporated into the WTO framework. In addition, STEs that engage in agricultural trade are also subject to the provisions in the Uruguay Round Agreement on Agriculture, that define market access restrictions, export subsidies, and internal support. Our work suggests open issues in two areas: (1) a lack of transparency in STE pricing practices and (2) the extent of U.S. efforts to address STEs. In the absence of complete and transparent information on the activities of STEs, member countries are hindered in determining whether STEs operate in accordance with GATT disciplines and whether STEs have a trade-distorting effect on the global market. In 1995, we reported that compliance with the Uruguay Round STE reporting requirements or notifications had been poor. Since then, STE notifications to the WTO have improved, including reporting by countries with major agricultural STEs. However, because they are not required to do so, none of the notifying STE countries have reported transactional pricing practices—information that could provide greater transparency about their operations. U.S. agricultural producers continue to express concern over the lack of transparency in STE pricing practices and their impact on global free trade. In 1996, we reported that our effort to fully evaluate the potential trade-distorting activities of STEs, including pricing advantages, could not be conducted because of a lack of transaction-level data. Without this data and the more transparent system it would create, the United States finds it difficult to assess the trade-distorting effects of, and compliance with, WTO rules governing reporting on STE operations. Our work on STEs raises the following questions with regard to the lack of transparency: What progress has the WTO working party on state trading enterprises made in studying STEs and improving the information available about their activities? What steps, if any, can be taken within the WTO framework, or otherwise, to increase the pricing transparency of import- and export-oriented STEs? U.S. agricultural interests have expressed concern regarding the potential of STEs to distort trade, and USDA officials have said that a focused U.S. effort to address STEs is vitally important. Although, under the WTO, STEs are recognized as legitimate trading entities subject to GATT rules, some U.S. agricultural producers and others are concerned that STEs, through their monopoly powers and government support, may have the ability to manipulate worldwide trade in their respective commodities. For example, some trade experts and some WTO member countries are concerned about STEs’ potential to distort trade due to their role as both market regulator and market participant. Further, the U.S. agricultural sector competes with several prominent export STEs in countries such as Canada, Australia, and New Zealand and import STEs in other countries such as Japan. Questions from our work regarding the U.S. effort to address STEs include the following: How are USTR and USDA monitoring STEs worldwide to ensure that member countries are meeting their WTO commitments? Given the limited transparency resulting from STE notifications to the WTO, how can the United States be assured that STEs are not being operated in a way that circumvents other WTO agriculture commitments, such as the prohibition on export subsidies or import targets? Mr. Chairman and members of the Subcommittee, this concludes my statement for the record. Thank you for permitting me to provide you with this information. Agricultural Exports: U.S. Needs a More Integrated Approach to Address Sanitary/Phytosanitary Issues (GAO/NSIAD-98-32, Dec. 11, 1997). Assistance Available to U.S. Agricultural Producers Under U.S. Trade Law (GAO/NSIAD-98-49R, Oct. 20, 1997). North American Free Trade Agreement: Impacts and Implementation (GAO/T-NSIAD-97-256, Sept. 11, 1997). U.S. Agricultural Exports: Strong Growth Likely, but U.S. Export Assistance Programs’ Contribution Uncertain (GAO/NSIAD-97-260, Sept. 30, 1997). World Trade Organization: Observations on the Ministerial Meeting in Singapore (GAO/T-NSIAD-97-92, Feb. 26, 1997). International Trade: The World Trade Organization’s Ministerial Meeting in Singapore (GAO/T-NSIAD-96-243, Sept. 27, 1996). Canada, Australia, and New Zealand: Potential Ability of Agricultural State Trading Enterprises to Distort Trade (GAO/NSIAD-96-94, June 24, 1996). International Trade: Implementation Issues Concerning the World Trade Organization (GAO/T-NSIAD-96-122, Mar. 13, 1996). State Trading Enterprises: Compliance With the General Agreement on Tariffs and Trade (GAO/GGD-95-208, Aug. 30, 1995). Correspondence Regarding State Trading Enterprises (GAO/OGC-95-24, July 28, 1995). The General Agreement on Tariffs and Trade: Uruguay Round Final Act Should Produce Overall U.S. Economic Gains (GAO/GGD-94-83A&B, July 29, 1994). General Agreement on Tariffs and Trade: Agriculture Department’s Projected Benefits Are Subject to Some Uncertainty (GAO/GGD/RCED-94-272, July 22, 1994). North American Free Trade Agreement: Assessment of Major Issues (GAO/GGD-93-137, Sept. 9, 1993) (two vols.). CFTA/NAFTA: Agricultural Safeguards (GAO/GGD-93-14R, Mar. 18, 1993). International Trade: Canada and Australia Rely Heavily on Wheat Boards to Market Grains (GAO/NSIAD-92-129, June 10, 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 discussed the implementation of certain agricultural provisions of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) and North American Free Trade Agreement (NAFTA), focusing on: (1) the impact of measures to protect human, animal or plant life or health--referred to as sanitary and phytosantiary (SPS) measures; and (2) state trading enterprises (STEs). GAO noted that: (1) the Uruguay Round and NAFTA included significant provisions to liberalize agricultural trade; (2) while forecasters have estimated that increases in agricultural trade would account for a sizeable portion of the Uruguay Round and NAFTA agreements' projected benefits to the United States, challenges exist for ensuring their full implementation; (3) the World Trade Organization's (WTO) agreement on the application of sanitary and phytosanitiary measures, and chapter 7 of NAFTA, established guidelines regarding the appropriate use of SPS measures in relation to trade; (4) although the United States Trade Representative (USTR) has identified some foreign SPS measures as key barriers to U.S. agricultural exports, GAO's recent report to Congress found several weaknesses in the federal government's approach to identifying and addressing such measures; (5) because of these weaknesses, the federal government cannot be assured that it is adequately monitoring other countries' compliance with the WTO or NAFTA SPS provisions and effectively protecting the interests of U.S. agricultural exporters; (6) USTR and the Department of Agriculture (USDA) have primary responsibility for addressing agricultural trade issues, and they receive technical support from the Food and Drug Administration (FDA), the Environmental Protection Agency and the Department of State; (7) absent a coordinated approach for addressing foreign SPS measures, the specific role of USDA regulatory and research agencies in resolving SPS has not been clearly defined; (8) WTO and USTR officials suggest that member countries appear to have focused on implementing provisions of the SPS agreement that enable them to resolve SPS disputes as they arise; (9) the agricultural and SPS agreements of the Uruguay Round were intended to move member nations toward establishing a market-oriented agricultural trading system by minimizing government involvement in regulating agricultural markets; (10) as a result of the Uruguay Round, the WTO officially defined STEs and addressed procedural weaknesses of article XVII by improving the process for obtaining and reviewing information; (11) in the absence of complete and transparent information on the activities of STEs, member countries are hindered in determining whether STEs operate in accordance with GATT disciplines and whether they have a trade-distorting effect on the global market; and (12) U.S. agriculture interests have expressed concern regarding the potential of STEs to distort trade, and USDA officials have said that a focused U.S. effort to address STEs is vitally important. |
Since the Medicare program was created in 1965, it has been administered largely by private contractors under federal oversight. These contractors enroll and pay providers and suppliers while also maintaining the responsibility to help ensure Medicare program integrity. CMS currently contracts with 12 MACs, each of which is responsible for its own geographic region, known as a “jurisdiction.” Figure 1 shows the MACs’ jurisdiction areas. The NSC manages the DMEPOS suppliers’ enrollment, performs site visits for DMEPOS suppliers, and interacts with the durable medical equipment MACs, which pay claims for durable medical equipment items. MACs and the NSC are instructed by CMS to adhere to the processing guidelines of CMS’s manual to enroll providers, suppliers, and DMEPOS suppliers into PECOS. PECOS is CMS’s centralized database for Medicare provider and supplier enrollment information. Entities enrolled in PECOS are granted Medicare billing privileges and can be reimbursed for services rendered to Medicare beneficiaries. CMS provides additional guidance to the MACs and the NSC using directives such as technical direction letters and, in some cases, has monthly calls with the MACs to discuss new guidance or process changes. MACs and the NSC are responsible for updating PECOS after they have approved or revalidated enrollment for providers and suppliers. CMS requires all enrolled providers or suppliers to report changes to existing profile information within a certain period.practice location address, the provider must notify the MAC or the NSC of this change and the MAC or the NSC is responsible for verifying the new address information, and updating the provider’s profile in PECOS to reflect the current practice location address. PPACA requires all providers and suppliers to be subject to licensure checks. Applicants must provide copies of all applicable federal and state licenses and certifications. A licensure check consists of a MAC checking the provider’s license information with a state licensing board within its jurisdiction to determine whether the provider has an active license and any board disciplinary actions. PPACA also gives CMS the authority to require additional screening procedures beyond those each provider and supplier must undergo, such as criminal-background checks, depending on the type of risk presented by the provider or supplier type. Further, PPACA required new screening procedures based on risk of fraud, waste, and abuse. As a result of PPACA, CMS now assigns categories of providers and suppliers to limited-, moderate-, and high-risk levels; those in the highest level are subject to the most-rigorous screening. For example, whereas providers and suppliers in all three risk levels must undergo licensure checks, those in moderate- and high-risk levels are also subject to unannounced site visits. In addition, the NSC is required to conduct site visits to all of the DMEPOS suppliers (which are Table 1 shows the categories of categorized as moderate or high risk).Medicare providers and suppliers and their associated risk level. According to CMS, as of January 2015, there were 2,506 high-risk providers and suppliers, 105,558 moderate-risk providers and suppliers, and 1,649,779 limited-risk providers in PECOS. In addition, there were 15,885 high-risk DMEPOS suppliers and 74,372 moderate-risk DMEPOS suppliers. In 2011, CMS awarded two contracts to assist the MACs with performing aspects of the provider and supplier enrollment-screening process. The first was issued to an automated screening contractor that collects and analyzes license information and then provides the information to CMS for review. The data are then reviewed by a MAC for further determination. The second was issued to a site-visit contractor, who is in charge of performing site visits to all providers and suppliers, except DMEPOS suppliers. Prior to these awards, MACs were responsible for conducting all site visits and required to manually review individual state medical-licensing boards within their respective jurisdictions. Medicare provider and supplier enrollment entails other screening procedures based on the type of providers and suppliers. For example, MACs and the NSC need to validate the identify of individual providers, owners, and authorized/delegated officials using SSA validation; validate and verify the legal business names for organizations; and validate and verify the provider’s National Provider Identifier, among other things. For the purposes of our review, we will focus on the four specific screening procedures outlined in our report. Medicare provider and supplier enrollment entails other screening procedures based on the type of providers and suppliers. We identified weaknesses in two of the four screening procedures CMS implemented to prevent and detect ineligible or potentially fraudulent providers and suppliers from enrolling in PECOS: the verification of practice location and of licensure status. CMS’s procedures to screen for providers and suppliers listed as deceased or excluded from participating in federal programs or health care–related programs appear to be working, but we identified a few instances of ineligible or potentially fraudulent providers and suppliers that we referred to CMS for further review. Our examination of practice location addresses of providers and suppliers listed in PECOS as of March 2013 and DMEPOS as of April 2013 revealed thousands of questionable practice location addresses. We found limitations with CMS’s Finalist software used to validate practice location addresses. For example, Finalist does not provide flags to indicate whether the practice location is potentially ineligible to qualify as a legitimate location. Additional checks, such as checking for these addresses in Internet searches of sites such as 411.com, USPS.com, or Google Maps, or conducting site visits, are at times required to determine whether a practice location is legitimate. However, the revised screening procedures that CMS issued in March 2014 require MACs to do less verification of providers’ practice locations than before. Federal regulations stipulate the type of physical practice location that applicants must have. Specifically, providers and suppliers must be “operational” to furnish Medicare covered items or services. Federal regulations define “operational” as having a qualified physical practice location, being open to the public for the purpose of providing health care–related services, being prepared to submit valid Medicare claims, and being properly staffed, equipped, and stocked to furnish these items All providers and suppliers are required to list a physical or services.practice location address in their application, regardless of provider or supplier type.would be required to supply his or her own home address in the application. For example, a provider who renders in-home services Addresses that generally would not be considered a valid practice location include post office boxes, and those associated with a certain type of Commercial Mail Receiving Agency (CMRA), such as a United Parcel Service (UPS) store. Based on USPS guidance, a CMRA is a third-party agency that receives and handles mail for a client. Additionally, addresses that can be traced to a virtual office—that is, a company advertising mailboxes, telephone answering services, and dedicated workspaces—raise questions about whether the provider or supplier meets the CMS practice location requirements under CMS regulations. Vacant or invalid addresses are also ineligible for PECOS enrollment. A vacancy refers to a provider or supplier that is no longer at the location provided on the application form. USPS would flag a location as vacant if it used to deliver mail there and has not delivered mail there in more than 90 days. An invalid address is when an address is not recognized by USPS, was incorrectly entered in PECOS, or was missing a street number. Once enrolled in PECOS, providers and suppliers have the responsibility to self-report changes to their practice locations. CMS requires providers, suppliers, and DMEPOS suppliers to report a change in practice location within 30 days. Not all CMRAs would disqualify an applicant from the PECOS enrollment. For example, a hospital may be legitimately designated as a CMRA if it uses or acts as a third party that collects and distributes mail to its employees and would be considered an eligible practice location. Post office boxes and drop boxes are not acceptable except in some cases where the provider is located in rural areas. sites like 411.com and USPS.com, calling the official business telephone number listed on the application, and using software called Finalist to validate the practice location address.issued additional guidance to MACs that requires fewer verification techniques to verify a practice location. This new guidance is discussed later in the report. In March 2014, CMS Our examination of practice location addresses of the providers and suppliers listed in PECOS as of March 2013 and DMEPOS as of April 2013 (the most-current data available at the time of our review) revealed thousands of questionable addresses. Specifically, we checked PECOS practice location addresses for all records that contained an address using the USPS address-management tool, a commercially available software package that standardizes addresses and provides specific flags on the address such as CMRA, vacant, and invalid. The USPS address-management tool includes addresses as of December 15, 2013. This software is not currently being used by CMS. Instead, CMS uses the Finalist software to standardize practice location addresses. As part of our initial analysis using the USPS address-management tool, we identified 105,234 (about 11 percent) of the 980,974 addresses listed in PECOS appeared in the USPS address-management tool as a CMRA, a vacant address, or an invalid address. We took further steps to determine the number of these questionable addresses that could be determined to be ineligible for Medicare providers and suppliers. Specifically, we selected a generalizable stratified random sample of 496 addresses from the population of 105,234 that appeared in the USPS address-management tool as a CMRA, a vacant address, or an invalid address. For each selected or physical site address, we used Google Maps, Internet searches,visits to confirm whether the practice location address was an eligible address. On the basis of our additional analysis of the generalizable sample of 496 addresses, we estimate the following: About 23,400 (22 percent) of the 105,234 addresses that we initially identified as a CMRA, vacant, or invalid address are potentially ineligible for Medicare providers and suppliers. About 300 of the addresses were CMRAs, 3,200 were vacant properties, and 19,900 were invalid. Of the 23,400 potentially ineligible addresses, we estimate that, from 2005 to 2013, about 17,900 had no claims associated with the address, 2,900 were associated with providers that had claims that were less than $500,000, and 2,600 were associated with providers that had claims that were $500,000 or more per address. About 39,900 (38 percent) of the 105,234 addresses that we initially identified as a CMRA, vacant, or invalid address are potentially valid addresses and thus eligible for Medicare providers and suppliers.For example, in some instances, the USPS address-management tool flagged an address as a CMRA that we subsequently identified as a hospital, based on our Google Maps or related searches. A hospital may be considered a CMRA if it acts as a third party distributing mail to its staff. Although the hospital was correctly flagged as a CMRA, for the purposes of our review we considered these addresses to be valid, since they are likely practice locations. About 42,000 (40 percent) of the 105,234 addresses could not be identified as either eligible or ineligible using the methods described above, and may warrant further review to make an eligibility determination. Among those for whom we could not verify an address, we estimate that about 25,500 had no claims associated with the address, 9,500 were associated with providers that had claims that were less than $500,000, and 7,000 were associated with providers that had claims that were $500,000 or more per address, from 2005 to 2013. Some of these claims could be at risk of being ineligible Medicare payments. See figure 3 below for a breakdown of the identified addresses and our estimates of the number of ineligible addresses. During our review of the CMS internal controls intended to prevent and detect these potentially ineligible providers from enrolling or remaining in PECOS, we found limitations with the Finalist software being used to validate the addresses. As previously noted, the Finalist software is one of the techniques used by the MACs and the NSC to validate a practice location. According to CMS, Finalist is integrated into PECOS to standardize addresses and does so by comparing the address listed on the application to USPS records and correcting any misspellings in street and city names, standardizing directional markers (NE, West, etc.) and suffixes (Ave, Lane, etc.), and correcting errors in the zip code. However, the Finalist software does not indicate whether the address is a CMRA, vacant, or invalid—in other words, whether the location is potentially ineligible to qualify as a legitimate practice location. CMS does not have these flags in Finalist because the agency added coding in PECOS that prevents post office box addresses from being entered, and believed that this step would prevent these types of ineligible practice locations from being accepted. CMS officials agreed, however, that adding flags to the Finalist software to identify any potential issues that might make the practice location address ineligible, such as a CMRA, could be of value. Some CMRA addresses are not listed as post office boxes. For example, during our review of the practice location addresses in PECOS, we identified 46 out of the 496 sample addresses that were allowed to enroll in Medicare with a practice location that was inside a mailing store similar to a UPS store. These providers’ addresses did not appear in PECOS as a post office box, but instead were listed as a suite or other number, along with a street address. Businesses can purchase a post office box that is listed to the public as a suite number in a business district from some commercial mailing businesses. By doing so, businesses can mask the identity of the address as a post office box. Figure 4 shows an example of one of the providers that we identified through our search and site visits as using a mailbox-rental store as its practice location and where services are not actually rendered. This provider’s address appears as having a suite number in PECOS and was continuing to be used in the system as of January 2015. According to our analysis of CMS records, this provider was paid approximately $592,000 by Medicare from the date it enrolled in PECOS with this address to December 2013, which is the latest date for which CMS has claims data. Our review also found locations that were vacant addresses. For example, we identified a provider who used a hospital’s address as its practice location, but the hospital no longer exists. The USPS address- management tool flagged this address as vacant as of September 2013. When we conducted a site visit to this address in December 2014, we found that the hospital had been demolished (see fig. 5). According to the MAC, however, the provider went through the revalidation process using the demolished hospital address and was approved in January 2015. As of January 2015, therefore, this provider continued to use the vacant address as one of its practice locations. If the provider moved to another location, it was required to report the change of its practice location to the MAC within 30 days. This provider was not paid by Medicare from September 2013 through December 2013 data. However, by remaining in PECOS, this provider may be eligible to bill Medicare in the future. In another example in which we identified an address as vacant, we visited a provider’s stated practice location in December 2014 and found a fast-food franchise there (see fig. 6). Workers from the fast-food franchise said that they have been in the location for about 3 years. In addition, we found a Google Maps image dated September 2011 that shows this specific location as vacant. According to the MAC in charge of enrolling this provider, the provider was enrolled in PECOS in March 2010. As of January 2015, this provider had not updated its address in PECOS and continued to use the fast-food franchise as its practice location. As previously noted, CMS requires providers to report changes in practice locations within 30 days. Currently, this provider is enrolled in Medicare with an ineligible practice location because services can no longer be rendered at this address. This provider was not paid by Medicare from the date this practice location address was flagged as vacant in the USPS address-management tool to December 2013. However, by being enrolled in PECOS, this provider may be eligible to bill Medicare in the future. Providers’ submission of addresses that do not appear to be actual practice locations are an indicator of potential fraud. Without having flags in Finalist to better indicate the validity of the providers or suppliers’ practice locations, CMS misses an opportunity to focus on addresses that may be potentially illegitimate practice locations at enrollment or after enrollment. Using software that flags potentially ineligible addresses can help to identify potentially ineligible practice locations, but conducting additional research on addresses, including site visits, may be additionally helpful to determine whether the provider or supplier is located at the address provided at enrollment. As mentioned previously, MACs are only required to conduct a site visit to providers and suppliers that are listed as moderate or high risk, which is a cost-effective and practical option. However, there are more than 1.6 million limited-risk providers—which make up the vast majority of providers in PECOS—that will likely never receive a site visit to confirm the practice location unless their risk status changes. Of the 496 addresses in our sample that were flagged as potentially ineligible, 252 were categorized as limited risk. In specific instances where a limited-risk provider’s address is flagged as a CMRA, vacant, or invalid address, additional checks on these particular providers may be warranted. For example, when searching addresses in Google Maps, we could sometimes identify the building of the practice location, but not always visually confirm whether the suite number that the provider or supplier listed existed in the location. We visited 30 practice locations that the USPS address-management tool flagged as vacant or located at a CMRA. provider or supplier. According to our physical observation, 11 of the 30 locations appeared to be vacant; 6 appeared to be ineligible CMRAs; and 11 locations were inconclusive because we were not able to find the providers or suppliers at the address. Of these 30, we were able to confirm that 2 housed a legitimate We also identified 25 applicants out of our generalizable sample of 496 addresses that the USPS address-management tool flagged as a CMRA and that our additional research found to be located in places advertised as “virtual offices.” mailboxes, telephone-answering services, and a dedicated workspace to clients who are not physically located on the premises. While, according to CMS, a virtual office may be appropriate for some suppliers, it may not be appropriate for other types of providers and suppliers, since CMS requires the practice location to be open to the public for purposes of providing health care–related services and properly staffed, equipped, and stocked to furnish services or items. The 30 locations were selected based on the geographic proximity to the three MACs and the NSC we visited, and to GAO offices. These locations were selected independently of our generalizable sample of 496 addresses, and this selection is not generalizable to any set of addresses. These addresses were flagged as CMRA because they serve as a third party that handles their customers’ mail. We visited 5 of the 25 providers and suppliers in Maryland, Texas, and California that our research indicated were located in places advertised as virtual offices. Based on our observational visits, the 5 providers and suppliers were located in places that were advertised as virtual offices. In one instance, we took pictures of an office space in Texas that a provider had listed as its practice location. As previously noted, CMS requires the practice location to be open to the public for purposes of providing health care–related services and properly staffed, equipped, and stocked to furnish services or items. As shown in figure 7, at the time of our visit there was no actual office operating at the practice location address provided to CMS. As of May 2015, this provider had not updated its practice location address in PECOS or received a site visit because the provider falls into the limited-risk category. Without conducting additional reviews or a site visit, the MAC or CMS will not be able to confirm whether this provider is located at the practice location address listed in PECOS or whether this virtual office meets CMS’s eligibility requirements. In light of the advertised characteristics of many virtual office spaces, which may not meet practice location requirements, and what we observed about these addresses, virtual office practice locations may warrant a site visit or other detailed address check. However, 17 of the 25 provider or supplier applicants our research indicated were located in places advertised as virtual offices had not received site visits, primarily because most of these providers or suppliers were not classified as high or moderate risk. We referred the 25 cases of providers and suppliers with virtual office locations that we identified to CMS for further review. As previously noted, for the practice location addresses found in the PECOS data we obtained as of March 2013, CMS required MACs to verify practice location addresses using various techniques to obtain information about the practice location, such as searching the Internet using sites like 411.com and USPS.com, calling the official business telephone number listed on the application, and using Finalist to standardize the practice location address. In March 2014, however, CMS issued guidance to the MACs that revised the practice location verification methods.required to contact the person listed in the application to verify the practice location address and use the Finalist software that is integrated in PECOS to standardize the practice location address. Additional verification, such as using 411.com and USPS.com, which was required under the previous guidance, is only needed if Finalist cannot standardize the actual address. According to CMS officials, they revised the screening procedures to verify the practice location to reduce application processing time frames. Specifically, under the March 2014 guidance, MACs are Our findings suggest that the revised screening procedure of contacting the person listed in the application to verify all of the practice location addresses may not be sufficient to verify such practice locations. For example, we found two providers in our sample of 496 addresses that the USPS address-management tool flagged as CMRA, invalid, or vacant that underwent the revalidation process in 2014. The MAC used the new procedure of calling the contact person to verify the practice location. We found that each of these two providers had a UPS or similar store as its practice location. practice location by one of the providers that the MAC verified by contacting the provider by telephone. As we stated earlier in this report, conducting additional address-verification steps may be helpful to identify ineligible practice locations. Federal internal-control standards require management to identify risks that could impede an agency’s ability to achieve its objectives and then take appropriate steps to manage those risks. By using the new procedure of only calling the contact person listed in the application to verify the practice location, CMS has weakened its internal controls in this process and has increased the likelihood that it could miss identifying some potentially ineligible practice locations and could allow potentially ineligible providers and suppliers to enroll in Medicare. We identified these two providers by conducting Internet searches and also conducting a site visit to one of the two providers. All physicians applying to enroll in the Medicare program must hold an active license in the state in which they plan to practice. They must include that licensing information on their applications; however, CMS does not require that physicians also report licenses they might hold in They must also self-report any final adverse actions they other states.have received by any state licensing authority regardless of the state in which they plan to practice. Under federal law, a final adverse action can be a suspension or revocation of a license to provide health care by any state licensing authority due to a conviction for a federal or state felony offense that CMS has determined to be detrimental to the best interest of the program or revocation or suspension by an accreditation organization, among other actions. Applicants with an active license and a final adverse-action history may still enroll into the Medicare program depending on the severity of the actions and whether the applicant self-reported the action on his or her application. According to CMS guidance, when an applicant first enrolls into Medicare, MACs must corroborate adverse legal actions and licensure information directly with state medical boards using information located on the respective state medical board website and conduct follow- up research to ensure that the applicant retains an active license, as applicable, before allowing applicants to enroll in Medicare. CMS does not require MACs to independently identify and verify an applicant’s license status in areas other than the state where the applicant is enrolling. Further, CMS only requires MACs to verify final adverse actions that the applicant self-reported on the application. To improve oversight of the provider-license review process, in March 2014 CMS began providing the License Continuous Monitoring (LCM) report to MACs. CMS officials explained that because MACs must research all enrolled providers each month using multiple state medical board websites in their respective jurisdictions, CMS established the LCM report to provide consistency over the review process. It is designed to be used in a monitoring capacity to evaluate changes in current license The LCM report is generated from an information, according to CMS.external vendor that obtains license information directly from individual state medical boards. Each report is compiled monthly into an Excel spreadsheet and provides a nationwide snapshot of PECOS provider licensure status such as “suspended,” “surrendered,” “probation,” or “deceased.” The report does not change the overall review process; MACs are still required to access the state medical board website of each provider to verify licensure status. The LCM report that CMS provides to MACs includes the current provider license status but not the adverse-action history. MACs therefore cannot use the report to review a provider’s adverse-action history, but can use the report to research current changes in the provider’s license status on state medical websites and determine whether an adverse action was the cause. Further, the LCM report is limited to only those license numbers used to enroll into the Medicare program. Some licenses of providers with multiple medical licenses would not appear in the LCM report because they were not used to enroll into Medicare. A provider may be associated with various license numbers because of licenses in different states. We found instances in which providers could have been denied enrollment, based on our analysis of providers’ adverse-action histories. We used data from the Federation of State Medical Boards (FSMB) to examine physician license information and disciplinary actions. FSMB is a nonprofit organization that serves state medical boards in all U.S. states, Puerto Rico, Guam, and the Northern Mariana Islands; and 14 state boards of osteopathic medicine. FSMB data differ from the database that CMS uses in that the FSMB database includes a provider’s entire history of license revocations and suspensions, for all medical licenses, while the LCM report only includes the current license status of the licenses reported by providers in PECOS. We found that 321 out of about 1.3 million physicians with active PECOS profiles as of March 29, 2013 (the most-current data available at the time of our review) had received an adverse action from a state medical board related to conduct such as crimes against persons (e.g., battery, rape, or assault), financial or related crimes (e.g., extortion, embezzlement, income-tax evasion, or insurance fraud), and felony crimes outlined in section 1128 of the Social Security Act (e.g., substance abuse, health-care fraud, or patient abuse) that resulted in a revocation or suspension of their licenses sometime between March 29, 2003, and March 29, 2013. See appendix V for a breakdown of adverse actions identified in our review. We followed up with the MACs to determine whether these physicians self-reported final adverse actions or whether MACs had identified any actions and revoked these physicians from the Medicare program. For 174 of the 321 physicians we identified as having adverse actions, MACs either revoked and later reinstated the physician into the Medicare program after meeting eligibility requirements or determined that the adverse action did not affect the physician’s enrollment and allowed the physician to remain in the Medicare program. The remaining 147 physicians were either not revoked from the Medicare program until months after the adverse action or never removed. highlighted that delays in removing physicians from Medicare may occur due to MAC backlogs, delays in receipt of data from primary sources, or delays in the data-verification process. Figure 9 provides a breakdown of adverse actions related to the 147 physicians. We referred the 147 physicians to CMS for further review and action. To help ensure that Medicare maintains current enrollment information and to prevent others from utilizing the enrollment data of deceased providers and suppliers, MACs are required to check that providers and suppliers in PECOS are not deceased. Since January 2009, CMS sends the MACs a file containing a list of individuals who have been reported as deceased to the SSA, and MACs review the file monthly. For individual providers, CMS automatically applies the date of death to the PECOS enrollment record and deactivates the enrollment. For owners, authorized officials, and managing employees, MACs are required to manually update the enrollment record, according to CMS. We compared the list of about 1.7 million unique providers and suppliers in PECOS as of March 2013 and DMEPOS suppliers as of April 2013 with SSA’s full death file and found 460 (about 0.03 percent) who were identified as deceased. In September and October 2014, we followed up with the MACs to obtain additional information on these providers and suppliers. Of the 460 providers and suppliers our analysis had identified as deceased, CMS or the MACs found 409 (89 percent) to be deceased between March 2013 to February 2015. According to the MACs’ responses, the remaining 51 of the 460 deceased providers and suppliers were not identified as deceased by the MACs or CMS. Some MACs noted that due to our work they confirmed that the provider or supplier was deceased and will take further action. Even though the MAC or CMS identified 409 of the 460 providers and suppliers that were deceased from March 2013 to February 2015, there were some instances when much more time elapsed before the MAC or CMS identified the provider as deceased. For example, we found that a provider died in April 2008, but the MAC identified the provider as deceased and duly updated the PECOS record in July 2014. Further, we found that for 162 of the 409 providers, CMS or the MAC took a year or more to identify the provider as deceased. According to CMS, some of the delays in identifying the deceased providers occurred because SSA may take a long time to report an individual as deceased. Not identifying a provider or supplier as deceased exposes the Medicare program to fraud. A provider or supplier can be paid after the date of death for services performed before the date of death. Therefore, CMS is required to check that no claims are paid for services provided after the date of death. We found that the 38 out of the 460 providers and suppliers we found to be deceased were paid about $80,700 by Medicare for services performed after their date of death until December 2013, which is the date CMS had Medicare claims data available. It is unclear what caused the delay or omission by CMS and the MACs in identifying these individuals as deceased or how many overpayments they are in the process of recouping. We referred these cases to CMS for further review. MACs are required to check the Medicare Exclusion Database and the General Services Administration debarment list known as System for Award Management to ensure that the applicant and other individuals listed in an application have not been suspended or debarred from participating in a federal contract or a Medicare or Medicaid program. If a MAC identifies the applicant as debarred or suspended, it is required to document the finding and confirm whether it is an accurate match. Applicants found on the System for Award Management website are not automatically excluded; the MAC needs to contact the agency that issued the exclusion or suspension action and confirm that the applicant is the same person. In addition, the applicants can be excluded or suspended for a certain period, but once the suspension period expires, the applicant can apply to enroll in Medicare. According to CMS, in April 2010, it began providing the MACs a report each month on any providers and suppliers that have been sanctioned on the Medicare Exclusion Database. On the basis of our analysis of relevant data, we found about 0.002 percent (40) of providers and suppliers listed in the HHS OIG List of Excluded Individuals and Entities (LEIE), which feeds into the Medicare Exclusion Database and PECOS, as of March 2013. These individuals were excluded from participating in health care–related programs. We found that 16 of the 40 excluded providers and suppliers were paid approximately $8.5 million by Medicare for services rendered after their exclusion date until the MAC or the NSC found them to be excluded. In September and October 2014, we followed up with the MACs to determine the status of these providers and suppliers in PECOS. Of the 40 providers we found, MACs had removed 38 providers and suppliers from PECOS from March 2013 to October 2014. However, for two matches that we identified, the MACs did not take any action. According to CMS, one of two providers was not found in the Medicare Exclusion Database or LEIE using specific identifiers such as National Provider Identifier, last name, and Social Security number. This provider is currently approved in PECOS. According to CMS, the other provider was found in LEIE using the specific identifiers, but the middle initial did not match. Because the MAC could not determine an exact match to the excluded provider, it did not take any action. Since May 2014, this provider was deactivated due to requesting to be withdrawn from the Medicare program. However, this provider billed Medicare about $22,000 during the period for which she should have been ineligible to participate in the Medicare program. We referred these two providers to CMS for further review and action. As part of an overall effort to enhance program integrity and reduce fraud risk, effective enrollment-screening procedures are essential to ensure that ineligible or potentially fraudulent providers or suppliers do not enroll in the Medicare program. CMS has taken steps to develop and implement such procedures, but our analysis found limitations in two key areas that have allowed potentially ineligible providers and suppliers to enroll in Medicare. First, CMS software to validate the applicant’s practice location address does not contain specific flags that can help identify questionable practice locations. Without those flags, CMS misses an opportunity to identify questionable practices that might warrant further review. In addition, the absence of those flags along with CMS’s recently revised guidance—in which the MACs contact the person listed in a provider’s or supplier’s application to verify an address—call into question the overall effectiveness of CMS’s procedures to ensure that applicants have a legitimate practice address. Similarly, CMS’s efforts to improve the oversight of physician license reviews by providing the MACs with the License Continuous Monitoring (LCM) report are a good first step. However, the report only provides MACs with the current status of the license that the provider used to enroll in the Medicare program. Without collecting license information on all medical licenses, regardless of the state the provider enrolled in, CMS may be missing an opportunity to identify potentially ineligible providers who have license revocations or suspensions in other states, which can put Medicare beneficiaries at risk. Utilizing additional resources, such as the Federation of State Medical Boards (FSMB), could help CMS identify whether providers or suppliers have additional licenses in other states that have ever been revoked or suspended. These resources would enable CMS and the MACs to access a provider’s entire adverse-action history and could provide the MACs with a more-complete picture when enrolling or revalidating a Medicare provider. To help improve the Medicare provider and supplier enrollment-screening procedures, we recommend that the Acting Administrator of CMS take the following three actions: 1. modify the CMS software integrated into PECOS to include specific flags to help identify potentially questionable practice location addresses, such as Commercial Mail Receiving Agency (CMRA), vacant, and invalid addresses; 2. revise CMS guidance for verifying practice locations to include, at a minimum, the requirements contained in CMS’s guidance in place prior to March 2014 so that MACs conduct additional research, beyond phone calls to applicants, on the practice location addresses that are flagged as a CMRA, vacant, or invalid to better ensure that the address meets CMS’s practice location criteria; and 3. collect information on all licenses held by providers that enroll in PECOS by using data sources that contain this information, including licenses obtained from other states, and expand the License Continuous Monitoring (LCM) report to include all licenses, and at least annually review databases, such as that of the Federation of State Medical Boards (FSMB), to check for disciplinary actions. We provided a draft of this report for review to HHS and received written comments that are summarized below and reprinted in appendix VI. HHS also provided technical comments, which we incorporated as appropriate. In addition, we provided excerpts of this draft report to the 12 MACs, NSC, SSA, USPS, and FSMB to help ensure the accuracy of our report. We received technical comments from these parties, which we have incorporated, as appropriate. In its comments, HHS concurred with two of our three recommendations, but disagreed with the recommendation to revise its guidance. We continue to believe this action is needed, as discussed below. Specifically, HHS concurred with our recommendation to modify CMS’s software already integrated into PECOS to include specific flags to help identify potentially questionable practice location addresses, such as CMRA, vacant, and invalid addresses. HHS stated that it will configure the provider and supplier address-verification system in PECOS to flag CMRAs, vacancies, invalid addresses, and other potentially questionable practice locations. HHS did not agree with the recommendation to revise its guidance for verifying practice locations to include, at a minimum, the requirement contained in CMS’s guidance in place prior to March 2014 so that MACs conduct additional research, beyond phone calls to applicants, on the practice location addresses that are flagged as a CMRA, vacant, or invalid. In its written comments, HHS stated that the March 2014 guidance was updated to remove redundant practices, such as the use of 411.com and USPS.com to verify practice locations because the provider and supplier address-verification system in PECOS performed the same checks. Further, HHS noted that removing these requirements allowed HHS to reduce provider and supplier burden and eliminate duplication of effort without reducing the effectiveness of its program-integrity efforts. The agency noted that, if a MAC is unable to validate the practice location using the software incorporated in PECOS, it is permitted to request clarifying information from the provider/supplier or request an unannounced site visit. However, our audit work shows that additional checks on addresses flagged by the address matching software as a CMRA, vacant, or invalid address can help to verify whether the addresses are ineligible. For example, when the USPS address-management tool flagged a practice location address as a CMRA, we took further steps, such as conducting Google Maps searches or physical site visits, to determine whether the address was ineligible. On the basis of these steps, we were able to confirm that the addresses were legitimate in some cases, while in other cases the practice locations in PECOS were ineligible addresses, such as a UPS store or similar establishments. We continue to believe that our recommendation will help ensure that HHS conducts this type of additional research on practice location addresses, when necessary. This additional research can include Google Map searches, Internet searches, site visits, or the additional steps HHS highlighted in its response. We are concerned that HHS’s 2014 guidance does not describe any of these specific types of additional methods or techniques, beyond contacting the person listed in the application, and some of the MACs that we contacted were no longer taking the types of additional steps outlined above after issuance of HHS’s 2014 guidance. Further, as our report highlighted, we identified providers with potentially ineligible addresses that were approved by MACs using the process outlined in that guidance. Therefore, we continue to believe that the agency should update its 2014 guidance to reflect the need to conduct the types of additional address research that we cite in our report and that the agency cites in its response, on addresses that are flagged as potentially ineligible practice locations. HHS also concurred with our draft recommendation to require applicants to report all license information including those obtained from other states and expand the LCM report to include all licenses, and at least annually review databases, such as that of FSMB, to check for disciplinary actions. HHS noted that it will take steps to make certain that all applicants’ licensure information is evaluated as part of the screening process by MACs and the LCM report as appropriate and will regularly review other databases for disciplinary actions against enrolled providers. HHS further stated, however, that it does not have the authority to require providers to report licenses for states in which they are not enrolled. As shown in our report, having a provider’s complete licensing history is a way to determine whether a provider has a history of final adverse actions. Without obtaining all licenses from a provider, as we did, CMS does not have the ability to verify whether all final adverse actions were reported. Without collecting license information on all medical licenses, regardless of the state the provider enrolled in, it is unclear how HHS will obtain the information it needs to identify past disciplinary actions, as the agency indicated it will do in its response to our report. Instead, HHS may continue to miss an opportunity to identify potentially ineligible providers who have license revocations or suspension in other states, which can put Medicare beneficiaries at risk. While providers are not currently required to list out-of-state license information in the enrollment application, CMS can independently collect this information by using other resources. For example, CMS can compare the provider’s information to license databases, such as FSMB’s, that identify all licenses associated with an individual. For the purposes of our work, we compared the provider’s SSN and name with FSMB’s data to determine whether enrolled providers had disciplinary actions that might make them ineligible for Medicare enrollment and found instances in which providers could have been denied enrollment. Therefore, we clarified our recommendation to state that CMS should collect information on all licenses held by providers that enroll in PECOS by using data sources that contain this information. Doing so will help HHS to develop a more-complete picture of individual providers. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the appropriate congressional committees, the Acting Administrator of CMS, 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) 512-6722 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix VII. GAO was asked to assess Medicare’s provider and supplier enrollment- screening procedures to determine whether the Provider Enrollment, Chain and Ownership System (PECOS) was vulnerable to fraud. This report examines the extent to which Centers for Medicare & Medicaid Services (CMS) enrollment-screening procedures are designed and implemented to prevent and detect the enrollment of ineligible or potentially fraudulent Medicare providers; suppliers; and durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) suppliers into PECOS. To assess the extent to which CMS’s enrollment-screening procedures are designed to prevent and detect the enrollment of ineligible or potentially fraudulent Medicare providers, suppliers, and DMEPOS suppliers into PECOS, we reviewed CMS procedural manuals and directives including the Program Integrity Manual that outlines the procedures that Medicare Administrative Contractors (MAC) and the National Supplier Clearinghouse (NSC) should use to determine provider and supplier enrollment eligibility. We also interviewed CMS officials about provider and supplier enrollment-screening procedures, including procedures that were developed and implemented as a result of the Patient Protection and Affordable Care Act’s (PPACA) provisions. In addition, we conducted interviews with five MACs, to learn about the enrollment-screening procedures. We selected the five MACs to include some with larger numbers of physicians serviced, some that met and some that did not meet the accuracy threshold in CMS’s provider enrollment performance evaluation, some that participated in the automated screening process and some that did not (to capture additional possible checks that some MACs performed on providers’ enrollment information through this process), and some that served more than one jurisdiction to maximize the number of states included in our review. We also interviewed NSC officials responsible for enrolling DMEPOS suppliers to learn about the DMEPOS supplier enrollment-screening procedures. We contacted by e-mail the remaining seven MACs to obtain additional information on the provider enrollment-screening procedures to verify applicants’ practice location addresses and validate applicants’ licensure and accreditation information. To assess the extent to which CMS implemented enrollment-screening procedures to prevent and detect the enrollment of ineligible or potentially fraudulent Medicare providers, suppliers, and DMEPOS suppliers into PECOS, we matched the list of providers and suppliers present in PECOS on March 29, 2013, and DMEPOS suppliers on April 6, 2013— the most-current data available at the time of our review—to four specific databases listed below. 1. The United States Postal Service (USPS) Address Matching System Application Program Interface, which is a commercially available USPS software package that standardizes addresses and provides specific flags such as Commercial Mail Receiving Agency (CMRA), vacant, or invalid addresses to determine the validity of the providers’ or suppliers’ practice location addresses. Specifically, we submitted 980,974 PECOS practice location addresses to the USPS address-management tool. The USPS address-management tool contained valid addresses as of December 15, 2013. Of the 980,974 addresses, 105,234 (about 11 percent) appeared in the USPS address-management tool as a CMRA, a vacant address, or an invalid address. For those addresses that the tool flagged as a CMRA, vacant, or invalid, we selected a generalizable stratified random sample. Specifically, we sampled 496 addresses from the population of 105,234. We stratified the population addresses by the type of match (CMRA, vacant, or invalid) and by the type of provider (individual practitioner, organization, or DMEPOS supplier). This resulted in nine mutually exclusive strata. We computed sample sizes to achieve a precision of plus or minus 10 percentage points or fewer, at the 95 percent confidence level for each of the three types of matches. 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 particular sample’s results as a 95 percent confidence interval (e.g., plus or minus 10 percentage points). This is the interval that would contain the actual population value for 95 percent of the samples we could have drawn. To confirm whether each of the 496 sampled practice location addresses was an eligible address, we used Google Maps, Internet searches including searching the provider’s website, or physical site visits. On the basis of the results of our work on the sample, we produced estimates of how many addresses were likely to be ineligible, potentially valid, or inconclusive. The estimates are based on our generalizable stratified random sample of 496 addresses and have a margin of error at the 95 percent confidence level of plus or minus 10 percentage points or fewer. To calculate the amount of Medicare claims paid to providers and suppliers we confirmed to have an ineligible practice location, we ran the provider and supplier National Provider Identifier against the claims paid from 2005 to 2013, the period for which CMS has claims data. For addresses that were located at an ineligible CMRA, we calculated the claims data from the date the provider or supplier enrolled into PECOS using the address to December 2013. For addresses flagged as vacant by the USPS address-management tool, we calculated the claims data from September 2013 to December 2013.at least 90 days to be flagged as vacant in the USPS address- management tool. For the invalid addresses, we calculated the claims According to USPS guidance, an address must be vacant for data from the date the provider or supplier enrolled into PECOS using the address to December 2013. The Medicare claims paid to providers and suppliers with ineligible addresses may be understated because some of the providers and suppliers enrolled in PECOS with a potential ineligible address prior to 2005. 2. The Federation of State Medical Boards (FSMB) licensure data from March 31, 2014, to determine whether enrolled providers or suppliers had disciplinary actions that might make them ineligible for Medicare enrollment. We matched the providers and suppliers in PECOS with the FSMB licensure data by Social Security number and provider name. We then validated the FSMB licensure information against individual state medical licensing boards. We then calculated Medicare claims for those physicians that received a suspension or revocation of their medical license while enrolled in PECOS. This included the time the physician was actively suspended or revoked and in some cases the time when the provider could have been barred from the Medicare program for not reporting an adverse action. We calculated the Medicare claims data paid from 2005 to 2013, which are the years CMS had the claims data available. 3. The Social Security Administration’s (SSA) full death file containing updates through April 2013, to determine whether enrolled providers or suppliers were deceased. We matched the providers and suppliers with the SSA full death file by Social Security number and provider’s last name. We also matched the providers and suppliers we identified as deceased with the Medicare claims by National Provider Identifier. We calculated the Medicare claims data paid from 2005 to 2013, which are the years CMS had the claims data available, to the deceased providers by considering only claims paid for services rendered after the date of death. 4. The Department of Health and Human Services (HHS) Office of Inspector General (OIG) List of Excluded Individuals and Entities (LEIE) as of September 17, 2012, to determine whether providers or suppliers were excluded from doing business with the federal government or health care–related programs.match by comparing the provider’s Social Security number and provider’s last name. We also matched the providers and suppliers we identified as being excluded with the Medicare claims data by using the provider and supplier National Provider Identifier. We calculated the Medicare claims data paid from 2005 to 2013, which are the years CMS had the claims data available, to the excluded providers and suppliers by considering only claims paid for services rendered after the exclusion date through the date the MAC or CMS found the provider to be excluded. The Medicare claims paid to excluded providers and suppliers may be understated in cases where these providers and suppliers were excluded prior to 2005. We also contacted the NSC and those MACs responsible for enrolling any of the individuals and entities that appeared in our four sets of matches. Since our PECOS data were as of March 29, 2013, for providers and suppliers and April 6, 2013, for DMEPOS suppliers, we requested updated information during the months of September 2014 to October 2014. This information included whether the providers or suppliers were revalidated or changed their PECOS profile information. We also requested providers’ and suppliers’ application files including site-visit reports from the MACs when appropriate to corroborate MACs’ responses. We also selected 30 locations for a physical site visit to confirm whether the practice location address was an eligible address. The 30 locations were selected based on the geographic proximity to the five MACs and the NSC we visited, and to GAO offices. These locations were selected independently of our generalizable sample of 496 addresses and this selection is not generalizable to any set of addresses. We assessed the reliability of the PECOS data, USPS address- management tool, FSMB licensure data, SSA full death file, HHS LEIE, and Medicare claims data by reviewing relevant documentation, interviewing knowledgeable agency officials, and performing electronic testing to determine the validity of specific data elements in the data. Specifically, for the USPS address-management tool, we selected a generalizable stratified random sample of 496 addresses that the tool flagged as a CMRA, vacant, or invalid and used Google Maps, Internet searches, or physical site visits to confirm the address. For the FSMB licensure data, we selected a random, nongeneralizable sample of 153 licenses and traced the license information, including disciplinary actions when applicable, to the appropriate state licensing medical board for confirmation. We determined that these databases were sufficiently reliable for the purpose of our work. We conducted this performance audit from January 2014 to June 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The following table outlines the steps in the enrollment-screening process depicted in figure 2. Federal regulations require that applicants have a physical practice location that is open to the public for providing health care–related services that is properly staffed, equipped, and stocked to furnish the services for which they will be receiving Medicare funds. Providers and suppliers are required to list a physical practice location address in the enrollment application regardless of their provider or supplier type. The practice location address provided in the application depends on the type of services the provider or supplier renders. Table 3 describes the type of practice locations allowed based on the services the provider or supplier renders. We selected a generalizable stratified random sample of 496 addresses from the population of 105,234 that appeared in the United States Postal Service (USPS) address-management tool as a Commercial Mail Receiving Agency (CMRA), a vacant address, or invalid address. For each selected address, we used Google Maps, Internet searches, or physical site visits to confirm whether the practice location address was an eligible address. For the 496 addresses we reviewed, we confirmed the following: 120 of the 496 addresses had an ineligible address, of which 46 addresses were determined to be CMRAs, 29 were vacant properties, and 45 were invalid. We contacted the Medicare Administrative Contractors (MAC) and the National Supplier Clearinghouse (NSC) to determine whether the 120 addresses were updated, because providers and suppliers can submit changes to their addresses or update them during the revalidation process, since the time we obtained the list of providers and suppliers in the Provider Enrollment, Chain and Ownership System (PECOS). The MACs and the NSC noted that 92 of the 120 addresses we found to be ineligible have not been updated in PECOS from March 30, 2013, to October 2014. We found that from the time a provider enrolled in PECOS with the ineligible practice location through December 2013 or the date the provider updated the address, the Medicare program has paid providers associated with these 120 addresses approximately $122.4 million. 162 of the 496 addresses were determined to be valid addresses and thus eligible for Medicare. 214 of the 496 addresses cannot be determined as either eligible or ineligible using these methods. The numbers of addresses presented in this appendix are unweighted counts of results obtained from the stratified random sample of 496 cases. These numbers do not represent estimates of the population. The estimated percentages included in the body of the report were computed using methods appropriate for a stratified random sample and have been weighted to account for the sample design. As a result, percentages computed from the numbers presented in this appendix are not expected to match the estimated percentages included in the body of the report. During our review, we found that 321 physicians in the Provider Enrollment, Chain and Ownership System (PECOS) have received some type of revocation or suspension from March 29, 2003, to March 29, 2013. Of the 321 physicians, 147 were either not revoked from the Medicare program until months after the adverse action or never removed. Below in table 4 is a breakdown of the adverse actions identified in our review. Seto J. Bagdoyan, (202) 512-6722 or [email protected]. In addition to those mentioned above, the following staff members made significant contributions to this report: Latesha Love, Assistant Director; Gloria Proa, Analyst-in-Charge; Ariel Vega; and Georgette Hagans. Additionally, Colin Fallon, Maria McMullen, and Marcus Corbin provided technical support; Shana Wallace and James Ashley provided methodological guidance; and Brynn Rovito and Barbara Lewis provided legal counsel. | In fiscal year 2014, Medicare paid $554 billion for health care and related services. CMS estimates that $60 billion (about 10 percent) of that total was paid improperly. To establish and maintain Medicare billing privileges, providers and suppliers must be enrolled in a CMS database known as PECOS. About 1.8 million providers and suppliers were in PECOS as of December 2014, according to CMS. GAO was asked to assess Medicare's provider and supplier enrollment-screening procedures to determine whether PECOS was vulnerable to fraud. This report examines the extent to which CMS's enrollment-screening procedures are designed and implemented to prevent enrollment of ineligible or potentially fraudulent Medicare providers. GAO reviewed relevant documentation, interviewed CMS officials, and contacted the 12 CMS contractors that evaluate provider applications. GAO matched providers and suppliers in PECOS, as of March 2013, to several databases to identify potentially ineligible providers and suppliers, and used 2005–2013 Medicare claims data to verify whether they were paid during this period. GAO examined the implementation of four enrollment screening procedures that the Centers for Medicare & Medicaid Services (CMS) uses to prevent and detect ineligible or potentially fraudulent providers and suppliers from enrolling into its Provider Enrollment, Chain and Ownership System (PECOS). Two of CMS's procedures appear to be working to screen for providers and suppliers listed as deceased or excluded from participating in federal programs or health care–related programs. However, GAO identified the following weaknesses in the other two procedures: CMS's verification of provider practice location and physician licensure status. First, Medicare providers are required to submit the address of the actual practice location from which they offer services. GAO's examination of 2013 data found that about 23,400 of 105,234 (22 percent) of practice location addresses are potentially ineligible. The computer software CMS uses as a method to validate applicants' addresses does not flag potentially ineligible addresses, such as those that are of a Commercial Mail Receiving Agency (such as a UPS store mailbox), vacant, or invalid addresses. In addition, CMS's March 2014 guidance has reduced the amount of independent verification conducted by contractors, thereby increasing the program's vulnerability to potential fraud. For example, the figure below shows a mailbox located within a UPS store that an applicant reported as a practice location, which CMS contractors inaccurately verified as an authentic practice location under CMS's new guidance, which allows contractors to use phone calls as the primary means for verifying provider addresses. Second, physicians applying to participate in the Medicare program must hold an active license in the state they plan to practice and self-report final adverse actions, such as a suspension or revocation by any state licensing authority. CMS requires its contractors to verify final adverse actions that the applicant self-reported on the application directly with state medical board websites. In March 2014, CMS began providing a report to its Medicare contractors to improve their oversight of physician license reviews. However, the report only includes the medical license numbers providers use to enroll into the Medicare program, but not adverse-action history or other medical licenses a provider may have in other states that were not used to enroll into Medicare. GAO found 147 out of about 1.3 million physicians listed as eligible to bill Medicare who, as of March 2013, had received a final adverse action from a state medical board for crimes against persons, financial crimes, and other types of felonies but were either not revoked from the Medicare program until months after the adverse action or never removed. GAO recommends that CMS incorporate flags into its software to help identify potentially questionable addresses, revise its 2014 guidance for verifying practice locations, and collect additional license information. The Department of Health and Human Services concurred with two of the three recommendations, but did not agree with the recommendation to revise its guidance. GAO continues to believe the recommendation is valid, as discussed in the report. |
This section presents information on the use of injection wells in the oil and gas industry and key provisions of the Safe Drinking Water Act and EPA regulations related to protecting underground sources of drinking water, and EPA UIC regulations and evaluations. After a long period of declining production that lasted through 2005, annual U.S. production of oil and gas—and associated wastewater—has experienced significant growth. This increase is due in large part to development of oil and gas from unconventional formations. For example, shale oil production increased more than 5-fold, from 39 million to about 217 million barrels from 2007 through 2011, while shale gas production increased approximately 4-fold, from 1.6 to about 7.2 trillion cubic feet, over the same period. Oil and gas production, including production from unconventional oil and gas bearing formations, involves removing hydrocarbon bearing fluids from geologic formations underground. Conventional oil and natural gas are found in deep, porous rock or reservoirs and can flow under natural pressure to the surface after drilling. In contrast to the free-flowing resources found in conventional formations, the low permeability of some formations, including shale, means that oil and gas trapped in the formation cannot move easily from the rock. As a result of geologic differences, the methods used to extract hydrocarbon resources, including the amounts of water used and wastewater produced during extraction, vary widely. Some oil and gas can be developed by drilling a well and relying on the natural pressure in the formation to push the oil or gas to the surface. When an oil or gas producing reservoir is depleted—that is, no longer producing oil or gas—a producer can inject fluids, such as saltwater, into the reservoir to increase the pressure in the formation and move the residual oil and gas toward a well and the surface for collection, a process known as enhanced recovery (See fig. 1.). Similarly, some hydrocarbons are produced through the use of hydraulic fracturing. Hydraulic fracturing involves the injection of liquid under pressure to fracture the rock in geologic formations such as shale to create fractures and allow hydrocarbons to flow more freely from the formation into the well for collection. The liquids used in this process consist primarily of water, but also include chemicals, and sand or other agents for holding open the fractures (proppants). When a well is no longer economically viable, a producer may decide to cease production from it. At some point after production stops, wells may be converted from production wells to disposal wells, where wastewater can be injected for disposal. If the well is not used for any of these purposes, it becomes idle or inactive and will eventually be plugged and abandoned. The process of extracting oil and gas creates several waste streams that must be managed. Key among these waste streams is the water (brine) produced along with the oil or gas during production. Produced water may include water that occurs naturally in the formation, water or other liquids that were injected into the formation to enhance recovery during the drilling or production process, and flowback water, which consists of the water, chemicals, and proppants used for hydraulic fracturing (fracturing fluids). Over 90 percent of the water produced during oil and gas operations is disposed of underground, either through injection for disposal or for enhanced recovery. The remaining water may be discharged to surface water such as streams or lakes, stored in surface impoundments, reused for agricultural purposes such as irrigation or livestock, or reused for hydraulic fracturing. Differences in geologic formations can affect the pressure and volume of wastewater injected underground for either disposal or reuse in enhancement of oil and gas production. Layers of sediment and rock deposited over time create different underground formations with different characteristics, depending on the material that was deposited and various geologic processes. These characteristics include how porous and permeable a rock is—both characteristics that determine how well a formation can accept and hold fluids such as wastewater. Generally, fluids are injected into porous, permeable reservoirs below an upper confining layer, or geologic formation with low permeability through which significant quantities of liquids cannot move. The confining layer serves as a barrier of protection between the reservoir where fluids are being injected, known as the injection zone, and underground sources of drinking water (see fig. 1). Ideally, an injection zone is sealed above and below by continuous, impermeable rock formations and is large enough to keep injected fluids from reaching pressures great enough to fracture the confining rock layers. Much of the nation relies on groundwater as a source of drinking water, and reflecting this fact, Congress included groundwater protection provisions in the 1974 Safe Drinking Water Act, as amended. The act, among other things, required EPA to establish the UIC program, including the oversight of state programs regulating underground injection activities, to prevent the endangerment of underground sources of drinking water. Before the act’s passage, there was no overall federal regulation of injection activities, although some individual states regulated injection wells. Because of concerns about leaks from injection wells and the potential contamination of underground sources of drinking water, Congress established the national program in the Safe Drinking Water Act. The Safe Drinking Water Act requires EPA to establish regulations for state programs with minimum requirements to prevent injection of fluids that endanger underground sources of drinking water. These minimum requirements are to prohibit the injection of fluids underground unless permitted and are to include, among other things, requirements for monitoring of and reporting on injection wells. In implementing the program, EPA has defined underground sources of drinking water as an aquifer, or part of an aquifer, that has not been exempted from regulation and either supplies a public water system or contains a sufficient quantity of water to supply a public water system and (1) currently supplies drinking water for human consumption or (2) which, among other things, contains fewer than 10,000 milligrams per liter (mg/l or parts per million) total dissolved solids.the act and used for injection. Operators may apply for an exemption for a particular aquifer from EPA and, if granted, operators may inject fluids into the aquifer. Aquifers can be exempted from protection under The act, as amended through 1977, placed three conditions on the UIC program. First, EPA’s program regulations must not interfere with or impede the underground injection of brine or other fluids brought to the surface in connection with oil or natural gas production or natural gas storage operations, or any underground injection for the secondary or tertiary recovery of oil or natural gas, unless such requirements are essential to protecting underground sources of drinking water. Second, EPA’s regulations of class II wells should provide for varying geological, hydrological, and historical conditions within and among the states. Third, EPA’s program must not unnecessarily disrupt existing state UIC programs. The act also included provisions for states to apply for and receive approval from EPA to manage one or more of the UIC programs in their state (each class of well is managed as a program).gain EPA approval, a state generally must adopt and implement a program that meets the minimum requirements established under EPA regulations and conduct reporting as EPA requires. EPA must approve or disapprove a state’s program through a rulemaking process, and EPA’s practice is to enter into a memorandum of agreement with each state, outlining state and federal responsibilities for program management and oversight. States with approved programs—state programs—manage the permitting, inspection, and enforcement of injection wells in their states under EPA oversight. Under the act, to Congress amended the act in 1980, creating an alternative process for states to receive approval for their UIC class II programs specifically. Using this alternative, in lieu of adopting EPA’s minimum requirements, a state can seek approval to manage its own program by demonstrating to EPA that its program is effective in preventing the contamination of underground sources of drinking water. Similar to the conventional approval process, states are required to submit an application to EPA and enter into a memorandum of agreement with EPA laying out the components of their program. However, EPA has discretion when making the determination that the state’s program is effective at protecting underground sources of drinking water. To help states seeking approval for their programs under this approach, EPA developed guidance outlining what would constitute a program that is effective in preventing contamination of underground sources of drinking water. Most states have class II programs that have been approved by EPA under one or the other process, although some of these states do not have class II injection wells. EPA has approved 16 states under the conventional process (2 with class II injection wells), and 23 state programs under the alternative process (all 23 with class II injection wells), with most states approved in the 1980’s soon after the program’s inception (see app. I for a list of states). Eleven states do not have program approval (eight with class II injection wells), and the programs in these states are managed by six EPA regional offices. In 1980, EPA issued regulations that established minimum requirements for state programs, and through the mid-1990s, issued guidance for the class II programs. Until recently, EPA has made few significant additions or updates to the regulations and guidance, which have remained in effect to govern EPA’s class II program. In 1988, about a decade after EPA issued its regulations, the agency initiated a midcourse evaluation of the class II program to determine whether any changes were needed to improve the program. EPA evaluated the adequacy of program regulations and safeguards, including various safeguards such as mechanical integrity tests, and found that most of the regulations and corresponding safeguards were adequate to protect underground sources of drinking water and needed no changes. EPA’s evaluation also identified some areas of the program that could be improved, such as the temporary abandonment of injection wells and construction requirements for injection wells. In 1992, in a follow-on study, an EPA-chartered workgroup recommended that the agency amend its regulations to ensure that wells were abandoned in such a way that they would not provide a conduit for injected fluids.construction requirements be changed so that all wells drilled after the regulations went into effect have multiple layers of steel casing and cement through formations that had a certain water quality. According to EPA officials, EPA developed draft regulations to address some of the recommendations from the evaluation and follow-on study, but the draft regulations were never published. EPA announced in 1995 that it would not pursue a change to regulations, and no subsequent action was taken. The study also recommended that well In 1996, EPA created the UIC Technical Workgroup to provide a forum to evaluate ongoing technical issues in the UIC program. The workgroup has members from EPA, states, and environmental organizations, which discuss, review, and resolve technical matters related to underground injection. The workgroup’s objectives include promoting consistent implementation of the UIC program and assisting with the development of regulatory revisions and technical guidance. Since its inception, the workgroup has reviewed a number of technical issues surrounding class II wells, including well construction standards and the types of fluids that are acceptable for injection into wells. In 2005, the Energy Policy Act amended the Safe Drinking Water Act to exempt the underground injection of fluids associated with hydraulic fracturing operations related to oil, gas, or geothermal production activities from regulation under class II programs, except in cases where diesel fuels are used in the fracturing process. In February 2014, EPA issued class II permitting guidance for hydraulic fracturing operations using diesel fuels. The guidance includes technical recommendations for EPA permit writers. EPA and states have separate roles and responsibilities for class II programs and provide a mix of resources to support them. EPA headquarters oversees the class II program by setting program regulations and guidance, while regions focus their oversight on evaluating state programs and state reporting. State programs, as well as EPA-managed programs, are largely responsible for the day-to-day management of the class II program, including providing permits, conducting inspections, enforcing regulations and guidance, and collecting data and reporting. EPA and states provide a mix of resources to support the class II program including EPA grants, EPA and state personnel, and state funding. EPA headquarters regulates and oversees state class II programs, in addition to all other UIC programs, by setting program regulations and guidance and providing grant funding to state programs. EPA’s regional offices primarily oversee states that have approved UIC programs— particularly class II programs—by reviewing grants and conducting annual evaluations. EPA’s primary responsibilities include the following: Establishes program regulations and guidance. EPA issues and, in some cases, updates minimum federal regulations and develops guidance, to assist with the implementation of UIC program requirements, including those established in the Safe Drinking Water Act. In addition, EPA develops guidance for state and EPA-managed programs on technical program requirements such as pressure testing and well construction. Approves state program applications and state program revisions. EPA reviews and approves state applications to manage their own programs. The act requires EPA to approve state programs, and certain revisions, by rule, meaning that EPA conducts a rulemaking including public notice and opportunity to comment. EPA has issued regulations and guidance concerning the process for approving state programs and revisions. Currently, 39 states have approved class II programs, and, according to EPA officials, there are two applications pending approval. See appendix I for a list of states with approved programs and appendix II for a description of the approval process. Enforcement of state class II regulations. Once state programs are approved, EPA incorporates state program regulations into federal regulations, which gives EPA the ability to enforce state program requirements in cases where the state does not take action or requests EPA assistance. To incorporate state program requirements into federal regulations, EPA conducts a rulemaking process that provides public notice of the proposed regulations and the opportunity for any person or organization to review the requirements and submit comments in writing for a 30- to 90-day period. EPA generally provides a response to the significant issues raised during the comment period and discusses any changes made to the regulation as a result, and it publishes the text of the final regulation in the Federal Register. The Code of Federal Regulations provides a public record of approved state programs that can be enforced by EPA. Oversees state programs. EPA regions oversee state programs. EPA guidance issued in 1983 provides details of effective oversight of state programs, including several steps that regions are to take. EPA regional officials are expected to conduct annual on-site evaluations of state managed programs that usually involve, among other things, an on-site meeting with state class II officials to discuss program performance and a review of permitting and inspection files, both of which are intended to help determine whether the state program is meeting the requirement to protect underground sources of drinking water from endangerment by underground injections. EPA headquarters is responsible for conducting the annual evaluation of EPA-managed programs. Allocates and administers grants. EPA allocates grant funding to state programs using a formula that includes the number of underground injection wells in each state, state population, and state land area. To receive funding, states are required to submit a grant application with a work plan that estimates the amount of federal funds and state funds needed during the state’s fiscal year, and the number of personnel the funding will support to accomplish specific activities such as permitting, inspections, and data management. States are required to match 25 percent of the grant funding allocated with state funding. Funding allocated for EPA-managed class II programs is provided to the EPA regional office to help cover its costs for managing the programs. At least once annually, EPA regional officials are to evaluate state program accomplishments and compare federal funds and state matching funds spent to the state’s end of year financial reporting. Aggregates and reports data. EPA makes data available to the public on the class II program, as well as other UIC programs, nationwide. EPA’s guidance says that it will aggregate state-reported data on the UIC program to allow tracking and evaluation of the program. According to EPA officials, EPA developed and maintained a mainframe database to aggregate and summarize state reporting data at a national level until the mid-1990s, and it has not had a similar database until recently when the agency determined that it needed to modernize its data and reporting systems. EPA has three data collection efforts under way: (1) a Web-based system to collect and report basic information on program performance; (2) biannual summary reporting forms submitted by the states or EPA regional offices; and (3) a national well-specific database that, according to agency documents, will ultimately provide data, by well, on a number of variables, including violations, significant noncompliance, and alleged contamination of underground drinking water. EPA is working with state UIC programs to help them develop the capability to input data directly into the database. States, as well as certain EPA regional offices responsible for EPA- managed programs in some states, are largely responsible for the day-to- day management of the class II program. Management includes permitting wells, inspecting wells, enforcing regulations and guidance, and collecting and reporting program data to EPA. More specifically, managing the day-to-day activities of the class II program includes the following: Program management. States and EPA regional offices are responsible for managing class II program staff, developing program regulations and associated guidance, applying for EPA grants, and tracking expenditures associated with EPA grant funding. Permitting. States and EPA regional offices review and approve permits for existing and new injection wells and regularly review historical well records. Monitoring and inspections. States and EPA regional offices review monitoring reports submitted by well operators, conduct field inspections of well sites, test wells to ensure protection of underground sources of drinking water, and ensure that operator reporting, inspections, and testing are done consistently and correctly. Compliance and enforcement. States and EPA regional offices are expected to identify wells that are not in compliance with regulations and guidance, take enforcement action against well operators in violation of regulations and guidance, and pursue legal action against violators when necessary. Aquifer identification and exemption. States and EPA regional offices are expected to conduct aquifer surveys and develop inventories of aquifers in the state. They assist with applications to EPA for aquifer exemptions. In addition, they conduct investigations of potential contamination of aquifers. Data management and reporting. States and EPA regional offices develop a complete inventory of class II wells in the state. They also collect and manage data on wells to satisfy EPA’s reporting requirements, including data on well inspections and compliance data, such as well operator violations and any enforcement actions taken. Public information, training, and technical assistance. States and EPA regional offices conduct public outreach and training to help staff and well operators keep current on technical issues. States and EPA regional offices also provide technical assistance to well operators when necessary. EPA and states provide a mix of resources to support the class II program, including EPA grants, state funding, and EPA and state personnel. State programs are funded in part by EPA grants. States receive EPA grants to help pay for the costs of managing the class II program. Federal officials said that federal grant funds for the UIC program, including EPA grant funds for states’ class II programs, have remained unchanged since the 1990s, at around $11 million in grant funding for all states, territories, and tribes. As shown in figure 2, EPA’s grant funding for the UIC program, as well as grants for state class II programs, remained flat from fiscal year 2003 through fiscal year 2012. Between fiscal year 2003 and fiscal year 2012, nationwide, grant funding for state UIC programs has fluctuated between approximately $9.7 million and $10.1 million. During the same period, total UIC grant funding for the states we reviewed remained between $3.0 and $3.2 million, and grant funding for state class II programs was around $4 million. As shown in figure 2, considering inflation and rising costs these totals represent an actual decline in available funds for state UIC programs when converted to real fiscal year 2013 dollars. State programs also use state funding, including revenues from well permitting fees and other sources, to pay for their programs. For five of the six programs we reviewed that provided budget data, states generally provided most of the funding to support their class II programs (see table 1). Some states have increased their budgets for the class II program over the last few years, while others’ budgets have stayed relatively level. Even so, in the states we reviewed, the percentage of the state class II program budgets covered by EPA grants has decreased in the last few years in some states. For example, EPA grant funding comprised approximately 6 percent of California’s class II program budget in fiscal year 2008 and approximately 3 percent in fiscal year 2012. Similarly, grant funding comprised approximately 35 percent of Colorado’s class II budget in fiscal year 2008 and 30 percent in fiscal year 2012. States also dedicate various staff resources to administer state class II programs. Generally, states utilize management staff to administer the program; technical staff, such as geologists and engineers to review permit applications; and field based staff to conduct inspections and observe well construction. According to state and EPA regional officials, class II programs are managed by a combination of full-time staff and part-time staff that split their responsibilities between the class II programs and other tasks. In the states we reviewed, staffing levels for the class II program have fluctuated over the past several years. For example, Colorado and North Dakota remained flat at approximately 3 and 5 staff members in their programs respectively between 2008 and 2013, whereas Texas and Ohio increased the number of staff in their class II programs from approximately 18 to 24 and 3 to 8 respectively over the same time period. In contrast, the number of class II program staff in Oklahoma decreased from 8 to approximately 6 between 2009 and 2013. Resources for EPA-managed class II programs, such as Pennsylvania and Kentucky, also include EPA grant funds and EPA staff, although EPA regional offices do not separately track funding and staff resources specific to the class II program. EPA allocates grant funding to all states with UIC programs, regardless of whether they are managed by states or regions, and EPA regions receive this grant funding to help pay for their management. Regions that manage class II programs in certain states said that they have approximately 4 to 6 staff working on the program across all UIC programs, not just the class II program, as of fiscal year 2013. According to EPA officials, staffing resources and funding for the programs has remained relatively flat or decreased since fiscal year 2011. For example, staffing levels for EPA Region 4’s class II program in Kentucky have decreased from approximately 8 staff to approximately 6 staff from fiscal year 2011 through fiscal year 2013. According to EPA and state officials, UIC program responsibilities have increased in the last several years. In particular, EPA, with the input of some state program officials, developed guidance for diesel fuel use in hydraulic fracturing operations and regulations for a new class of injection wells associated with carbon sequestration, known as class VI wells. In addition, between 2005 and 2012, the nationwide inventory of class II wells increased from approximately 144,000 to 172,000. All of the class II programs we reviewed have safeguards to prevent the contamination of underground sources of drinking water by ensuring that fluids injected into underground formations do not leak into aquifers that are used, or could be used, for drinking water. The six state programs we reviewed incorporate safeguards that EPA deemed effective at preventing underground injections from endangering drinking water sources, while the two EPA-managed programs incorporate the specific safeguards established in EPA regulations and guidance. Officials who manage the eight programs we reviewed reported few known instances of contamination from the injection of fluids into class II wells in the last 5 years; however, EPA’s class II program does not require monitoring of groundwater for contamination nor do most of the eight states we reviewed. Moreover, EPA has noted that the absence of known contamination is not necessarily proof that contamination has not occurred. In the last several years, issues have emerged with the potential to affect the protectiveness of class II safeguards, but EPA officials have said that any changes or additions to the safeguards will be addressed on a state-by-state basis. EPA developed safeguards to protect underground drinking water sources in the 1980s, designing them to prevent fluids that are injected into underground formations from endangering underground drinking water sources. Specifically, in a 1980 document titled Statement of Basis and Purpose: Underground Injection Control Regulations (Basis and Purpose), EPA identified the major pathways that contaminants can take to enter underground sources of drinking water, and discussed EPA’s proposed regulations to ensure that movement of injected fluids would not endanger these sources.contamination, or ways in which fluids injected into a well could escape the well and enter underground sources of drinking water. Figure 3 shows four of the six different pathways. The programs in the eight states we reviewed reported few instances of alleged contamination caused by potential leaks from underground injections into underground drinking water sources. State and EPA officials reported this information from two sources: (1) data on well violations that could be significant enough to contaminate underground sources and (2) data on citizen complaints of water well contamination and resulting state investigations. States and EPA-managed programs track data on well violations that are significant enough to pose a risk of contaminating underground sources of drinking water. State and EPA regional officials identify violations through their well inspections and, using EPA definitions, identify the violations that may have been significant enough to contaminate underground sources of drinking water. State and regional officials do not have to confirm that contamination has occurred, only that a violation was significant enough that fluids may have contaminated an underground source of drinking water. Officials for the eight programs we reviewed said that they reported few such significant violations, and that few of these had actually contaminated drinking water sources, as shown in table 3. For example, California reported 9 instances of alleged contamination in 2009, and 12 instances of alleged contamination in 2010; California officials told us that the instances of alleged contamination resulted from an individual operator that was injecting fluids illegally into multiple wells. Officials from the eight states we reviewed also based their statements about few or no instances of contamination from injection wells on their efforts to track and investigate citizen complaints alleging water well contamination. Each of the eight states we reviewed has a process for receiving, tracking, and investigating citizen complaints about their water wells being contaminated. The process the states use is similar, taking citizen complaints and investigating the complaints. The investigation may involve, for example, checking the drinking water well for contamination and completing an assessment of the possible sources of contamination. However, unless it is part of an investigation of a citizen or other complaint, EPA and states generally do not directly monitor groundwater to detect contamination from injection wells as part of their class II programs. When it first developed the UIC program and its regulations, EPA considered, but did not include, monitoring of groundwater for contamination as a means of evaluating the effectiveness of the program Furthermore, the Safe Drinking Water Act does not and its safeguards.specifically require groundwater quality monitoring for class II wells. Moreover, EPA guidance notes that, while evidence of the presence or absence of groundwater contamination is important, it cannot serve as the only measure of program effectiveness, and the absence of evidence of contamination does not necessarily prove that contamination has not occurred. Nonetheless, some of the programs in the eight states we reviewed do monitor baseline water quality, although EPA’s regulations do not require it. North Dakota, Oklahoma, and Colorado each require sampling of groundwater at various stages of the oil and gas production process. For example, North Dakota requires applicants for a class II injection well permit to provide a quantitative analysis from a state-certified laboratory of freshwater from the two freshwater wells nearest to the proposed injection well. Similarly, Oklahoma requires permit applicants to provide an analysis of freshwater from two or more freshwater wells within a one- mile radius of the proposed injection well. Colorado officials said the state requires oil and gas drilling permit applicants to analyze the water quality of groundwater samples from four nearby water wells, depending on well location and depth. New risks have emerged in the management of class II disposal wells that could affect the class II program: induced seismicity, overpressurization of formations, and use of diesel fuel in hydraulic fracturing operations. EPA has tasked the UIC Technical Workgroup with providing technical information to inform states’ decisions about induced seismicity, but plans to address overpressurization of formations and diesel use on a state-by-state basis without requesting assistance from the workgroup. Without similar reviews of other emerging risks, class II programs may not have the information necessary to fully protect underground drinking water. Induced seismicity: Recent seismic activity associated with injection wells in Arkansas, Ohio, Oklahoma, Texas, and West Virginia has raised awareness of the potential for earthquakes resulting from the underground injection of fluids. In addition, in 2012, the National Academy of Sciences concluded that underground injection does pose some risks for induced seismicity. To the extent that induced seismicity creates conditions that endanger underground sources of drinking water, according to EPA, it may have negative environmental effects. Programs in three of the eight states we reviewed—Ohio, Texas, and Oklahoma—have adopted steps to address the potential for seismic activity in injection areas. Ohio finalized new regulations that went into effect on October 1, 2012 that allow the state’s chief of the Division of Oil and Gas to require a number of different tests or evaluations to address potential induced seismic risks for companies seeking permits for brine injection wells in Ohio.in-house seismic expert to assess potential risks and the state continues to monitor developments and research related to induced seismicity. Oklahoma has partnered with Region 6 to conduct three dimensional mapping of seismic events for analysis. According to Region 6 officials, Texas hired an EPA officials said the agency has not amended its regulations to add specific requirements related to seismic activity and injection wells, but rather, tasked its UIC Technical Workgroup with conducting a study of the problem and potential actions to be taken by EPA and the states. The workgroup issued a draft white paper that identified the three key components behind injection-induced seismic events and identified possible steps to be taken by state programs to manage or minimize induced seismicity, including (1) determining whether a site needs further assessment to ensure protection of underground sources of drinking water; (2) taking steps to assess the reservoir and to modify well operations (injection pressure, intervals, or other measures); and/or (3) require additional seismometers or increase monitoring of injection pressures, formation pressures, and/or the characteristics of the fluids being injected. EPA officials said that the white paper is still in draft, but will help the state program directors to decide what, if any, regulations or safeguards need to be adopted to deal with the issue of induced seismicity. Overpressurization of formations: Overpressurization, according to Region 6 officials, occurs when fluids injected into a formation increase the pressure in it to a point where the fluids flow back up a well and onto the surface. Region 6 officials said that two such incidents occurred in Oklahoma, and they noted that overpressurization is occurring in locations where formations have been developed and receiving wastewater for long periods of time. The key threat to underground drinking water sources in such situations is from the leaked fluids containing contaminants from produced water or fracturing fluids flowing to the surface and migrating back into formations containing underground sources of drinking water. Region 6 officials indicated that fluids could leak from the well into groundwater formations through other pathways and that it is difficult to determine if this has happened. In 2003, Region 6 held a conference, where officials expressed concern that a large number of injection zones were becoming overpressurized because they were seeing an increase in requests for permit modifications to increase injection pressure. According to Region 6 officials, no additional actions were taken to address the region’s concerns regarding overpressurization. EPA officials said that instances of overpressurization occur infrequently and that they plan to address overpressurization of formations on a state-by-state basis, not through the UIC Technical Workgroup. The issue could affect other states, however, as increased volumes of fluids are injected into formations; these states and EPA regions could benefit from the information that other states and regions have learned. GAO-12-732. physical characteristics of the fluids to be injected, the guidance suggests focusing on prepermit water quality monitoring in the area of review. According to EPA and state program officials, the UIC program guidance for diesel use in hydraulic fracturing will be implemented on a state-by- state basis and does not need review from the UIC Technical Workgroup. However, while it is the responsibility of the operator to obtain a permit for any injection covered by UIC program laws or regulations, the information officials need to ensure that diesel permits are issued when necessary may not be available, depending on state requirements and practices. Specifically, officials that manage seven of the eight state programs we reviewed said that diesel fuel, as defined by EPA’s guidance, are not now being used in oil and gas production in their respective states, and none of the states we reviewed have issued permits for use of diesel fuels in hydraulic fracturing, according to officials. California did not know whether diesel had been used or not. To discover whether companies were using diesel fuel, some of the states said that they had reviewed available information on chemical disclosures and discussed operations with oil and gas companies to determine whether companies are using diesel fuels in hydraulic fracturing operations. While several states have begun to require well owners or operators to use a national reporting system called FracFocus to disclose chemicals used in hydraulic fracturing fluid that could help states identify hydraulic fracturing operations using diesel fuels, not all states have done this, which means that all operators may not be providing information, and the information available is not Furthermore, operators consider some information, such as complete. hydraulic fracturing fluid chemical composition, to be classified business information, which is not subject to public disclosure. Without an assessment of the complete chemical information needed for permitting, such as an assessment by the UIC Technical Workgroup, EPA and the states may not have the chemical disclosure information they need to ensure permits are issued for wells that use diesel fuel in hydraulic fracturing. Colorado, North Dakota, Ohio, Oklahoma, Pennsylvania and Texas require producers and service companies disclose chemicals used in hydraulic fracturing in FracFocus. In addition, California has developed a Chemical Disclosure Registry that requires disclosure of the composition, and disposition of hydraulic fracturing fluids within 60 days of the cessation of a hydraulic fracturing operation. EPA is not consistently performing two key activities associated with its oversight and enforcement responsibilities for class II programs. First, EPA does not consistently conduct annual on-site reviews of state programs, which EPA guidance identifies as a key activity needed to conduct effective oversight and to ensure that state and EPA-managed class II programs are protecting underground sources of drinking water. Second, EPA is not consistently incorporating changes to state class II program requirements into federal regulations, as required by its regulations, to enable enforcement of state program requirements if necessary. As part of effective oversight of state programs and EPA-managed programs, EPA’s guidance recommends that regional staff and headquarters staff, conduct several ongoing oversight activities. These include (1) reviewing annual reports from states, (2) reviewing financial reporting on grant funding from state programs, (3) reviewing state reports on injection wells that do not comply with federal or state regulations, and (4) conducting annual on-site program evaluations. For the regions we reviewed, EPA regional officials regularly conducted three of the four oversight activities identified in EPA guidance. For example, in the eight regions we reviewed, EPA officials regularly reviewed states’ annual reports and forms identifying noncompliance within each state to identify any areas of concern and followed up with state officials to discuss and resolve them. In addition, EPA regional officials reviewed grant financial reporting for class II programs as part of their annual grant program review. However, EPA regions we reviewed did not consistently conduct annual on-site program evaluations as directed in the EPA guidance, nor did EPA headquarters conduct such evaluations of EPA-managed programs. According to EPA guidance, EPA regions should perform at least one on- site evaluation of each state program each year to, among other things, assess whether the state is managing the program consistent with state regulations, setting program objectives consistent with national and regional program priorities, and implementing recommendations from previous evaluations. Following the on-site evaluation, the regional office should draft a written report on the state’s performance and submit the report to EPA headquarters and the relevant state program office. EPA headquarters is responsible for conducting similar program evaluations of EPA-managed programs and producing the associated written reports. EPA officials recognize the benefits of on-site evaluations of state programs, but said they have limited resources to conduct them. Regional officials said that on-site program evaluations are valuable for coordinating between federal and state officials to improve program management. For example, a comprehensive evaluation of the California class II program contracted by Region 9 in 2011 resulted in a number of recommendations, and as a result, California is planning to update their regulations and hired 43 additional staff in the division, including additional staff responsible for managing their class II program to bolster regulatory activities. In addition, officials in Region 7 and Region 10 told us that their evaluations have identified deficiencies in the financial requirements of well operators planning to drill new class II injection wells that are necessary to ensure that those wells can be adequately plugged in an emergency. However, according to EPA officials, limited resources have prevented regions, and EPA headquarters, from consistently conducting on-site reviews. Three EPA regions told us that that they try to conduct on-site evaluations of state programs every 3 to 5 years. For example, officials in Region 5 and Region 7 told us that their goal is to conduct on-site evaluations of each class II program at least once every 4 or 5 years, and that they prioritize their reviews based on issues such as public complaints, regulation changes, staff changes, and other emerging areas of concern. Region 6 has a goal of conducting annual on-site evaluations of all class II programs each year, but regional officials said they have had to increasingly rely on conference calls and electronic file review in lieu of site visits to complete the annual evaluations and associated reports. Similarly, EPA headquarters officials told us that they do not conduct annual evaluations of EPA-managed programs due to limited resources. Headquarters officials told us that in lieu of on-site evaluations they focus on reviewing annual grant reports and hold ongoing discussions of various policy issues with state officials. According to EPA officials, even with the agency’s limited resources, EPA has not evaluated the guidance and required oversight activities to identify priority activities that are needed to oversee programs and ensure their effectiveness. The agency issued guidance on effective oversight of state and EPA-managed UIC programs in 1983, just after the national UIC program’s inception when many state class II programs had just been approved. The guidance contained activities that were needed to ensure that a new program was being implemented as it was supposed to, such as reviewing the memorandum of agreement in each state. However, according to regional officials, some of these activities may not be needed for programs as they mature. For example, officials in regions 4, 7, and 8 told us that while annual on-site evaluations can strengthen oversight and improve communication with state program officials in some cases, they may only be necessary every few years rather than annually now that UIC programs have matured. In addition, Regions 6, 8 and 10 told us that, due to improvements in technology in electronic well file sharing, they have been able to conduct some activities remotely, such as file reviews, that once required an on-site visit. Without evaluating its guidance, EPA does not know what oversight activities are most effective and should be priorities—or even necessary—given current program conditions and funding. Without updated guidance for effective oversight, EPA cannot have reasonable assurance that state class II programs are being managed effectively and cannot confirm whether the programs are achieving their purpose of protecting underground sources of drinking water. EPA has not consistently incorporated state program requirements, or changes to state program requirements, into federal regulations, as required by agency regulations; as a result, where it has not done so, EPA does not have the ability to enforce these state program requirements if necessary. Specifically, if a state does not enforce a requirement against an injection well operator violating state regulations, EPA can take enforcement action if EPA has approved the state regulations being violated and incorporated them into federal regulations, and has met specific procedural requirements. EPA regulations and guidance establish a process for EPA and its regions to review and approve state programs, as well as changes to state programs. Under its regulations, EPA can only enforce state program requirements that it has incorporated into federal regulations through a rulemaking process. Rulemaking requires EPA to provide public notice of the proposed regulatory changes, respond to the significant issues raised during the comment period and discuss any changes made to the regulation as a result, and publish the text of the final regulation in the Federal Register. Simultaneous injection wells separate oil and/or gas from brine inside the wellbore, produces the oil and/or gas along with a small fraction of wastewater to the surface, and reinjects the remaining brine within the wellbore into formations below the base of underground sources of drinking water. federal regulations and, as a result, does not have enforcement authority for class II program regulations in either state. Without incorporating state program requirements, or changes to state program requirements, into federal regulations, EPA may not be able to take enforcement action, if a state does not take such action or requests EPA’s assistance to take action, against well operators that are violating state regulations. Under EPA regulations, the agency cannot enforce For example, according to regulations that it has not approved by rule. an EPA official, Illinois requested that EPA Region 5 enforce the state’s class II UIC requirements against an Illinois well operator for violating the regulations after the state was unsuccessful at getting compliance from the well operator through its own enforcement actions. The operator did not conduct required mechanical integrity tests on six injection wells and did not submit annual status reports for the wells. Without the operator’s compliance with testing and reporting requirements, Illinois program officials were unable to determine whether the wells were at risk of contaminating underground sources of drinking water. EPA originally issued an administrative order assessing a fine of $105,000. According to EPA officials, the operator challenged EPA’s enforcement action several times over a period of nearly 10 years, and eventually appealed the case to the U.S. District Court. While on appeal, EPA discovered that the latest Illinois regulations had not been incorporated into the federal regulations. EPA moved to remand the case, and in 2012, the court granted EPA’s request to remand the underlying decision of EPA’s Environmental and EPA later settled the case with the estate of the Appeals Board,operator for $20,000. EPA officials said that they do not often have to step in to enforce a state class II program regulation, but as the oil and gas industry continues to develop its resources and use innovative technologies, state programs may change their regulations, and EPA may have increasing numbers of state program changes to review, approve, incorporate into federal regulations, and enforce. Because EPA has not been incorporating changes to state program requirements into federal regulations, the agency has a backlog of state program requirements that it cannot enforce if necessary. When faced with a similar backlog in the early 1990s, EPA conducted a review to identify all state program changes since the UIC program’s inception in the early 1980s, and then conducted one large rulemaking to incorporate all of the identified changes into federal regulations. EPA spent 3 years researching and comparing state regulations to those already incorporated into federal regulations, and it identified changes to 37 state programs that needed to be incorporated into federal regulations through its rulemaking. However, EPA has not undertaken a similar effort to identify and incorporate changes to state program requirements into federal regulations since 1991. In 2010, EPA UIC officials assessed the resources that would be needed to conduct a similar effort, and they estimated the time and resources necessary to complete those steps. At that time, according to EPA documents, EPA could not verify that any state programs were up-to-date in federal regulations, and estimated that it would require 2 to 3 years, $150,000 in outside contract support, and dedicated EPA staff to identify and incorporate all state program changes made since 1991 into federal regulations. Until it conducts a rulemaking to incorporate the backlog of state program requirements and changes to state program requirements that have been approved, EPA will not be able to enforce some state program requirements, hindering the agency’s enforcement of the program nationally. EPA officials told us that incorporating changes into federal regulations, particularly through the rulemaking process, was burdensome and time- consuming. Several EPA officials told us that reviewing, approving, and then incorporating changes into federal regulations through rulemaking is lengthy and resource intensive. As a result, the agency has not conducted rulemakings to keep pace with the changes that are occurring in state programs. The requirement that EPA incorporate changes to state regulations into federal regulations is established through the agency’s regulations, however, and is not required by the Safe Drinking Water Act. According to EPA officials, other EPA programs have a less burdensome process for reviewing and approving changes to state programs that does not require a rulemaking for approval, and does not require a separate rulemaking process for EPA to incorporate changes into federal regulations. For example, under EPA’s Public Water System Supervision program, the EPA Administrator can review and approve changes to state programs and maintain enforcement authority, and the agency does not require that those changes be incorporated into federal regulations. The agency has discretion under the Safe Drinking Water Act to change its UIC regulations to revise or eliminate the requirement for incorporating state program changes into federal regulations, but, according to officials, has not evaluated alternatives to its current approval process. For example, EPA has not evaluated whether it could remove the requirement for a separate rulemaking to incorporate state program changes, or somehow modify its approval process to ensure that state program changes are incorporated into federal regulations at the Until EPA evaluates same time changes are reviewed and approved.whether this requirement can be revised or eliminated to make the review, approval, and incorporation of state program changes more efficient, the process for incorporating future state program changes will remain burdensome and time-consuming. EPA collects large amounts of data on class II wells in each class II program, but the data are not sufficiently complete or comparable for reporting to Congress, the public, or other groups interested in the nationwide program. According to EPA’s guidance, the agency will establish a tracking and evaluation system for the program, and provide the Congress and other groups with information to assess the program. To this end, the agency collects data on class II programs across the country using required activity reports from state programs, and, to a lesser extent, a Web-based performance management database. Our review of the data shows that it is not sufficiently complete or comparable to report on the program at a national level. To satisfy EPA’s goal of aggregating and reporting state data for the purpose of responding to inquiries from Congress and other interested groups, EPA collects a large amount of summary data on class II programs. It does so using the following two methods: Activity reporting. EPA’s primary method for collecting summary data on state UIC and class II programs is its series of activity reporting forms known as the 7520 forms. These forms are collected twice a year from state programs and EPA-managed programs. The states are to provide the forms to their respective EPA regional offices, and the regional offices are supposed to submit the forms to EPA headquarters for review. Five forms comprise the core of the 7520 series; each form collects information at a summary level on injection wells under a state’s program, reported by type of UIC well, including class II wells. Data collected include summary information on the total number of permits issued during a year, total violations cited by inspectors, enforcement actions taken on wells that do not comply with regulations, wells that are repaired and returned to working order—a process called returning to compliance–within specified times, and total number of inspections and testing of the mechanical integrity of wells. Performance reporting. In addition to its 7520 forms, EPA collects summary data on two basic performance measures through a Web- based program known as the Inventory Measures Reporting System, to satisfy requirements of the Government Performance and Results Act. The Inventory Management Reporting System was created in 2003 and collects data on the inventory of wells—that is, the number of each type of injection well per state, including class II wells. This inventory data is one factor used by EPA to calculate states’ annual grant allocations. In 2006, the function of this Web-based system was expanded to also collect information on the number of wells that failed mechanical integrity tests and returned to compliance within 180 days (the number of days that EPA deems appropriate). Both pieces of data are generally entered into the Web-based system by EPA regional officials; EPA reports the data by state in its annual performance report. Because the paper forms it uses are burdensome and time-consuming to pull together, according to EPA officials, the agency is focusing its efforts on the creation of a national UIC database to be able to report on the national program. This database is designed to collect well-specific data from state agencies—as opposed to summary data—and from regional offices in cases where EPA manages state programs. The database will also receive data electronically directly from the states and regions, rather than through paper documents sent from the states to EPA regions, and then to the agency’s headquarters. The database has been under construction since 2007, and EPA officials report that it is now functional; however, this database is not fully populated, as of January 2014, with only eight class II programs uploading data into the database. EPA officials told us that the database will not be complete and widely populated enough to report national data for at least 2 to 3 years. Until the agency has a fully populated database, EPA will not have a ready way to aggregate and report data on the UIC program, and class II wells in particular. Without this reporting, EPA may not fulfill its goal of providing information on the national program. Given public concerns over oil and gas development generally, demand for such data may increase; however, in light of EPA’s budget limitations, it could be longer before the UIC database is complete and the data are available. The data that EPA collects from its 7520 forms represents the most detailed and extensive set of data the agency compiles on the program; however, it is not sufficiently complete or comparable to allow EPA to aggregate state information and report on the national class II program. The forms are not complete for two reasons. First, the forms are generally received in paper format making the data difficult and time-consuming to summarize and report. As a result, EPA headquarters does not have all the 7520 forms to summarize and report. We requested, but were unable to obtain, a full 5 years of 7520 forms for all states. EPA officials told us that EPA headquarters provided all of the forms available, but that, in some cases, the forms had not been submitted by the states. The agency has attempted to compile the data as part of an effort to put the data in a simple electronic spreadsheet, but it acknowledges that it is missing state data and would have to get it from the regional offices or individual states. Second, in our review of the 7520 forms provided to us by EPA, we found examples of incomplete forms, including forms without state names and forms with blank fields, with no indication of whether the blanks represented missing data or a quantity of zero. According to officials at the regional level, there are no data entry protocols to indicate whether these blank fields represent zeros or missing data. While EPA regional officials reported that they were familiar enough with operations in the states that they knew which blanks were supposed to be zeros and which were supposed to be blank fields, none reported editing the forms before transmitting them to headquarters. Without reporting protocols, states cannot provide complete data and regions cannot review the data and ensure that it is sufficiently complete. Such incomplete data, when aggregated and compared with other state data, could lead EPA, as well as those to whom the agency reports, to draw incorrect conclusions on the status of state programs and the national program. In addition to being incomplete, the data that EPA collects through its activity reporting forms is not comparable among states because of inconsistencies in the way that state agencies responsible for class II wells interpret the instructions on the forms. We found two key variables that states in our sample were interpreting inconsistently: (1) significant noncompliance and (2) alleged contamination of aquifers. As shown in table 4, states found different levels of significant noncompliance—those violations that, in general, pose a threat to underground sources of drinking water. For example, from fiscal year 2008 through fiscal year 2012, most states’ instances of significant noncompliance represented less than 1 percent of their total well inventory. However, instances of significant noncompliance that occurred in Texas during this same period range from 2 to 11 percent of the state’s total class II well inventory. The amount of significant noncompliance reported by states can vary in part because state and EPA regional officials interpret the definition of significant noncompliance differently. Through discussions with officials in the eight states we reviewed, we discovered that at least two states use a different method than others to identify and record significant noncompliance violations. EPA guidance for determining significant noncompliance is outlined on the 7520 form, as well as through select guidance documents, and allows state discretion for determining which violations should be counted as significant noncompliance. Most states generally reported adhering to the instructions on the 7520 forms, but states’ interpretation of the directions varies. For example, Texas officials reported that they consider all delinquent mechanical integrity violations as significant noncompliance, and Ohio officials said that all mechanical integrity failures are considered to be significant noncompliance regardless of their resolution. However, the guidance for reporting significant noncompliance notes that mechanical integrity violations should be counted as significant noncompliance when the loss of integrity causes the movement of fluid outside the authorized zone, if such movement may have the potential for endangering underground drinking water. Officials in Texas told us that they consider all significant noncompliance a potential threat to groundwater, but they did not indicate whether they consider proximity of underground drinking water when they determine which mechanical integrity loss violations are recorded as significant noncompliance. Ohio officials told us that significant noncompliance violations are determined based on the state’s definition of significant noncompliance, even if the violation does not endanger groundwater. Additionally, states vary in how they interpret a second key piece of data—the instances of alleged contamination of underground sources of drinking water. The instructions included on EPA’s 7520 form note that the respondent should enter the number of times a well cited for noncompliance has allegedly contaminated an underground source of drinking water. Several state agencies with whom we spoke initially had difficulty describing how they populated this field. Officials from three of the state programs with whom we spoke told us that, as they interpreted this question, they would only report instances of alleged contamination if they were confirmed as cases of contamination due to a class II well. However, officials representing the remaining five states said that they would report instances of alleged contamination without needing to confirm whether actual contamination had occurred from a class II well. Officials in California, Colorado, North Dakota, and Oklahoma indicated that they would investigate situations of potential underground drinking water contamination, and if evidence showed a reasonable suspicion or likelihood that contamination had occurred, it would be reported on the form 7520 as a case of alleged contamination. Officials from EPA Region 3, who manage the program for Pennsylvania, told us any suspected contamination of an underground source of drinking water would be reported as an instance of alleged contamination on the 7520. EPA officials acknowledge that there may be inconsistencies in how data on these forms are reported, yet the data submitted on the 7520 forms is not subjected to any formalized review to ensure completeness or consistency. EPA regional officials said that they review the data for completeness, however, they do not have a protocol to ensure data quality or that states are reporting the data the same way in the first place. Without protocols to ensure the consistency and completeness of the data that states report, EPA regions cannot ensure the quality of the data that are being reported to headquarters and EPA may not be able to aggregate and report complete and comparable data. EPA has also found inconsistencies in states’ data that are aggregated and reported from the national UIC database, including class II data. The agency found these inconsistencies by comparing data from the simple 7520 database it created to data in the national UIC database. For example, on the basis of this data check, officials told us that they planned to refine definitions for data fields that may be yielding inconsistent results to make them more comparable across states, and they have had some initial training sessions with regions to educate them on the correct interpretation of definitions. These efforts should improve the information that is ultimately submitted in the national UIC database, according to EPA officials. These efforts could also help make the data reported on the 7520 forms more consistent and comparable; however, the agency does not plan to use the database to aggregate and report UIC program data because it plans to phase out the 7520 reports when it brings the national database online. In the meantime, however, EPA will not be able to report on the national program if it cannot aggregate the data with reasonable assurances of its completeness and consistency. Given increased public attention on the oil and gas industry, reporting on the national program is helpful for Congress, the public, and other groups to understand the program. EPA officials indicated that they are open to using the simple 7520 database for reporting if their efforts to improve the data do not distract from their efforts to improve the national UIC database. For over 30 years, EPA and states have managed regulatory programs with safeguards that are designed to prevent contamination of underground sources of drinking water from the injection of fluids associated with oil and gas production. As domestic oil and gas production and the demand for underground injection wells continue to increase, EPA faces additional challenges maintaining sufficient oversight and enforcement of these different programs and requirements in a budget-constrained environment. States have been partners with EPA in managing their programs, yet face similar budgetary constraints. To meet its responsibilities to oversee and enforce class II program requirements, it is important that EPA ensures that state programs have information on risks to underground sources of drinking water posed by underground injection, that its oversight and enforcement are focused and efficient, and that it obtains sufficient information to monitor and report on the program nationally. We have identified several challenges that EPA faces to meet these responsibilities: As the class II program has developed, new risks have emerged, including overpressurization of geologic formations and potential contamination of underground sources of drinking water by diesel fuels. Without information on emerging risks on a national scale, such as through a UIC Technical Workgroup review, state class II programs may not have the information necessary to address these risks and ensure that their programs are designed to be effective at protecting underground sources of drinking water. EPA regions and headquarters are not consistently carrying out annual on-site evaluations of state class II programs—an activity that EPA guidance, issued in 1983 when many state programs had just been approved—identified as key to ensuring effective oversight of state programs. Limited resources have prevented EPA from conducting on-site evaluations annually. Yet, on-site evaluations may only be necessary every few years now that UIC programs have matured, and with improvements in technology, some activities that once required an on-site visit, such as file reviews, can be done remotely in some cases. Given that EPA has not conducted an overall review of the class II program since the early 1990s, the agency has not considered what activities should be priorities to ensure effective oversight of the program as it currently stands, and what resources are necessary to carry out those activities. Until EPA evaluates its guidance to determine what activities are essential for conducting effective oversight of a mature class II program, and revises its guidance as needed to reflect those activities, it cannot ensure that its oversight is effective. Enforcement of state and federal class II program regulations is a key EPA responsibility under the act. Yet, EPA has not taken steps to ensure that it has appropriate enforcement authority for all state program requirements. As a result, EPA cannot enforce some state program requirements. EPA’s difficulty taking legal action against a violator in Illinois illustrates the importance of EPA incorporating state program requirements into federal regulations, as currently required by EPA regulations. Since the agency’s 1991 rulemaking to incorporate changes to state program requirements into federal regulations, EPA has accumulated another backlog of state program requirements that need to be incorporated. Until EPA begins incorporating these changes, the backlog of state program changes it must review, approve, and incorporate into federal regulations will continue to increase. EPA officials are correct in their assessment that the process created by EPA regulations and guidance to review, approve, and separately incorporate changes in state program requirements through a rulemaking is burdensome and resource intensive. While agency officials recognize that other programs, such as the Public Water System Supervision program, have more efficient processes for reviewing and approving state requirements, EPA has not evaluated whether it could remove the requirement for a separate rulemaking to incorporate state program changes, or somehow modify its approval process to ensure that changes to state program requirements are incorporated into federal regulations at the same time changes are reviewed and approved. Until EPA evaluates whether this requirement can be revised or eliminated to make the review, approval, and incorporation of state program changes more efficient, the process for incorporating future state program changes will remain burdensome and time-consuming. Congress, the public, and national groups all have great interest in the nation’s oil and gas resources and their development, including how water and wastewater associated with those resources are managed. The best source of information that EPA has is the simple 7520 database, and while it has taken steps to use that database to correct information in developing and testing its national UIC database, it has not taken steps to use the 7520 database for reporting. Yet, because the 7520 data are not complete or consistent, they are not sufficiently reliable for the purposes of reporting at a national level. The same steps that the agency is taking to correct its data for the national UIC database—using consistent definitions of terms in collecting program data and having a protocol to check data quality—would help correct its 7520 data and would make that data available, perhaps earlier, to allow the agency to report on the program nationally. With some additional effort, EPA could make the 7520 database useful for reporting until the national UIC database is ready for reporting. Unless EPA takes these steps, it will be several years before EPA can provide updated information at a national level to Congress, the public, and others on the UIC program, preventing them from understanding the program and the protection being provided to underground sources of drinking water at an important juncture in the development of oil and gas in the country. To ensure that EPA’s oversight of the class II program is effective at protecting drinking water sources from the underground injection of large amounts of wastewater that will be produced with increasing domestic oil and gas production, we recommend that the Administrator of the Environmental Protection Agency take the following four actions: Task the UIC Technical Working Group with reviewing emerging risks, and related program safeguards, including overpressurization of formations and information on use of diesel fuels in hydraulic fracturing. Evaluate and revise, as needed, UIC program guidance on effective oversight to identify essential activities that EPA headquarters and regions need to conduct to effectively oversee state and EPA- managed programs. To ensure that EPA maintains enforcement authority of state program conduct a rulemaking to incorporate state program requirements, and changes to state program requirements, into federal regulations, and at the same time, evaluate and consider alternative processes to more efficiently incorporate future changes to state program requirements into federal regulations without a rulemaking. To support nationwide reporting goals until the national UIC database improve the 7520 data for reporting purposes, as well as to help with quality assurance for the national UIC database, by developing and implementing a protocol for states and regions to enter data consistently and for regions to check 7520 data for consistency and completeness to ensure that data collected from state and EPA-managed class II programs are complete and comparable for purposes of reporting at a national level, and in the interim, develop a method to use the 7520 database to report UIC data, including data on class II wells, until the national UIC database is fully populated with state data. We provided a draft of this report to EPA for review and comment. EPA provided written comments, reproduced in appendix V, in which the agency expressed general agreement with the report’s findings, conclusions, and recommendations. Overall, the comment letter agreed with the report’s characterization of the resource challenges facing state and EPA-managed programs. EPA agreed with three recommendations, and agreed with the findings of another recommendation but did not agree with the recommended action. EPA also provided technical comments that we incorporated as appropriate. In addition, we provided appropriate sections of the draft report to the six states whose programs we reviewed. State officials from California, Colorado, North Dakota, Ohio, Oklahoma, and Texas provided technical comments, which we incorporated as appropriate. In response to our recommendation that EPA task the UIC Technical Workgroup with reviewing emerging risks and related program safeguards, EPA agreed that to ensure effective oversight of the class II program the agency must identify emerging risks and provide state and EPA-managed class II programs with the information they need to address those risks. EPA stated that it will provide information on overpressurization to state and EPA-managed programs in the UIC Technical Workgroup’s planned report on induced seismicity; and that its February 2014 guidance on class II program permitting for hydraulic fracturing with diesel fuels provides recommendations to EPA permit writers, including best practices identified by states and industry. We recognize EPA’s efforts to provide additional information to state and EPA-managed programs on induced seismicity, overpressurization, and permitting hydraulic fracturing operations that use diesel fuels, but these efforts do not completely address the issues we identified. As a part of these efforts, it is important that the UIC Technical Workgroup provide information to states and EPA-managed programs on the other risks posed to underground sources of drinking water by overpressurization of formations, such as potential contamination by surface breakout of injected fluids as occurred in Oklahoma in recent years. In addition, since not all states legally require disclosure of hydraulic fracturing fluid composition through the FracFocus database, including states with large numbers of wells such as California, it is critical that the UIC Technical Workgroup provide guidance on the information that all states must collect to successfully identify and permit hydraulic fracturing operations using diesel fuels. In response to our recommendation that EPA evaluate and revise, as needed, UIC program guidance to identify essential activities needed to effectively oversee state and EPA-managed programs, EPA stated that it generally agreed with our finding and the recommendation. The agency stated it will begin an internal dialogue among the UIC program managers at the June 2014 UIC National Managers Meeting and continue this dialogue over the next year to evaluate the effectiveness of the agency’s oversight activities, and will document the results of this process and any recommendations for further action by July 2015. EPA further stated that if any change in expectations or practice is warranted, the agency will develop an advisory document that supplements its 1983 guidance on effective oversight by July 2016. In response to our two-part recommendation that EPA conduct a rulemaking to incorporate state program requirements and changes to state program requirements into federal regulations, and that EPA evaluate and consider alternative processes to efficiently review, approve, and incorporate future changes to state program requirements into federal regulations without a rulemaking, EPA agreed with GAO’s findings but it did not agree to take the recommended actions. In response to the first part of the recommendation, EPA stated that the agency cannot conduct a rulemaking to approve and codify all state program revisions without going through considerable effort to determine whether each of the changes meets the requirements of the Safe Drinking Water Act. EPA also stated that conducting a single rulemaking of this scale to incorporate all outstanding state program changes would be impractical because EPA, in conjunction with all state programs, would have to simultaneously review all state class II programs approved through both the conventional and alternative processes laid out in the Safe Drinking Water Act. EPA stated that given that the process would take many years to complete, this approach would still not ensure that all program changes are up to date in federal regulations, as other states could make changes to their programs during this time. In lieu of a single rulemaking EPA said it was conducting an ongoing process of individual rulemakings to approve and codify state program revisions in a collaborative manner with states, EPA regions, and EPA’s Office of Enforcement and Compliance Assurance. However, as stated in the report, according to an analysis conducted in 2010, EPA estimated that it would take 2 to 3 years, dedicated EPA personnel, and $150,000 in outside contractor support to identify, approve, and incorporate all state program changes made since 1991 into federal regulations. By EPA's own estimate, the targeted state- by-state approach will take much longer than a single rulemaking and will face greater challenges of states continuing to make changes in the interim, leaving EPA without the ability to enforce the program, if needed. EPA provided no evidence in its comment letter that the effort it is now contemplating would be any less costly or any more efficient than the approach it assessed in 2010. For this reason, we believe that our recommendation is still necessary for EPA to carry out its responsibilities for the class II program. In response to the second part of this recommendation, that EPA consider alternative processes to review and approve state program revisions and to incorporate state programs into federal regulations without rulemaking, EPA stated that (1) the Safe Drinking Water Act specifically requires that state UIC program revisions made in response to changes in EPA UIC regulations be approved by rule, and (2) the agency would need to revise its regulations to be able to approve state program changes without a rulemaking. We were not suggesting that EPA violate the Safe Drinking Water Act and have made changes to the recommendation language to avoid any such confusion. The focus of our recommendation is on the requirement appearing in EPA's regulation, but not in the Safe Drinking Water Act, that effectively prohibits EPA enforcement of state UIC regulations unless the latter are codified in the federal regulations. EPA stated that there are strong policy and programmatic reasons to maintain this requirement. Specifically, according to EPA, without codification it would not be possible to find a complete set of EPA approved rules for a state in one place, making it difficult for the regulated community, EPA, and the Department of Justice to determine what state program requirements are applicable and enforceable under the Safe Drinking Water Act. If EPA believes the codification process is important, it should devote the resources necessary to implementing it, or, if those resources are not forthcoming, it should consider alternative methods of maintaining federal enforceability within existing resource constraints that are likely to reduce the current backlog. In its letter, EPA states that it will continue coordination among its offices to make the program review and rulemaking process more efficient. However, it provided no detail as to what actions may produce such efficiencies, when they might take effect, or why they have not already been implemented. For these reasons, we continue to believe that EPA should explore alternative methods for ensuring the enforceability of state UIC regulations that do not rely on the rulemaking process. In response to our recommendation that EPA develop and implement a protocol for states and regions to ensure that 7520 data are complete and comparable for purposes of reporting at the national level and that EPA develop a method to use the 7520 database to report UIC data until the national UIC database is fully populated with state data, EPA agreed with our finding and recommendation. Specifically, EPA agreed that there is room for improvement in the completeness and consistency of data submitted by the states and regions through the 7520 forms, and that the 7520 database should be completed so that it can be used as a tool to better understand national UIC activities. In addition, EPA described actions that it plans to take to implement the recommendation, including updating the instructions on the 7520 forms by adding instructions to eliminate blank fields and clarifying data definitions. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the appropriate congressional committees, the Administrator of EPA, and other interested parties. In addition, the report is available at no charge on the GAO Web-site at http://www.gao.gov. If you or your staff members have any questions about this report, 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 report. GAO staff who made major contributions to this report are listed in appendix VI. Table 5 provides a list of EPA-managed programs, state programs with safeguards deemed effective by EPA, state programs that have adopted minimum federal underground injection control requirements, and the number of class II wells in each state in 2012. This appendix presents information on provisions of law and regulations, as well as guidance that govern EPA approvals of state class II Underground Injection Control (UIC) programs. The Safe Drinking Water Act establishes several requirements for EPA and the UIC program. These requirements include the review and approval of programs at the state level, review and approval of revisions to these programs, conditions under which EPA could manage programs for a state, and enforcement of the UIC programs. The act applies to six types of well classes, including class II wells for oil and gas related purposes. The Safe Drinking Water Act (SDWA) of 1974 required EPA to establish the underground injection control program. Among other things, EPA was to promulgate regulations specifying minimum requirements for state UIC programs. Under section 1422, each identified state was to propose its own program, meeting the EPA requirements. EPA was then to review state submissions, and within 90 days and after reasonable opportunity for presentation of views, approve or disapprove the state program “by rule.” Once approved, the state has primary enforcement authority for underground water sources in the state.standards may be referred to as section 1422 states. The act also requires states to revise their programs when EPA amends its regulation concerning requirements of state programs adding or revising a requirement. EPA showing that the state meets the new or revised requirement. 42 U.S.C. § 300h-1(b)(1)(B) (2014). is to approve or disapprove such changes using the same process as with initial program approvals, that is, by rule. Following EPA’s June 1980 promulgation of the regulations establishing minimum requirements for state programs, Congress amended the act. The December 1980 amendments created an alternative way for states to receive EPA approval of UIC class II programs in SDWA section 1425. Using this alternative, in lieu of adopting EPA’s minimum requirements, a state can seek approval of its program—and primary enforcement authority—by demonstrating to EPA that its program is effective in preventing contamination of underground drinking water sources. A state must show that its program meets the same four key requirements that the EPA regulations were to address: (1) prohibition of unauthorized injections; (2) authorized and permitted injections must not endanger drinking water sources;(3) include inspection, monitoring, recordkeeping, and reporting requirements; and (4) apply to federal agencies and federal land. These states may be referred to as section 1425 states. The House Commerce Committee report for this amendment noted that 32 states already regulated underground injection related to the recovery or production of oil or natural gas and believe they have programs already in place that meet the minimum requirements of the act. The report states, “it is the committee’s intent that states should be able to continue these programs unencumbered with additional federal requirements if they demonstrate that they meet the requirements of the act. These requirements are the same as must be met by the administrator in establishing the regulations, thus ensuring that a state program pursuant to an alternative demonstration results in an equivalent degree of protection for drinking water sources.”initial approval, new demonstrations may be needed, such as if EPA The report also noted that, after revises a requirement, or “instances in which a state significantly alters a program for which a demonstration has been made, or in which the administrator determines that new information about the endangerment of drinking water supplies necessitates a new demonstration.” According to the report, under such circumstances, EPA would need to determine, by rule after public hearing, that a state’s demonstration is no longer adequate. Under these amendments, a state using the alternative demonstration process under section 1425 is to submit to EPA a demonstration showing its program meets the four statutory requirements. process is the same as for a regular approval: EPA is to review the state submission, and within 90 days and after reasonable opportunity for presentation of views, approve or disapprove the state program by rule. Once approved, the state has primary enforcement authority for underground water sources in the state. As with the section 1422 states approved under the regular approval process, states need to take action when EPA amends its regulation adding or revising a requirement relating to class II underground injection. In such cases, a state is to submit a notice to EPA demonstrating that with respect to the changed aspect of the state regulation, the state meets the four statutory requirements and represents an effective program to prevent underground injection that endangers drinking water sources. EPA is to approve or disapprove such changes using the same process as with initial program approvals, that is, by rule. 42 U.S.C. § 300h-4(a) (2014). for that state. EPA can revise such a program from time to time by regulation. The act authorizes EPA to enforce requirements of an applicable UIC program in a state with primary enforcement authority under certain circumstances. Specifically, when EPA finds a person in violation of such a requirement, has notified the state, and after 30 days the state has not commenced appropriate enforcement action, the act requires EPA to issue an order requiring compliance or to initiate court action. The act defines “applicable underground injection control program” with respect to a state with primary authority as the program or most recent amendment that has been adopted by the state and approved by EPA by rule. With respect to a state where EPA has primary enforcement authority, “applicable underground injection program” is the program which has been prescribed by the Administrator by regulation. Charged with developing the new UIC program, EPA promulgated a series of regulations in the early 1980s. EPA’s regulations, as amended, are divided into distinct parts. For example, 40 C.F.R. part 144 sets forth permitting and other program requirements for all UIC programs; part 145 sets forth the requirements and procedures for approval of state programs under section 1422; and part 146 establishes technical criteria and standards for use by states and EPA in the development and implementation of state UIC programs. These program regulations do not establish requirements for owners or operators of injection wells, but rather, establish requirements for state or EPA officials to use in developing UIC programs that in turn establish enforceable requirements for owners or operators of injection wells. As such, there are no “background” federal regulations directly imposing requirements onto regulated parties, as is found in several other major environmental statutes. In establishing the initial 1980 regulations for the UIC program, EPA interpreted the act to establish a process for changes to state programs that were originally approved under both the regular and alternative processes. As noted above, the act requires that when EPA amends the regulations to add or revise a requirement, states must in essence show they meet the requirement. The act does not speak to state-initiated changes. In the regulations providing for state program approvals (part 145), EPA acknowledged that state program changes may be in response to an EPA change to a requirement, or be state-initiated. EPA’s regulations require states to “keep EPA fully informed of any proposed modifications to its basic statutory or regulatory authority, its forms, procedures, or priorities.” Under EPA’s regulations, program revisions begin when a state submits documents to EPA, as necessary under the circumstances. As to processing the revision, EPA’s regulations make a distinction not found in the statute. The regulations distinguish “substantial changes” as requiring a rulemaking process, including notice in the Federal Register, a 30-day public comment period, and opportunity for a hearing, with notice of the approval in the Federal Register. The regulations do not require this process for nonsubstantial program changes, which may be approved by Since part 145 is only applicable to state a letter from EPA to the state. programs approved under section 1422 of the Safe Drinking Water Act, this section concerning program revisions does not directly apply to the class II programs approved under section 1425 of the act. EPA officials stated, however, that the agency considers this section as guidance for 1425 states. The regulation specifies the Administrator, but this has been delegated to the regional administrators. The regulations do not define substantial and nonsubstantial; however, EPA guidance provides a few examples of substantial changes, such as changes to a state’s authority, transfer from an approved state agency to another, and changes which would make the program less stringent than applicable requirements. Available documents, such as the original Federal Register preambles for this part, do not explain why EPA made this distinction. EPA officials said that because of the expense and time for rulemakings, EPA may have determined that such a requirement could not be intended to apply to any sort of change that could occur— such as editorial or renumbering changes—and thus carved out a less burdensome process for such changes. We note that because the regulation does not distinguish certain changes subject to specific requirements in the act—that is, state revisions that are necessitated in response to an EPA change to a requirement—and introduces a less rigorous process for some changes, it is not clear whether the regulation ensures that the statutory requirement is being met. That is, under the statute, all state revisions made in response to an EPA change are to be approved by rule. Under the regulation, however, state revisions deemed nonsubstantial can be approved by letter, rather than by rule, and it appears possible that these nonsubstantial changes could include changes made in response to an EPA requirement. In addition to the program regulations for review and approval of state programs, EPA determined in 1983 that another part was required in regulations (1) to contain EPA’s requirements in states where EPA would manage the program and have primary enforcement authority and (2) to codify EPA’s approval of state UIC programs. On this basis, EPA promulgated part 147 in 1984. The general provisions state that part 147 “sets forth the applicable Underground Injection Control (UIC) programs” in each state, and that “egulatory provisions incorporated by reference (in the case of approved state programs) or promulgated by EPA (in the case of EPA-administered programs), and all permit conditions or permit denials issued pursuant to such regulations, are enforceable by the Administrator” under the act. Thus, EPA established in its regulation an obligation not found in the act: that state programs must be codified into the part 147 regulations to be enforceable by EPA. Available documents, such as the original Federal Register preambles for this part, do not explain why EPA added this obligation. EPA officials noted that without codification, however, there could be a due process issue whereby regulated entities may lack notice of the requirements applicable to them and enforceable by EPA. EPA wrote guidance in 1984 to help states with the process of review and approval of state programs and state program changes, but it has not written guidance on how these changes will be codified in federal regulations under section 147. The guidance applies to all state programs approved under both sections 1422 and 1425. The guidance, Guidance for Review and Approval of State Underground Injection Control (UIC) Programs and Revisions to Approved State Programs, distinguishes between substantial and nonsubstantial changes to state programs and includes examples of substantial changes. Substantial changes, including changes to a state’s authority, transfer from an approved state agency to another, and changes which would make the program less stringent than applicable requirement, are to be approved by the EPA Administrator. Nonsubstantial changes may be approved by a Regional Administrator in a letter to a state’s Governor. The guidance also indicates that states will apply for EPA to review and approve their program changes and also sets out a process for EPA to review and approve the program changes in 90 days. The process involves a rulemaking procedure different from the process needed to codify the state program or program changes into section 147. Once a state program or program change is approved, EPA’s regulations indicate that it should be codified into section 147 to allow EPA to enforce the state program, if needed. However, the guidance is silent on the steps EPA headquarters and regions need to take to incorporate approved programs or program changes into section 147. Many states had approved programs for one or more well classes by 1984, and EPA’s initial promulgation of part 147 in that year codified most of them. EPA typically conducted two discrete steps to approve and codify the programs: (1) approval by rule of a state program and (2) later codification of the approved program into part 147. Over time, additional states obtained EPA approval for their programs. For example, Montana’s class II program was approved by rule in 1996. In addition, some states made changes to their programs. According to EPA headquarters officials, there have been few substantial changes to state class II programs, and EPA has not changed any requirements for class II programs that would trigger state revisions. EPA has not, however, codified some state programs. It last conducted an exercise to update its part 147 regulations in 1991, updating the references to state regulations. Even so, the revisions did not codify all of the programs approved to date. For example, West Virginia and Arkansas both had class II programs approved by EPA in 1983 and 1984, respectively, but these programs were neither included in the original part 147 nor the 1991 revisions. EPA officials could not explain why these state programs were not codified, noting that these events predated their tenure at the agency. EPA officials are aware that part 147 is out of date with respect to state program revisions, as well as these two state programs missing in their entirety. According to officials, resources have not been provided to conduct the necessary research and rulemaking. Thus, by the terms of section 147.1 in conjunction with the act, EPA is unable to enforce those state program requirements that are not contained in part 147. The objectives of this report are to examine: (1) EPA and state roles, responsibilities, and resources in management the class II program; (2) safeguards select states have in place to ensure the protection of underground drinking water; (3) EPA’s regulation and oversight of class II programs; and (4) the reliability of data to report on the class II program nationwide. To address all objectives, we reviewed the Safe Drinking Water Act and EPA’s regulations and guidance on the Underground Injection Control (UIC) program, including class II wells. We also spoke with officials from EPA headquarters and regional offices about all aspects of the class II program. Because this report also examines states’ roles in the program, we chose a sample of eight states on which to focus our analysis: California, Colorado, Kentucky, North Dakota, Ohio, Oklahoma, Pennsylvania, and Texas. These states represent a nonjudgmental sample, selected on the basis of the location of current shale oil and gas plays across the country, the number of class II wells in each state, and whether the class II program was managed by the state or EPA regions. To identify current shale oil and gas plays across the country, we used Energy Information Administration regions that are organized around national shale oil and shale gas resources. These regions represent diverse geography and geologic formations, as well as different oil and gas and wastewater operations. We selected at least one state in each of the six regions identified by the Energy Information Administration. We also selected states that had higher numbers of class II wells to ensure our sample represented significant class II activity. And finally, we selected states that had both state and EPA-managed programs. We spoke with state and EPA officials from programs in each of the eight states, and we visited four of these states in person. During these visits, we discussed program management and data collection and reporting with state officials, and we reviewed a sample of state inspection and violation files. To determine the roles and responsibilities of state class II programs, we reviewed EPA regulations and guidance for the program. We also spoke with officials from six of our eight selected states about their management and reporting on the program, as well as EPA’s oversight of the program. To understand the roles and responsibilities of EPA for EPA-managed programs, we spoke with EPA headquarters and regional officials. To evaluate funding for state and EPA-managed programs, we requested class II program budget data for fiscal year 2008 through fiscal year 2012 from the six states and two EPA regional offices that manage the class II programs in the states we reviewed. We discussed budget data with state officials to assess its reliability, and we determined that it was reliable for our purpose of summarizing state program budgets. We also obtained EPA UIC grant data for federal fiscal years 2008 through fiscal year 2012, including grants provided to all UIC programs, and class II programs specifically. We interviewed EPA officials about the data, and assessed the data for any outliers or missing data, and determined that they were reliable for the purpose of reporting on class II program funding. To evaluate the resources that state programs have to administer the program, we gathered state-reported budget data on the amount of funding for the class II program supplied by the state, and compared it to annual grant allocations from EPA to states. This enabled us to develop a percentage of total class II funding that came from each state’s grant compared to the funding that came from the state budget. To show the trend in funding over the last several years, we converted the EPA grant data into real fiscal year 2013 dollars. To assess staffing resources for both state and EPA-managed programs in the eight states we selected, we interviewed state and EPA regional officials about their staffing levels from fiscal year 2008 through fiscal year 2012. To analyze and compare the safeguards that EPA and selected states have in place to ensure the protection of underground drinking water, we reviewed the basic safeguards outlined in federal regulations, state regulations, guidance, and related program documents in each of our eight selected states. To better understand the basis and purpose for regulations addressing safeguards, we reviewed a key EPA document, the Statement of Basis and Purpose: Underground Injection Control Regulations, and spoke with EPA officials. Based on EPA’s Statement of Basis and Purpose, we identified seven program safeguards required for EPA-managed programs. To compare the safeguards in each state and EPA-managed program in eight selected states, we developed a table for each safeguard that categorized and compared the safeguards used by the programs in each of the eight states. We identified state program safeguards in state regulations, program guidance, and other documents. Our review included a summary and comparison of the regulations and guidance that establish state and EPA-managed program safeguards, but we did not analyze the technical sufficiency of those safeguards. Additionally, we gathered data from the states on inspections and alleged contamination of underground sources of drinking water. We discussed these data with state officials to assess their reliability for reporting, and in some instances, used limited EPA data to corroborate the state-reported data. We determined that these data were reliable to report for our purposes of describing state program safeguards. To identify any potential gaps in the safeguards in place, we obtained and analyzed EPA reviews such as the Mid-Course Review and an EPA contracted report by the technical and strategic consulting group, Cadmus. We also spoke with EPA and state officials about potential weaknesses in the safeguards, the effectiveness of the safeguards, and any issues that may affect the protectiveness of the safeguards. To examine EPA’s regulation and oversight of the class II program, we focused on the regulation and oversight of programs in our eight selected states: six state programs and two EPA-managed programs. To understand EPA’s regulation of the programs in the eight states, we reviewed EPA’s regulations for state programs. A key aspect of these regulations is the need to incorporate state regulations and revisions to these state regulations into federal regulations; this allows EPA to enforce state programs, when appropriate. To assess the extent to which EPA had accomplished the incorporation of state regulations into federal regulations, we identified situations in which the states we reviewed had updated or changed regulations and discussed the status of EPA’s approval and incorporation of these changes. We also reviewed EPA’s guidance and processes for requesting and approving aquifer exemptions, and we requested documentation of exemptions from EPA regions and headquarters. To understand EPA’s oversight responsibilities and evaluate the extent to which they are being carried out, we reviewed EPA guidance outlining effective oversight of state programs. We spoke with EPA headquarters and regional officials regarding how they completed the actions outlined in the guidance. We also obtained and reviewed the annual reports that EPA regions are to write for state programs, Memoranda of Agreements between EPA and each state program, and relevant grant reports from states. Finally, in order to examine the reliability of the data that EPA has on class II programs, we interviewed EPA headquarters’ officials about their various data collection methods and reviewed related documentation and guidance, as available. We identified three methods that EPA headquarters uses to collect data on the UIC program, including the class II program, and discussed the data collected by each method with EPA officials. We determined that one source of data contained the information we needed—the state activity reporting forms (7520 forms) that each state completes twice per year. We requested these forms from EPA for fiscal year 2008 through fiscal year 2012 and obtained all the forms that EPA said it had. The forms were in paper format, which we saved and transferred into an electronic database to analyze. To assess the reliability of the data for our reporting purposes, we took steps to evaluate the completeness and comparability of the data. To evaluate the completeness of the data, we performed basic checks of the data supplied by EPA to identify missing data. We found numerous missing data that resulted from incomplete or missing forms and mislabeled forms. We interviewed headquarters and regional EPA officials about this data, and they said that they had provided all the forms available to them. We also performed basic data checks on the consistency of the data provided by discussing state data with officials in the states we visited. We interviewed state officials about how they completed the 7520 forms and what data they used to complete the forms, and we discussed their understanding of the instructions on the 7520 form. From our evaluation of the completeness and consistency of the data, we determined that the 7520 data were not sufficiently complete or consistent, and we decided not to report the data, with two exceptions: we reported the number of instances alleged contamination reported by each of the eight states we reviewed because these data were solely descriptive, and we reported data on significant violations reported by the eight states to show the inconsistency in state reporting. In addition to discussing the 7520 data, we spoke with state and regional officials about the national UIC database and its development. We also reviewed documentation related to the national UIC database in development, including its data dictionary and business rules to example the progress and status of the database. We conducted this performance audit from November 2012 to June 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 the evidence provides a reasonable basis for our findings and conclusions based on our audit objectives. In the 1980s, to fulfill its statutory obligations under the Safe Drinking Water Act, EPA developed safeguards to protect underground drinking water sources from contamination by fluids that are injected into underground formations and could leak into other formations that contain sources of drinking water. Specifically, the safeguards help ensure that wells are designed to prevent fluids that are injected into underground formations from endangering underground drinking water sources. This appendix and the following tables summarize requirements for key class II program safeguards for the programs we reviewed in eight states: California, Colorado, Kentucky, North Dakota, Ohio, Oklahoma, Pennsylvania, and Texas. The programs in two of these states— Kentucky and Pennsylvania—are managed by EPA regions under EPA regulations, while the remaining six programs are state programs approved by EPA. To prevent fluids from entering an underground drinking water source, state UIC program directors determine an area of review necessary to obtain a permit for new injection wells. This is an area around an injection well where pressure in the injection zone may cause the migration of fluids into an underground source of drinking water, according to EPA documents. Before fluids can be injected into a new well, the state director must consider information on other active or abandoned wells in the area, and the corrective action status of any defective wells. The size of the area of a review can be a fixed radial distance of one-quarter mile or greater, or it can be calculated by a formula that considers the injection rate, movement of fluids through the injection zone, and the size of the injection zone among other factors. Table 6 shows the requirements for area of review for the eight programs we reviewed. To ensure that fluids do not travel through weak areas of a confining layer, EPA regulations require that appropriate geological data on the injection zone and confining zone be considered before issuance of a permit to inject fluids. Programs can rely on existing data, but a permit cannot be issued until confining formations are determined to be sound and capable of containing injected fluids. Table 7 shows the requirements for geologic and other information for the eight programs we reviewed. To prevent fluid from moving through a faulty injection casing, EPA set specific requirements for well construction. According to EPA’s Basis and Purpose report, some wells only need surface casing, or casing that extends the length of the bore through the formation in which shallow drinking water exists, while other wells may need multiple sets, or “strings,” of casing depending on the depth of the well and the surrounding geologic formation. For example, intermediate casing can be necessary to protect other underground resources such as coal beds or gas storage zones. The deepest layer of casing, known as the long- string or production casing, isolates injected fluids into designated formations. EPA also requires that each layer of casing be surrounded by cement and suggests that specific equipment called tubing and packer be used. Tubing is typically steel or plastic pipe inserted inside the production casing, which isolates the casing from the fluid injected into the well. Tubing set on a packer allows well operators to directly inject fluids into formations and prevents corrosion by not allowing injected fluids to contact the casing wall. A packer is a mechanical device that sits below the tubing and locks into the casing wall, sealing the space between the tubing and casing, called the annulus, from the injection zone. Table 8 shows requirements for casing and cementing for the eight programs we reviewed. To prevent fluids from leaking out or up through the wellbore, along the outside of the cement surrounding the casing, EPA’s regulations require that a well needs to demonstrate mechanical integrity, or the absence of leaks. Mechanical integrity testing involves, for example, increasing the pressure in the tubing and ensuring that the well is able to hold that pressure for a period of time. Verification first occurs prior to the well being authorized as ready for injection, with subsequent verification occurring at least once every 5 years during the operation of most wells. Table 9 shows the requirements for mechanical integrity testing for the eight programs we reviewed. Another measure to ensure that fluids do not travel through the confining layers and into a source of drinking water is to control the pressure at which fluids are injected, or injection pressure. EPA regulations require that well injection pressure should be controlled to avoid initiating fractures or propagating existing fractures in the confining zone adjacent to underground sources of drinking water. Table 10 shows the requirements for injection pressure for the eight programs we reviewed. To prevent fluid from moving through improperly abandoned wells, EPA regulations require that after operation of a well ceases the wellbore be plugged with cement. Table 11 shows the requirements for plugging and abandoning new wells for the eight programs we reviewed. In addition, EPA guidance and state requirements describe actions to take for inactive wells, which EPA refers to as temporarily abandoned wells. These are wells that will not be operating for several months to years. Table 12 shows the different requirements for the eight programs we reviewed. To provide an early warning of potential problems, EPA regulations require monitoring of fluids to be injected and well operation. For class II wells, EPA requires, among other things, that operators “monitor the nature of the injected fluids with sufficient frequency to yield data according to EPA’s Basis and representative of their characteristics;”Purpose report, such information can help federal and state regulators understand reasons for well failures and take appropriate corrective actions. In addition, class II wells should be monitored on a daily to monthly basis. Table 13 shows the different requirements for the eight programs we reviewed. In addition to the individual named above, Susan Iott (Assistant Director), Elizabeth Beardsley, Mark Braza, Antoinette Capaccio, John Delicath, Rich Johnson, Karine McClosky, Micah McMillan, Emily Norman, Dan C. Royer, and Maria Stattel made key contributions to this report. | Every day in the United States, at least 2 billion gallons of fluids are injected into over 172,000 wells to enhance oil and gas production, or to dispose of fluids brought to the surface during the extraction of oil and gas resources. These wells are subject to regulation to protect drinking water sources under EPA's UIC class II program and approved state class II programs. Because much of the population relies on underground sources for drinking water, these wells have raised concerns about the safety of the nation's drinking water. GAO was asked to review EPA's oversight of the class II program. This report examines (1) EPA and state roles, responsibilities, and resources for the program, (2) safeguards to protect drinking water, (3) EPA oversight and enforcement of class II programs, and (4) the reliability of program data for reporting. GAO reviewed federal and state laws and regulations. GAO interviewed EPA and state officials and reviewed class II programs from a nongeneralizable sample of eight states selected on the basis of shale oil and gas regions and the highest number of class II wells. The Environmental Protection Agency's (EPA) role in the Underground Injection Control (UIC) class II program is to oversee and enforce fluid injection into wells associated with oil and gas production, known as class II wells. EPA has approved 39 states to manage their own class II programs, and EPA regions are responsible for managing the programs in remaining states. EPA regions and states use a mix of resources to manage class II programs, including EPA grant funding, state funding, and federal and state personnel. EPA's UIC grant funding has remained at about $11 million for at least the past 10 years. Class II programs from the eight selected states that GAO reviewed have safeguards, such as construction requirements for injection wells, to protect against contamination of underground sources of drinking water. Programs in two states are managed by EPA and rely on EPA safeguards, while the remaining six programs are state managed and have their own safeguards that EPA deemed effective at preventing such contamination. Overall, EPA and state program officials reported that these safeguards are protective, resulting in few known incidents of contamination. However, the safeguards do not address emerging underground injection risks, such as seismic activity and overly high pressure in geologic formations leading to surface outbreaks of fluids. EPA officials said they manage these risks on a state-by-state basis, and some states have additional safeguards to address them. EPA has tasked its UIC Technical Workgroup with reviewing induced seismicity associated with injection wells and possible safeguards, but it does not plan reviews of other emerging risks, such as high pressure in formations. Without reviews of these risks, class II programs may not have the information necessary to fully protect underground drinking water. EPA is not consistently conducting two key oversight and enforcement activities for class II programs. First, EPA does not consistently conduct annual on-site state program evaluations as directed in guidance because, according to some EPA officials, the agency does not have the resources to do so. The agency has not, however, evaluated its guidance, which dates from the 1980s, to determine which activities are essential for effective oversight. Without such an evaluation, EPA does not know what oversight activities are most effective or necessary. Second, to enforce state class II requirements, under current agency regulations, EPA must approve and incorporate state program requirements and any changes to them into federal regulations through a rulemaking. EPA has not incorporated all such requirements and changes into federal regulations and, as a result, may not be able to enforce all state program requirements. Some EPA officials said that incorporating changes into federal regulations through the rulemaking process is burdensome and time-consuming. EPA has not, however, evaluated alternatives for a more efficient process to approve and incorporate state program requirements and changes into regulations. Without incorporating these requirements and changes into federal regulations, EPA cannot enforce them if a state does not take action or requests EPA's assistance to take action. EPA collects a large amount of data on each class II program, but the data are not reliable (i.e., complete or comparable) to report at a national level. EPA is working on a national database that will allow it to report UIC results at a national level, but the database will not be fully implemented for at least 2 to 3 years. GAO recommends that, among other things, EPA review emerging risks related to class II program safeguards and ensure that it can effectively oversee and efficiently enforce class II programs. EPA agreed with all but the enforcement recommendation. GAO continues to believe that EPA should take actions to ensure it can enforce state class II regulations, as discussed in the report. |
HUD’s Section 8 Assisted Housing Program provides rental subsidies for low-income households. Assistance is either tenant-based—the household receives the assistance wherever it finds an acceptable housing unit owned by a landlord who agrees to participate in the program—or project-based—rent is paid for an eligible tenant or tenants when they occupy a specific housing development or unit. For tenant-based assistance, HUD contracts with and provides funding to local and state housing agencies to administer the program. In turn, these agencies make payments to private sector landlords to subsidize the rent for eligible households. For most project-based assistance other than the MOD REHAB Program, HUD contracts directly with and provides rental subsidies to the owners of private rental housing and to state finance agencies. Although the MOD REHAB Program is a type of project-based assistance, it is administered by local housing agencies under contract with HUD. For each type of Section 8 housing assistance, participating households generally pay 30 percent of their income for rent, although this percentage can vary depending on family income and program type. The Section 8 MOD REHAB Program was created in 1978 to add to the existing inventory of assisted housing. It did this by providing funding to upgrade a portion of the estimated 2.7 million then-unassisted rental housing units with deficiencies that required a moderate level of repair and rental subsidies for low-income families. Under annual contracts with housing agencies, HUD provides the funding for rental subsidies as well as an administrative fee to the agencies. The administering agencies, in turn, enter into Housing Assistance Payments (HAP) contracts with property owners. Under these HAP contracts, property owners rehabilitate their housing units by completing repairs costing at least $1,000 so their units meet HUD’s standards for housing quality and make the rehabilitated units available to eligible families. In exchange, the housing agencies screen applicants for eligibility and pay the difference between the approved contract rent and the tenants’ portion of the rent. Initially, the contract rent is based on an owner’s costs, and housing agencies can approve rents up to 120 percent of an area’s fair market rent to compensate the owner for rehabilitation costs. However, when the term of a property owner’s rehabilitation loan is less than the term of a HAP contract, regulations require housing agencies to adjust the contract rent downward at the end of the rehabilitation loan’s term to reflect the owner’s reduced expenses. During the 11 years that the Congress funded new contracts under the MOD REHAB Program, the term for HAP contracts was 15 years. When the oldest of these contracts began to expire in 1995 and 1996, HUD instructed housing agencies to replace them with Section 8 tenant-based assistance. Since fiscal year 1997, however, the Congress has required HUD to renew an expiring contract with a 1-year MOD REHAB contract if the owner so requests and the property consists of more than four housing units covered in whole or in part by a HAP contract. In calendar year 1997, about 25 percent of these expiring HAP contracts were renewed as 1-year MOD REHAB contracts. As of January 15, 1998, the MOD REHAB Program was assisting over 81,000 households, but this represents a small proportion of the total number of households receiving Section 8 assistance (see fig. 1). The excess budget authority in the Section 8 MOD REHAB Program is funding that has been obligated to the housing agencies that administer the program but will not be needed to meet the agencies’ obligations under current contracts. Three types of such funding exist in the Section 8 MOD REHAB Program: (1) funding that has been obligated to a housing agency but never been placed under a HAP contract, (2) budget authority that has been placed under a HAP contract but has not been used and thus has accumulated in a housing agency’s reserve account, and (3) excess funding that HUD estimates will accrue in a housing agency’s reserve account. The third type of excess budget authority cannot be recaptured until it actually accumulates in a housing agency’s reserve account. HUDCAPS is designed to capture the data necessary to calculate the total amount of excess budget authority that has accumulated in the program on an annual cycle as each housing agency reports its actual program costs to HUD. In January 1998, HUD estimated that the excess budget authority in the Section 8 MOD REHAB Program was $814 million before adjustments. After subtracting amounts required to cover future requirements and contingencies, HUD estimated that $439 million could be recaptured from the housing agencies that administer the program. HUD did not recapture the excess budget authority in the MOD REHAB Program in September 1997, when it recaptured similar excesses in its tenant-based program because, according to HUD program officials, the Secretary of HUD did not have the authority to do so. In addition, problems with its data on the MOD REHAB Program would have made it difficult for the Department to identify and recapture excess budget authority. For example, some HAP contracts had not been entered into HUD’s information system, and some of the data on the number of units under contract had been entered incorrectly. Therefore, HUD instructed its field offices to address these discrepancies by comparing the data in its central information system with the data in the Department’s original contracts with housing agencies and the original HAP contracts and then making any necessary changes. Although this internal effort to correct the data ended in December 1997, HUD officials believe that the accuracy of the data could be further improved and that approximately 10 percent of the system’s entries are inaccurate. As discussed later, HUD plans additional efforts to correct its data. After updating its information system to reflect the December 1997 corrections, the Department analyzed the system’s data to estimate the amount of MOD REHAB excess budget authority that was available for recapture and reuse. To estimate this amount, HUD first calculated the excess budget authority by comparing the total unexpended budget authority with the program’s requirements for that budget authority at each housing agency—the same method that it had used to determine the excess budget authority in its tenant-based program. As shown in table 1, HUD then determined that the total excess budget authority available as of January 15, 1998, was about $814 million before adjustments. Of that amount, HUD estimated that it would need about $191 million to cover known funding shortfalls for HAP contracts that have not had sufficient funding obligated to them to cover their expected needs through the end of their terms and $184 million to cover such contingencies as unexpected decreases in tenants’ incomes or unexpected rent increases. According to HUD, the remaining $439 million is available for recapture and reuse to meet ongoing needs for housing assistance. The Congress may also decide to rescind this excess budget authority as it did when excess budget authority was identified in the Section 8 tenant-based program. The $184 million reserve for contingencies is equivalent to almost 4 months of housing assistance payments to property owners participating in the MOD REHAB Program. When HUD recaptured the excess budget authority in the Section 8 tenant-based program in September 1997, the Department held in reserve for contingencies an amount equal to only about 2 months of housing assistance payments to property owners. According to HUD officials, the Department established a larger reserve for contingencies in the MOD REHAB Program than the one it had established for the tenant-based program because, at the time the analysis was performed, it did not have as much confidence in its data for the MOD REHAB Program as it did in its data for the tenant-based program. We cannot evaluate the accuracy of HUD’s estimate at this time because the Department has not completed its efforts to reconcile discrepancies between the data in its information system and contract documentation contained in field offices’ files. Despite HUD’s earlier efforts to improve its data on the MOD REHAB Program, the Department was not able to correct all the discrepancies identified before performing its analysis of excess budget authority. For example, at the time HUD performed its analysis, some HAP records still were incomplete and others contained irregular data. At the time of our review, officials in the Office of Public and Indian Housing qualitatively estimated that HUD’s data on the MOD REHAB Program were not entirely accurate in terms of being correct and complete. To further improve the data’s accuracy, HUD plans to continue correcting discrepancies in contracts that it has with housing agencies. HUD also plans to obtain an independent and statistically valid evaluation of the accuracy of the data in the MOD REHAB Program’s information system. HUD recognizes that its data on the MOD REHAB Program are questionable; therefore, it plans to undertake additional efforts to verify the information. First, HUD plans to instruct the staff in its field offices to again compare the MOD REHAB data in its information system with the data contained in the original contract documentation maintained at those offices. HUD officials explained that potential data inconsistencies will be reported to its field offices, which will reconcile the data by using the information in their contract files. However, because it believes that the documentation at its field offices will not always be reliable, HUD also plans to hire a contractor to follow up on and correct discrepancies by obtaining missing or additional information from the housing agencies that administer the program. By taking these steps, HUD hopes to enhance the integrity of its data on the MOD REHAB Program. The Department expects its field offices to complete their portion of the data reconciliation by the end of August and the contractor to complete the rest of the data retrieval by the middle of October. For its Section 8 tenant-based program, HUD engaged a contractor to independently evaluate its estimate of excess budget authority. The contractor also conducted a representative sampling of transactions in its information system and developed a statistically valid estimate of the system’s accuracy. HUD plans to require the contractor that will be correcting contract discrepancies to perform a similar evaluation of the accuracy of the MOD REHAB Program’s information system. Until HUD completes such an evaluation, we cannot report on the accuracy of HUD’s estimate of its excess budget authority. Although HUD plans to recapture the available excess budget authority from housing agencies’ accounts, the Department has not finalized its plans for this activity, according to officials in HUD’s offices of Public and Indian Housing and the Chief Financial Officer. For example, in addition to completing the data cleanup efforts discussed above, HUD also needs to develop and test the formula it will use to recapture the excess budget authority from housing agencies’ accounts. While some factors in the formula, such as the inflation rate and certain economic assumptions prescribed by the Office of Management and Budget, are not within HUD’s discretion to change, other aspects of the formula are still undetermined. For example, HUD may decide after its field offices complete their efforts to clean up the data that it no longer needs to keep the full $184 million in the housing agencies’ accounts to cover contingencies, as it originally had estimated in January 1998. This means that the actual amount recaptured and available for rescission may change and perhaps be more than the $439 million estimated in HUD’s January 1998 analysis. HUD officials could not provide us with a firm estimate of when the Department will finalize its recapture plan and could not predict a date for completing the recapture. Once HUD identifies the amount of excess budget authority in its Section 8 Program, the Congress has shown that it will act expeditiously to make the most productive use of that authority. Therefore, we believe that HUD is correct in taking steps to identify and plan for recapturing the excess budget authority in its MOD REHAB Program. Identifying, confirming, and recapturing this excess budget authority before HUD submits its fiscal year 2000 budget request would help to show that HUD is making progress toward improving its financial management of the Section 8 Program. To do this, HUD will need to complete its work to clean up its data, evaluate the accuracy of its data, and develop its recapture formula as soon as possible. Because HUD recognizes the steps it needs to take to properly report to the Congress the amount of excess budget authority in its MOD REHAB Program and has plans to take such steps, we are not making recommendations at this time. However, we will continue to monitor HUD’s budget process and review its fiscal year 2000 budget submission to determine whether the Department’s cost estimates accurately reflect the amount of its excess budget authority. We provided a draft of this report to HUD for review and comment. In commenting on the report, HUD said that it generally agreed with our assessment of the steps being taken to properly report to the Congress the amount of excess budget authority in the Section 8 MOD REHAB Program. The Department also provided several technical comments, which we incorporated, as appropriate. HUD’s letter appears in appendix I. To determine how HUD estimated the excess budget authority in its Section 8 MOD REHAB Program and the accuracy of this estimate, we discussed with Department officials their general approach for calculating excess budget authority and reviewed preliminary documentation supporting their approach. Specifically, we discussed HUD’s approach with officials in the offices of Public and Indian Housing and the Chief Financial Officer and analyzed reports from HUD’s accounting system that showed the amount of excess budget authority available for recapture from the housing agencies that administer the program. However, at the time we completed our review, HUD had not finalized its recapture plan and the assumptions that will determine the specific amounts to be recaptured from each housing agency. To determine what HUD plans to do with the excess budget authority in the Section 8 MOD REHAB Program, we interviewed program and budget officials and officials in HUD’s Office of the General Counsel about the Department’s plans and legal authority to recapture the program’s excess budget authority and reuse it to meet ongoing needs for housing assistance. We performed our work from February 1998 to July 1998 in accordance with generally accepted government auditing standards. We are sending copies of this report to the appropriate House and Senate committees; the Secretary of Housing and Urban Development; and to the Director, Office of Management and Budget. We also will provide copies to others on request. If you or your staff have any questions concerning this report, please contact me at (202) 512-7631. Major contributors to this report were Eric Marts, Assistant Director, and Paige Smith, Senior Evaluator, of our Resources, Community, and Economic Development Division. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a legislative requirement, GAO reviewed the Department of Housing and Urban Development's (HUD) financial management of the Section 8 rental assistance program, focusing on: (1) the amount of excess budget authority in the Section 8 Moderate Rehabilitation (MOD REHAB) Program and how HUD estimated this amount; (2) the accuracy of HUD's estimate; and (3) HUD's plans for recapturing this excess budget authority from housing agencies. GAO noted that: (1) in January 1998, HUD estimated that the amount of excess budget authority in the Section 8 MOD REHAB Program before necessary adjustments was $814 million; after subtracting amounts required to cover future requirements and contingencies, HUD estimated that $439 million could be recaptured from the housing agencies that the Department contracts with to administer the program; (2) HUD estimated these amounts after first addressing certain known problems with the data in its information system and then comparing the level of unspent program funds at each participating housing agency with that agency's future need for funding under its current contract with HUD; (3) GAO cannot determine the accuracy of HUD's estimate of excess budget authority in the Section 8 MOD REHAB Program at this time because HUD has neither completed identifying and correcting discrepancies in its data on the program nor tested the reliability of the data it used to estimate the excess budget authority; (4) because HUD still is not confident that its program data are sufficiently accurate, the Department plans to require its field staff to identify and address discrepancies in the accuracy of contract data and to work with a contractor to further address the data's problems on-site at housing agencies; (5) HUD officials do not expect these data cleanup efforts to be completed before the end of fiscal year 1998; (6) HUD plans to require its contractor to perform a statistically valid test of the accuracy of its information system; (7) although HUD plans to recapture the excess budget authority in the Section 8 MOD REHAB Program, the Department has not finalized its approach or timeframe to accomplish this task; (8) in addition to completing the planned data cleanup efforts in the field, HUD must also develop and test the formula it will use to recapture the excess budget authority from the housing agencies' accounts; (9) while some factors in the formula are not within HUD's discretion to change, policy decisions still need to be made to define other factors; (10) for example, HUD may decide that it does not need to leave as much excess budget authority in the housing agencies' accounts to cover contingencies as it originally had estimated in January 1998; (11) therefore, the actual amount recaptured from housing agencies and available for rescission by Congress may change and perhaps be more than the estimated amount in HUD's January 1998 analysis; and (12) HUD officials could not provide GAO with a firm estimate of when the Department will finalize its recapture plan and could not predict a date of completion. |
We believe that the United States generally achieved its negotiating objectives in the Uruguay Round, and most studies we reviewed projected net economic gains to the United States and the world economy. The General Agreement on Tariffs and Trade (GATT) Uruguay Round agreements are the most comprehensive multilateral trade agreements in history. For example, signatories (1) agreed to open markets by reducing tariff and nontariff barriers; (2) strengthened multilateral disciplines on unfair trade practices, specifically rules concerning government subsidies and “dumping;” (3) established disciplines to cover new areas such as intellectual property rights and trade in services; (4) expanded coverage of GATT rules and procedures over areas such as agriculture and textiles and clothing; and (5) created WTO, which replaced the preexisting GATT organizational structure and strengthened dispute settlement procedures. Despite expectations for overall economic gains, we noted in recent reports that specific industry organizations and domestic interest groups had concerns that the agreement would adversely affect some U.S. interests. For example, some believe that they did not gain adequate access to overseas markets or that they would lose protection provided by U.S. trade laws. In addition, because some sectors of the U.S. economy—notably textiles and apparel—and their workers will likely bear the costs of economic adjustment, the existing patchwork of reemployment assistance programs aimed at dislocated workers needs to be improved. Our work has indicated that it was difficult to predict outcomes and not all the effects of such a wide-ranging agreement will become apparent in the near term; important issues will evolve over a period of years during GATT implementation. We have identified provisions to be monitored to assure that commitments are fulfilled and the expected benefits of the agreements are realized. Moreover, our work on the GATT Tokyo Round agreements, negotiated in the 1970s, and numerous bilateral agreements has demonstrated that trade agreements are not always fully implemented. Implementation of the Uruguay Round agreements, which generally began to go into force on January 1, 1995, is complex, and it will take years before the results can be assessed. Nevertheless, our work highlights the following issues: (1) the WTO’s organizational structure and the secretariat’s budget have grown from 1994 to 1996 to coincid with new duties and responsibilities approved by the member countries; (2) faced with over 200 requirements, many member nations have not yet provided some of the notifications of laws or other information as called for in the agreements; (3) this year provides the first opportunity to review whether anticipated U.S. gains in agriculture will materialize, as countries begin to report on meeting their initial commitments; (4) the new agreements require that food safety measures be based on sound science, but U.S. agricultural exporters seem to be encountering more problems with other countries’ measures and a number of formal disputes have already been filed with WTO; (5) while efforts are underway to improve transparency provisions regarding state trading, these provisions alone may not be effective when applied to state-dominated economies, like China and Russia, seeking to join WTO; (6) while textile and apparel quotas will be phased out over 10 years, the United States has continued to use its authority to impose quotas during the phase-out period and will not lift most apparel quotas until 2005; (7) despite the end of the Uruguay Round, some areas, like services, are still subject to ongoing negotiations; (8) there were 25 disputes brought before WTO in 1995 by various countries, including some involving the United States. The United States lost the first dispute settlement case regarding U.S. gasoline regulations brought by Brazil and Venezuela and is now appealing that decision. The WTO was established to provide a common institutional framework for multilateral trade agreements. Some observers have been concerned about the creation of this new international organization and its scope and size. The “new” WTO was based on a similar “provisional” GATT organizational structure that had evolved over decades. The Uruguay Round agreements created some new bodies; however, these new bodies address new areas of coverage, for example, the Councils for Trade in Services and for Trade-Related Aspects of Intellectual Property Rights. Other bodies, such as the WTO Committee on Anti-Dumping Practices, were “reconstituted” from those that already existed under the old GATT framework but that were given new responsibilities by the Uruguay Round agreements and had broader membership. The WTO secretariat, headed by its Director General, facilitates the work of the members. The work of the bodies organized under the WTO structure is still undertaken by representatives of the approximately 119 member governments, rather than the secretariat. Early meetings of some WTO committees were focused on establishing new working procedures and work agendas necessary to implement the Uruguay Round agreements. In 1995, the WTO secretariat staff was composed of 445 permanent staff with a budget of about $83 million. This represented a 18-percent staff increase and about a 7-percent increase in the budget (correcting for inflation) from 1994 when the Uruguay Round agreements were signed. The members establish annual budgets and staff levels. The approved secretariat’s 1996 budget represents a 10-percent rise over the 1995 level to further support the organization’s wider scope and new responsibilities; it also includes an additional 15-percent increase in permanent staff. WTO officials in Geneva have told us that any additional increases in secretariat staffing are unlikely to be approved by the members in the foreseeable future. The secretariat’s duties include helping members organize meetings, gathering and disseminating information, and providing technical support to developing countries. Economists, statisticians, and legal staff provide analyses and advice to members. In the course of doing work over the last year, member government and secretariat officials told us it was important that the secretariat continue to not have a decision-making or enforcement role. These roles were reserved for the members (collectively). An important, but laborious, aspect of implementing the Uruguay Round agreements centers on the many notification requirements placed upon member governments. These notifications are aimed at increasing transparency about members’ actions and laws and therefore encourage accountability. Notifications take many forms. For example, one provision requires countries to file copies of their national legislation and regulations pertaining to antidumping measures. The information provided allows members to monitor each others’ activities and, therefore, to enforce the terms of the agreements. In 1995, some WTO committees began reviewing the notifications they received from member governments. The WTO Director General has noted some difficulties with members’ fulfilling their notification requirements. Some foreign government and WTO secretariat officials told us in 1995 that the notification requirements were placing a burden on them and that they had not foreseen the magnitude of information they would be obligated to provide. The Director General’s 1995 annual report estimated that the Uruguay Round agreements specified over 200 notification requirements. It also noted that many members were having problems understanding and fulfilling the requirements within the deadlines. While the report said that the developing countries faced particular problems, even the United States has missed some deadlines on filing information on subsidies and customs valuation laws. To address concerns about notifications, WTO members formed a working party in February 1995 to simplify, standardize, and consolidate the many notification obligations and procedures. One area of great economic importance to the United States during the Uruguay Round negotiations was agriculture; therefore, monitoring other countries’ implementation of their commitments is essential to securing U.S. gains. Agricultural trade had traditionally received special treatment under GATT. For example, member countries were allowed to maintain certain measures in support of agricultural trade that were not permitted for trade in manufactured goods. As a result, government support and protection distorted international agricultural trade and became increasingly expensive for taxpayers and consumers. The United States sought a fair and more market-oriented agricultural trading system, to be achieved through better rules and disciplines on government policies regarding agriculture. The United States sought disciplines in four major areas—market access, export subsidies, internal support, and food safety measures—and was largely successful, as the Agreement on Agriculture and the Agreement on the Application of Sanitary and Phytosanitary (SPS) Measures together contain disciplines in all of these areas. Member countries are required to report to the new WTO Committee on Agriculture on their progress in implementing commitments on market access, export subsidies, and internal support. The agriculture agreement will be implemented over a 6-year period, and commitments are to be achieved gradually. After each year, countries are required to submit data to demonstrate how they are meeting their various commitments. The agreement allows countries to designate their own starting point for implementation during 1995, depending on domestic policies. In this regard, the U.S. period began on January 1, 1995, while the European Union (EU) period began on July 1, 1995. Therefore, in some cases, the first opportunity to closely review the extent to which other countries are meeting their agricultural commitments—and, thereby, whether anticipated U.S. gains are materializing—should occur later this year. At the outset of the Uruguay Round, the United States recognized that multilateral efforts to reduce traditional methods of protection and support for agriculture, such as quotas, tariffs, and subsidies, could be undermined if the use of food safety measures governing imports remained undisciplined. To prevent food safety measures from being used unjustifiably as nontariff trade barriers, the United States wanted countries to agree that these measures should be based on sound science. The SPS agreement recognizes that countries have a right to adopt measures to protect human, animal, and plant life or health. However, it requires, among other things, that such measures be based on scientific principles, incorporate assessment of risk, and not act as disguised trade restrictions. Carefully monitoring how countries implement the SPS agreement is essential to securing U.S. gains in agriculture. Since the end of the round, U.S. agricultural exporters seem to be encountering growing numbers of SPS-related problems. For example, South Korean practices for determining product shelf-life adversely affected U.S. meat exports and were the subject of recent consultations. As a result, Korea agreed to modify its practices. Meanwhile, the United States and Canada have both filed several other disputes that allege violations of the SPS agreement. Key implementation and monitoring issues regarding the SPS agreement include examining (1) other countries’ SPS measures that affect U.S. agricultural exports; (2) how the SPS agreement is being implemented; (3) whether its provisions will help U.S. exporters overcome unjustified SPS measures; and (4) how the administration is responding to problems U.S. exporters face. We have ongoing work addressing all of these issues. Another issue that is currently important for agricultural trade but may have great future importance beyond agriculture is the role of state trading enterprises within WTO member countries. State trading enterprises (STE) are generally considered to be governmental or nongovernmental enterprises that are authorized to engage in trade and are owned, sanctioned, or otherwise supported by the government. They may engage in a variety of activities, including importing and exporting, and they exist in several agricultural commodity sectors, including wheat, dairy, meat, oilseeds, sugar, tobacco, and fruits. GATT accepts STEs as legitimate participants in trade but recognizes they can be operated so as to create serious obstacles to trade, especially those with a monopoly on imports or exports. Therefore, STEs are generally subject to GATT disciplines, including provisions that specifically address STE activities and WTO member country obligations. For example, member countries must indicate whether they have STEs, and if so, they must report regularly about their STEs’ structure and activities. The goal of this reporting requirement is to provide transparency over STE activities in order to understand how they operate and what effect they may have on trade. However, as we reported in August 1995, compliance with this reporting requirement was poor from 1980 to 1994, and information about STE activities was limited. Although state trading was not a major issue during the Uruguay Round, the United States proposed clarifying the application of all GATT disciplines to STEs and increasing the transparency of state trading practices. Progress was made in meeting U.S. objectives, as the Uruguay Round (1) enhanced GATT rules governing STEs, (2) addressed procedural weaknesses for collecting information, and (3) established a working party to review the type of information members report. Within this working party, the United States is suggesting ways to make STE activities even more transparent. It is too early to assess whether the changes made will improve compliance with the STE reporting requirements. By mid-February, only 34 WTO members had met the requirement—or roughly 29 percent of all members. Still, this response rate is higher than during the earlier years we reviewed. We continue to examine this important issue and are presently reviewing the operations of select STEs. Looking toward the future, officials from the United States and other countries told us in 1995 they were concerned about the sufficiency of GATT rules regarding STEs because countries like China and Russia, where the state has a significant economic role, are interested in joining WTO. Some country officials observed that current rules focus on providing transparency, but such provisions alone may not provide effective disciplines. U.S. officials said that the subject of state trading has been prominent during China’s WTO accession talks as WTO members attempt to understand the government’s economic role and its ability to control trade. Textiles is one sector where the United States expected losses in jobs and in domestic market share after the Uruguay Round, even though consumers were expected to gain from lower prices and a greater selection of goods. We are currently reviewing how the United States is implementing the Uruguay Round Agreement on Textiles and Clothing, which took effect in January 1995. The Committee for the Implementation of Textile Agreements (CITA), an interagency committee, is charged with implementing the agreement, which calls for a 10-year phase-out of textile quotas. Because of the 10-year phase-out, the effects of the textiles agreement will not be fully realized until 2005, after which textile and apparel trade will be fully integrated into WTO and its disciplines. This integration is to be accomplished by (1) completely eliminating quotas on selected products in four stages and (2) increasing quota growth rates on the remaining products at each of the first three stages. By 2005, all bilateral quotas maintained under the agreement on all WTO member countries are to be removed. The agreement gives countries discretion in selecting which products to remove from quotas at each stage. During the first stage (1995 through 1997), almost no products under quota were integrated into normal WTO rules by the major importing countries. The United States is the only major importing country to have published an integration list for all three stages; other countries, such as the EU and Canada, have only published their integration plan for the first phase. Under the U.S. integration schedule, 89 percent of all U.S. apparel products under quota in 1990 will not be integrated into normal WTO rules until 2005. CITA officials pointed out that the Statement of Administrative Action accompanying the U.S. bill to implement the Uruguay Round agreements provided that “integration of the most sensitive products will be deferred until the end of the 10-year period.” During the phase-out period, the textiles agreement permits a country to impose a quota only when it determines that imports of a particular textile or apparel product are harming, or threatening to harm, its domestic industry. The agreement further provides that the imposition of quotas will be reviewed by a newly created Textiles Monitoring Body consisting of representatives from 10 countries, including the United States. The United States is the only WTO member country thus far to impose a new quota under the agreement’s safeguard procedures. In 1995, the United States requested consultations with other countries to impose quotas on 28 different imports that CITA found were harming domestic industry. The Textiles Monitoring Body has reviewed nine of the U.S. determinations to impose quotas (where no agreement was reached with the exporting country) and agreed with the U.S. determination in one case. In three cases, it did not agree with the U.S. decision, and the United States dropped the quotas. It could not reach consensus in the other five cases it reviewed. In 15 of the remaining 19 decisions, the United States either reached agreement with the exporting countries or dropped the quotas. Four cases are still outstanding. Another area that warrants tracking by policymakers is the General Agreement on Trade in Services (GATS), an important new framework agreement resulting from the Uruguay Round. Negotiations on financial, telecommunications, and maritime service sectors and movement of natural persons were unfinished at the end of the round and thus postponed. Each negotiation was scheduled to be independent from the other ongoing negotiations, but we found that they do in fact affect one another. In 1995, we completed a preliminary review of the WTO financial services agreement, which was an unfinished area in services that reached a conclusion. The agreement covers the banking, securities, and insurance sectors, which are often subject to significant domestic regulation and therefore create complex negotiations. In June 1995, the United States made WTO commitments to not discriminate against foreign firms already providing financial services domestically. However, the United States took a “most-favored-nation exemption,” that is, held back guaranteeing complete market access and national treatment to foreign financial service providers. (Doing so is allowed under the GATS agreement.) Specifically, the U.S. commitment did not include guarantees about the future for new foreign firms or already established firms wishing to expand services in the U.S. market. Despite consistent U.S. warnings, the decision to take the exemption surprised many other countries and made them concerned about the overall U.S. commitment to WTO. The U.S. exemption in financial services was taken because U.S. negotiators, in consultation with the private sector, concluded that other countries’ offers to open their markets to U.S. financial services firms, especially those of certain developing countries, were insufficient to justify broader U.S. commitments (with no most-favored-nation exemption). The effect of the U.S. exemption may go beyond the financial services negotiations. According to various officials in Geneva, foreign governments are wary of making their best offers in the telecommunications service negotiations, for fear that the United States would again take a significant exemption in these talks. Nevertheless, three-quarters of the participating countries have made offers, and the telecommunications talks are continuing toward the April 30 deadline. However, U.S. and foreign government officials have expressed concern regarding the quality of offers made and the fact that some key developing countries have not yet submitted offers. Despite the commitments that all parties made regarding market access and equal treatment in the financial services sector, several U.S. private sector officials told us that the agreement itself did little to create greater access to foreign markets. Still, the benefit from such an agreement results from governments making binding commitments (enforceable through the dispute settlement process) that reduce uncertainty for business. Monitoring foreign government implementation of commitments is important to ensure that the United States will receive the expected benefits. At the end of 1997, countries, including the United States, will have an opportunity to modify or withdraw their commitments. Thus, the final outcome and impact of the financial services agreement are still uncertain. According to the WTO Dispute Settlement Understanding, the dispute settlement regime is important because it is a central element in providing security and predictability to the multilateral trading system. Members can seek the redress of a violation of obligations or other nullification or impairment of benefits under the WTO agreements through the dispute settlement regime. The objective of this mechanism is to secure a “positive solution” to a dispute. This may be accomplished through bilateral consultations even before a panel is formed to examine the dispute. The vast majority of international trade transactions have not been the subject of a WTO dispute. According to recent WTO figures, in 1994 the total value of world merchandise exports was $4 trillion and commercial service exports was $1 trillion. WTO reports that its membership covers about 90 percent of world trade. However, 25 disputes have been brought before WTO between January 1, 1995, and January 16, 1996. As we previously reported, the former GATT dispute settlement regime was considered cumbersome and time-consuming. Under the old regime, GATT member countries delayed dispute settlement procedures for months and, sometimes, years. In 1985, we testified that the continued existence of unresolved disputes challenged not only the principles of GATT but the value of the system itself. We further stated that the member countries’ lack of faith in the effectiveness of the old GATT dispute settlement mechanism resulted in unilateral actions and bilateral understandings that weakened the multilateral trading system. The United States negotiated for a strengthened dispute settlement regime during the Uruguay Round. In particular, the United States sought time limits for each step in the dispute settlement process and elimination of the ability to block the adoption of dispute settlement panel reports. The new Dispute Settlement Understanding establishes time limits for each of the four stages of a dispute: consultation, panel, appeal, and implementation. Also, unless there is unanimous opposition in the WTO Dispute Settlement Body, the panel or appellate report is adopted. Further, the recommendations and rulings of the Dispute Settlement Body cannot add to or diminish the rights and obligations provided in the WTO agreements. Nor can they directly force countries to change their laws or regulations. However, if countries choose not to implement the recommendations and rulings, the Dispute Settlement Body may authorize trade retaliation. As previously mentioned, there have been a total of 25 WTO disputes. Of these, the United States was the complainant in six and the respondent in four. In comparison, Japan was a respondent in four disputes and the EU in eight. All the disputes have involved merchandise trade. The Agreements on Technical Barriers to Trade and the Application of Sanitary and Phytosanitary Measures have been the subject of approximately half the disputes. In January 1996, the first panel report under the new WTO dispute settlement regime was issued on the “Regulation on Fuels and Fuels Additives - Standards for Reformulated and Conventional Gasoline.” Venezuela and Brazil brought this dispute against the United States. The panel report concluded that the Environmental Protection Agency’s regulation was inconsistent with GATT. The United States has appealed this decision. Based on our previous work on dispute settlement under the U.S.-Canadian Free Trade Agreement (CFTA), it may be difficult to evaluate objectively the results of a dispute settlement process. It may takes years before a sufficiently large body of cases exists to make any statistical observations about the process. After nearly 5 years of trade remedy dispute settlement cases under CFTA, there were not enough completed cases for us to make statistical observations with great confidence. Specifically, we were not able to come to conclusions about the effect of panelists’ backgrounds, types of U.S. agency decisions appealed, and patterns of panel decisionmaking. WTO members must wrestle with three competing but interrelated endeavors in the coming years. Implementation, accession of new member countries, and bringing new issues to the table will all compete for attention and resources. The first effort, which we have already discussed, involves implementing the Uruguay Round agreements. It will take time and resources to (1) completely build the WTO organization so that members can address all its new roles and responsibilities; (2) make members’ national laws, regulations, and policies consistent with new commitments; (3) fulfill notification requirements and then analyze the new information; and (4) resolve differences about the meaning of the agreements and judge whether countries have fulfilled their commitments. The importance of implementation was underscored by U.S. Trade Representative and Department of Commerce announcements earlier this year that they were both creating specific units to look at foreign government compliance with trade agreements, including WTO. The second effort is the accession of new countries to join WTO and to undertake GATT obligations for the first time. The accession of new members will present significant economic and political challenges over the next few years. Even though, as mentioned earlier, WTO members account for about 90 percent of world trade, there are many important countries still outside the GATT structure. The 28 countries that applied for WTO membership as of December 1995 included China, the Russian Federation, Viet Nam, and countries in Eastern Europe. These countries will be challenged in undertaking WTO obligations and fulfilling WTO commitments as current WTO members are themselves challenged by the additional responsibilities created by the Uruguay Round agreements. Many of these countries are undergoing a transition from centrally planned to market economies. The negotiations between current WTO members and those hoping to join are very complex and sensitive since they involve such fundamental issues as political philosophy. The third effort is negotiating new areas. In December 1996, a WTO ministerial meeting is to take place in Singapore. This is to be a forum for reviewing implementation of the Uruguay Round agreements and for negotiating new issues. Some foreign government and WTO officials told us that they hope these regularly scheduled, more focused WTO ministerial meetings will replace the series of multiyear, exhaustive negotiating “rounds” of the past. However, other officials expressed doubt that much progress could be made toward future trade liberalization without the pressure created by having a number of important issues being negotiated at one time. Nevertheless, any negotiations will require time and resources. Members are debating whether to (1) push further liberalization in areas already agreed to, but not yet fully implemented; and/or (2) negotiate new issues related to international trade. For example, future WTO work could include examination of national investment and competition policy, labor standards, immigration, and corruption and bribery. Some of these negotiations in new areas could be quite controversial, based on the experience of including areas like agriculture and services in the Uruguay Round negotiating agenda. Issues relating to the Singapore ministerial are currently under debate. This could be an opportunity for Congress to weigh the benefit of having U.S. negotiators give priority to full implementation of Uruguay Round commitments, as opposed to giving priority to advocating new talks on new topics. The first priority seeks to consolidate accomplishments and ensure that U.S. interests are secured; the latter priority seeks to use the momentum of the Uruguay Round for further liberalizations. Thank you, Mr. Chairman, this concludes my prepared remarks. I will be happy to answer any questions you or 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 implementation of the General Agreement on Tariffs and Trade's Uruguay Round agreements and the operation of the World Trade Organization (WTO). GAO noted that: (1) the U.S. has generally achieved its negotiating objectives in the Uruguay Round; (2) the agreements are expected to open markets by reducing trade barriers and unfair trade practices; (3) some U.S. industries and domestic interests are concerned that the agreements will have adverse effects; (4) implementation of the agreements is complex and its effects will not be known for many years; (5) the United States needs to monitor the agreements' implementation to ensure that member countries honor their commitments and the expected benefits are realized; (6) the WTO organizational structure and the secretariat's budget have grown in relation to its expanded responsibilities; (7) several import and export issues involving the service, textile, and agriculture industries continue to be disputed and are awaiting settlement; (8) many member countries have not met their notification requirements so that other member countries can monitor and enforce agreement terms; and (9) WTO members need to address how to allocate its resources, how to assimilate new countries into WTO, and whether to pursue liberalization in areas already agreed upon or initiate negotiations on new topics. |
The North Slope of Alaska—a vast, ecologically sensitive area north of the Arctic Circle—is home to the largest oil reserve in the United States. This sparsely settled area consists primarily of public lands owned by the federal government, state government, and Alaska Native corporations. To date, oil production activity has occurred mostly on state land and, to a limited extent, on Alaska Native lands. In the next couple of years, however, oil industry activity on federal lands adjacent to the state and Alaska Native corporation lands is expected to move from the exploration phase to the production phase. As of January 2002, only two companies— BP and Phillips Petroleum—operate producing oil fields on the North Slope. Several other large oil companies, including ExxonMobil, Anadarko, and Chevron, among others, also have ownership interests in this production under various collective operating agreements. Since the state lands were opened to oil industry activities, oil companies, federal, state and local governments have all shared in the profits. Once oil production ceases, responsibility for determining to what extent oil companies will have to dismantle and remove their production facilities and associated roads, pipelines, and airstrips, and restore the disturbed lands is generally divided among federal, state, and native entities, depending, in part, on who owns the land. Alaska’s arctic coastal plain, often referred to as the “North Slope,” extends from the foothills of the Brooks Range to the Arctic Ocean and from the Canadian border to Point Hope (see fig. 3). Covering approximately 89,000 square miles, this area is the boundary of the North Slope Borough— geographically the largest local government unit in the United States. The North Slope is also one of the least populated areas in the world, with a total population of about 7,400—of which almost 70 percent are native Inupiat Eskimo. It is a harsh climate with winter temperatures as low as –60O Fahrenheit and average annual wind speeds of 12 to 13 mph. For almost 2 months during the arctic winter, the sun never rises above the horizon. Snow generally remains on the ground until the beginning of June and begins accumulating again in September. Annual precipitation is quite low, averaging less than 5 inches per year. The North Slope coastal plain is a vast treeless expanse of tundra vegetation. Many lakes, streams, and rivers are scattered across this generally flat terrain, despite the limited precipitation. Because the entire area is underlain by permafrost (permanently frozen subsoil), which allows no water absorption, the surface consists mostly of wetlands (see fig. 4). Accordingly, this area provides excellent habitat for a variety of wildlife, especially large numbers of breeding migratory birds and caribou that calve on the coastal plain. In addition, the immediate coastal area is inhabited by an estimated 2,000 polar bears that spend most of their time feeding, resting, and denning on the drifting ice pack in the Beaufort Sea. Permafrost is vulnerable to surface disturbance because such disturbance usually results in thawing and the subsidence and erosion of soil. Damage due to surface disturbance is very difficult to reverse. In order to prevent thawing of the permafrost and provide a stable foundation, any development, such as roads, airstrips, and production facilities, must occur on gravel fill that is laid down to a depth of about 6 feet. The current mix of federal, state, and Alaska Native lands on the North Slope evolved after Alaska achieved statehood in 1959. Before Alaska obtained statehood, the federal government owned almost all the land. The Alaska Statehood Act of 1958 gave the new state government the right to claim land in the newly formed state. In 1964, the state selected, among other areas, a corridor of federal land on the North Slope that was about 100 miles wide. On the basis of geophysical surveys, this land was thought to hold large oil deposits. In 1971, under the Alaska Native Claims Settlement Act (ANCSA), the Arctic Slope Regional Corporation (ASRC) claimed surface and subsurface mineral rights across the North Slope. In addition, eight village corporations claimed surface lands surrounding their villages. These claims resulted in Alaska Native corporation lands being scattered across the North Slope. Soon after the state made its claims, it opened the North Slope lands to commercial leasing for oil industry activities. At first, exploration yielded only dry holes, but in 1968 Atlantic Richfield Company (ARCO) and Humble Oil (a predecessor of ExxonMobil Corporation) announced a major oil find in the Prudhoe Bay area of the North Slope. A year later, the companies announced plans to construct an 800-mile oil pipeline called the Trans-Alaska Pipeline System (TAPS), which opened in 1977. The pipeline is used to transport oil from Prudhoe Bay on the North Slope down the length of the state to Valdez, where it is then carried by oil tankers to markets primarily in the continental United States but also to other world markets. The federal government retained ownership of the land on either side of the state-owned lands on the North Slope; the National Petroleum Reserve- Alaska (NPR-A) lies to the west, and the Arctic National Wildlife Refuge (Arctic Refuge or ANWR) lies to the east. Management of the NPR-A, originally named the Naval Petroleum Reserve Number 4 Alaska, which is roughly the size of Indiana, was transferred from the Navy to the Department of the Interior’s Bureau of Land Management (BLM) in 1977. In 1980, the Congress granted the Secretary of the Interior the authority to lease land in the NPR-A for oil and gas exploration. While the BLM issued some leases in the early 1980s, almost no exploration occurred. It was not until leases were issued under the 1998 Integrated Activity Plan/Environmental Impact Statement that the most current oil exploration in the NPR-A was initiated. In 2001, Phillips Petroleum and Anadarko announced the discovery of likely commercial quantities of oil in the NPR-A. The Arctic National Wildlife Refuge was created in 1960, enlarged in 1980, and currently includes 19 million acres. In 1980, the Congress passed the Alaska National Interest Lands Conservation Act (ANILCA), which designated about 8 million acres of the Arctic National Wildlife Refuge as wilderness and as such prohibited oil industry activities. However, the coastal plain area of the refuge was not designated as wilderness. This area, known as the “1002 Area” after section 1002 of the Alaska National Interest Lands Conservation Act, was set aside for special study which would allow the Congress to subsequently decide whether to permit oil and gas industry activities, designate the area as wilderness, or make no changes. The Congress is currently debating the future status of this area. The extent of North Slope industry activities has grown progressively since the first oil was discovered there in 1968. Figure 5 shows the current range of growth, which originally centered on Prudhoe Bay, the largest oil field (as measured by volume) in North America. As exploration has yielded additional finds, the network of wells, roads, pipelines, and production facilities has expanded from the border of the NPR-A almost to the border of the Arctic Refuge. As a result, state lands on the North Slope now contain a web of industrial complexes spread across 1,500 square miles of state and native lands. A complete inventory of current North Slope infrastructure is not available. However, using information obtained from BP, the state, and data in a recent environmental impact statement (EIS), we identified the following infrastructure of wells, pipelines, roads, and facilities as presented in table 1 below. North Slope oil production is organized by units, which are a collection of leases. Each unit has a cooperative plan for oil exploration, development, and operation within a geographic area covering one or more oil fields. The reason for organizing leases owned by different companies into a unit is to prevent waste and enhance oil recovery. Within each unit one leaseholder is designated as the unit’s operator and is responsible for all oil production activities in the unit. The operator of a unit conducts oil field operations on behalf of leaseholders and is responsible for field operations, maintenance, and any current (but not future) DR&R expenses. As of 2001, two firms— BP and Phillips Petroleum—were performing most North Slope oil exploration and production activities. These two companies are also the only two operators of oil-producing units on the North Slope. ExxonMobil is the operator of the Point Thomson unit, but as of January 2002 that unit was not in production. Table 2 lists the North Slope units, production, operator, and ownership interests. Federal, state, and local governments as well as the oil companies all share in the revenues generated by oil production on the North Slope. The nation has benefited from North Slope oil production in terms of jobs, corporate taxes, and royalties provided by oil and associated companies, and a reduction in oil imports and the balance of trade deficit. One estimate, made by a consulting firm hired by the oil companies, attributed $40 billion in federal taxes and rents collected between 1977 and 1999 to North Slope oil production. The state of Alaska collects petroleum-based revenues from North Slope oil production and transportation in a variety of taxes (principally corporate income, severance, and property), royalty payments (generally 12.5 percent of the value of the oil), and bonuses and rents from oil leases. Because of the state’s oil revenues, residents of Alaska pay no state income tax or state sales taxes. Oil revenues also fund about 80 percent of the state’s general fund operating budget. In addition, in 1980, using mostly oil revenues, the state was able to establish a permanent fund that provides an annual dividend payment to every state resident. The North Slope Borough, the local municipality, also uses revenues from North Slope oil production to fund its government services. Oil companies pay nearly all of the borough’s property taxes and provide about 60 percent of borough revenues. A recent study developed by the Bureau of Land Management for the renewal of federal rights-of-way for the Trans-Alaska Pipeline System (TAPS) estimates that if the pipeline closed, the borough would lose almost $1.9 billion (1998 dollars) in property tax revenues for a 30-year period starting in 2004. According to an analysis done by Alaska’s Department of Revenue, for the fiscal year period 1988 through 2000 accounting profits (i.e., all returns on investment) for North Slope oil are split 41.6 percent to industry, 36.1 percent to the state, and 22.3 percent to the federal government. A number of other studies support the level of revenues accumulated by industry, the state, and the federal government. For example, a 1989 state- commissioned study found that for the period 1969 to 1987 oil companies generated $42.6 billion in net profits after taxes on total gross revenues of $131 billion from the production and transportation of North Slope oil. The study estimated a similar split in accounting profits for this earlier period of 44 percent for industry, 30 percent to the state, and 26 percent to the federal government. The production of oil on the North Slope peaked in 1988 at 2 million barrels per day. By 1999, production had fallen to 1.1 million barrels per day, or about 16 percent of total U.S. production. Total production on the North Slope through 2000 was 13.3 billion barrels, while another 6.1 to 13.3 billion barrels of technically recoverable oil from known and undiscovered sources remain on the North Slope, according to the Department of Energy. As a result of declining production on state lands, efforts to develop federal lands on the North Slope have intensified. Overall production on the North Slope will most likely continue to decline even as new fields are brought on line. According to the U.S. Department of Energy, most North Slope oil has already been produced. The remaining life of existing North Slope oil fields will depend partly on future economic factors. As oil fields age, the per-barrel cost to extract additional oil increases as each barrel requires greater effort to extract. Oil companies will continue to produce oil from a field only as long as it is profitable and will normally stop producing before an oil field is completely depleted. Because the cost of transporting oil from the North Slope tends to be higher than oil produced elsewhere in the United States, North Slope fields must produce at a lower cost to remain competitive. The amount of oil that can be produced at a profit, known as proven reserves, integrally depends on the market price for the oil and its cost to produce. These two variables, the price and cost, change over time. If the price of oil increases or new technology makes extraction less costly, the amount of economically recoverable oil will increase. Conversely, if the price of oil decreases or the cost of oil production increases, the amount of economically recoverable oil will decrease. The Trans-Alaska Pipeline is an additional and unique limiting factor in the North Slope’s oil production. TAPS carries all North Slope oil field production and requires a minimum amount of oil flow to make it economical to operate. While the exact minimum operating level for TAPS depends on the mechanics of pumping decreasing quantities of oil through the pipeline, the cost to operate TAPS, and the market price of oil, currently the U.S. Department of Energy estimates the volume to be roughly 300,000 barrels per day. Once North Slope production falls below the minimum economic operating level, producing oil on the North Slope will no longer be profitable and TAPS will be shut down. Recent proposals to build a natural gas pipeline from the North Slope could additionally extend the projected life of North Slope fields because many of the existing fields contain considerable natural gas reserves. In May 2001, the Department of Energy updated its estimates of North Slope production based on current production, undiscovered reserves, and future NPR-A production. These estimates exclude any production from the Arctic Refuge or the development of natural gas reserves. The new estimates, as shown in figure 6, have North Slope production falling below the TAPS minimum operating level of 300,000 barrels per day sometime between 2017 and 2031. In their application for lease renewal, the owners of TAPS anticipate that the pipeline will operate at least through 2034. The end of oil and gas production on the North Slope will likely render much of the current infrastructure of production facilities, pipelines, and roads unnecessary. Responsibility for regulating and overseeing the dismantlement and removal of this infrastructure and restoring the land on which it was built will be the shared responsibility of the state, federal, and local governments, depending in part on which party owns the land. Oil production requires the construction of a considerable infrastructure of, among other things, drilling pads, production facilities, pipelines, roads, airstrips, and gravel mines. Because most of this infrastructure has been built on state lands, the state is primarily responsible for regulating oil industry activity, including any requirements for dismantling and removing the infrastructure and restoring the land after oil production ceases. However, new oil production in the Arctic Ocean, combined with new oil discoveries in the NPR-A and the potential opening of the Arctic Refuge to oil exploration, has elevated the importance of federal jurisdiction on the North Slope. Alaska’s regulation of dismantlement, removal, and restoration for the North Slope oil industry is principally divided among four state agencies: the Alaska Oil and Gas Conservation Commission (AOGCC), the Alaska Department of Natural Resources (ADNR), the Alaska Department of Environmental Conservation (ADEC), and the Alaska Department of Fish and Game. The Alaska Oil and Gas Conservation Commission issues permits for drilling oil wells throughout Alaska, regardless of land ownership. AOGCC is primarily concerned with maintaining the subsurface integrity of oil fields during exploration and production and the proper plugging and abandoning of wells after their use. The Alaska Department of Natural Resources leases state lands for oil and gas industry activities and collects royalties on oil and gas production in the state. Such leases stipulate how the land will be returned to the state after production ceases. In addition, the Alaska Department of Environmental Conservation, which regulates waste management practices at exploration, development, and production facilities on private, state, and federal lands, and the Department of Fish and Game, which oversees habitat issues, have a limited and principally advisory role in regard to DR&R. Municipal government and Alaska Native corporations also have control over oil activities on the North Slope. The North Slope Borough, which encompasses all of the North Slope, has zoning authority over industry activities on non-federal lands on the North Slope. In addition, the borough is consulted under the Coastal Zone Management Act for development on federal lands. Alaska Native regional and village corporations own significant portions of surface and subsurface rights on the North Slope. These rights were the result of claims made under the Alaska Native Claims Settlement Act of 1971. In particular, the Arctic Slope Regional Corporation, a Fortune 500 Alaska Native corporation, owns 5 million acres of surface lands and subsurface mineral rights on the North Slope. In addition, eight Alaska Native village corporations own surface lands surrounding their villages on the North Slope. For example, the Kuukpik Village Corporation owns 146,000 acres of surface lands near the village of Nuiqsut on the Colville River, site of the Alpine oil field (Colville River Unit). Several federal agencies also have responsibility for regulating oil activities on the North Slope. The Department of the Interior’s Bureau of Land Management (BLM) manages the National Petroleum Reserve-Alaska and also issues and oversees leases for oil activities on any federal lands. The Department of the Interior’s Minerals Management Service (MMS) regulates oil activities on the Outer Continental Shelf, defined as 3 or more miles from shore. The U.S. Army Corps of Engineers issues permits for dredging or fill activities in U.S. waters, including wetlands. Almost the entire North Slope is designated wetland and, because gravel underlies most production facilities, airstrips, and roads, the Corps has a permitting role in basically all oil company construction activities. Interior’s Fish and Wildlife Service (FWS), the Environmental Protection Agency (EPA), and the Department of Commerce’s National Marine Fisheries Service (NMFS) can offer advisory comments to the Corps as part of the permit evaluation process. Further, the EPA also has veto authority over Corps permits. In addition, should the Congress decide to authorize oil industry activities in the Arctic Refuge, the FWS would oversee the issuance of right-of-way permits, while BLM would issue and oversee the federal leases. This regulatory construct assumes that the Arctic Refuge would be managed similarly to other refuges; various bills introduced in the 107th Congress to open the Arctic Refuge to oil and gas development were unclear on FWS’s role and regulatory authority. The Minority Leader of the House of Representatives, the Ranking Minority Member of the House Resources Committee, and Representative Edward Markey asked us to examine dismantlement, removal, and restoration requirements for Alaska’s North Slope. Specifically, we agreed to determine the nature and extent of dismantlement, removal, and restoration requirements for existing oil industry activities on state-owned land on Alaska’s North Slope, including how these requirements compare to those of other oil-producing states; whether any cost estimates exist for the dismantlement and removal of the infrastructure and for the restoration of North Slope state-owned land; what financial assurances the state of Alaska has that funds will be available to cover the eventual dismantlement, removal, and restoration costs and how these assurances compare to those of other oil-producing states; and the nature and extent of dismantlement, removal, and restoration requirements and financial assurances governing future oil industry activities on federal lands located on the North Slope and how these compare with requirements and financial assurances in other related industries, such as mining and nuclear power. To determine the nature and extent of federal, state, and local requirements for dismantling, removing, and restoring existing industry activities on the North Slope, we met with federal, state, and local government officials; Alaska Native corporations; oil company spokesmen; outside experts; and interest groups. We also researched state and local statutes, regulations, policies, and analyses relating to DR&R requirements and practices in Alaska. Finally, we visited Alaska’s North Slope in July 2001 to examine existing production facilities and DR&R reclamation projects. To compare Alaska’s DR&R requirements to those of other states with oil production, we surveyed the 10 states, including Alaska, that account for nearly 90 percent of the domestic oil production in the United States, excluding federal offshore production. For each state, we surveyed the office that issues permits for drilling oil and gas wells and the office that manages oil and gas leasing on state-owned lands. We asked each office to provide information on, among other things, its requirements for surface restoration. To determine whether any cost estimates exist for the dismantlement and removal of infrastructure and restoration of the North Slope, we sought estimates from officials of federal and state government, oil companies operating on the North Slope, academicians, and various interest groups, including conservation and pro-oil development organizations. We also submitted a formal written request to the oil companies operating on the North Slope to estimate their future dismantlement, removal, and restoration liability. In addition, we met with petroleum accountants and studied financial reporting requirements to understand how oil company’s estimate and report their DR&R liability. Finally, we obtained information on the inventory of oil company assets that currently exist on the North Slope from oil companies, academics, and government agencies. To determine what financial assurances exist that funds will be available to pay for dismantlement, removal, and restoration costs, we interviewed and obtained documentation from federal, state, and local government officials and Alaska Native corporations. We also researched federal, state, and local statutes, regulations, policies, and analyses relating to DR&R financial assurance requirements and practices in Alaska. To compare Alaska’s financial assurances to those of other states with oil production, we surveyed the 10 oil-producing states, including Alaska, that account for nearly 90 percent of domestic oil production excluding federal offshore production. For each state, we surveyed the office that issues permits for drilling oil and gas wells and the office that manages oil and gas leasing on state-owned lands. We asked each office to provide information on what, if any, financial assurances it obtains to ensure that funds will be available for plugging and abandonment of oil and gas wells and surface reclamation. Finally, to determine what dismantlement, removal, and restoration requirements and financial assurances exist for federal lands on the North Slope, we reviewed federal regulations and interviewed officials in Alaska and Washington, D.C., from the U.S. Army Corps of Engineers; the Department of the Interior’s Bureau of Land Management, Minerals Management Service, and Fish and Wildlife Service; the Environmental Protection Agency; and the Department of Commerce’s National Marine Fisheries Service. We also compared these requirements to reclamation requirements and financial assurance requirements for the Trans-Alaska Pipeline System and those found in the hardrock and coal mining industries and for nuclear power plants. The mining industry is comparable to the oil industry in that it extracts a nonrenewable resource from the ground and in so doing requires industrial facilities to process and deliver these resources. Likewise, we reviewed the nuclear utility industry because it generates electricity through a complex infrastructure with a fixed useful life span. We conducted our work from March 2001 through March 2002 in accordance with generally accepted government auditing standards. The state of Alaska’s dismantlement, removal, and restoration requirements, which apply to almost all existing oil production on the North Slope, offer no specifics on what infrastructure must be removed or to what condition lands used for oil industry activities must be restored. Additionally, the Corps of Engineers, the local North Slope municipality, and native landowners, all of which have authority to impose DR&R requirements, have for the most part not done so. The state, the oil industry, and environmental groups disagree about the benefits and risks associated with the state’s general requirements. The state believes that its requirements are sufficient and provide flexibility, the oil companies like the flexibility but would prefer more specific guidelines, and environmental groups feel the requirements are so vague that there is no assurance that any dismantlement, removal, and restoration will occur. A comparison of Alaska’s DR&R requirements to those of nine other oil-producing states reveals a spectrum of requirements; some states have general requirements like Alaska’s, while other states have more explicit requirements that create a fixed obligation to fully restore the land according to specific standards. Because existing oil production activities occur almost entirely on state lands, the state of Alaska largely determines the requirements for dismantling and removing the infrastructure and restoring the land following completion of oil activities. The state’s requirements are very general, especially with regard to surface restoration requirements. Two agencies within the state have the authority to impose DR&R requirements upon the oil companies—the Alaska Oil and Gas Conservation Commission and the Alaska Department of Natural Resources. AOGCC issues permits for drilling oil wells throughout Alaska, regardless of land ownership. AOGCC is concerned primarily with maintaining the subsurface integrity of oil fields during exploration and production and the proper plugging and abandonment of wells after production ceases. AOGCC regulations impose specific requirements on oil companies for plugging and abandoning wells, but what will be required regarding surface restoration beyond the immediate well site is uncertain. ADNR leases state lands for oil and gas industry activities and collects royalties on oil and gas production in the state. ADNR lease agreements contain only general language regarding DR&R requirements. What specific surface dismantlement, removal, and restoration will be required is unknown and left to the discretion of the state. In addition, Alaska’s Department of Environmental Conservation has certain statutory responsibilities for preventing air, land, and water pollution. Therefore, if a site on the North Slope is contaminated, ADEC requires the polluter to remediate the site. The Corps of Engineers, which issues permits for certain aspects of development occurring on both private and public wetlands, also has only general DR&R requirements as part of its permitting process. The Corps prefers the landowner to have primary responsibility for establishing DR&R requirements. Finally, the local municipality and Alaska Native landowners have authority over existing industry activities on their lands through zoning and the development of coastal management plans. However, these entities have largely deferred to the state to impose DR&R requirements. AOGCC drilling permits contain detailed requirements for well-plugging and abandonment, but provide minimal guidance on surface restoration. The primary purpose of AOGCC’s well-plugging and abandonment regulations are to protect subsurface oil reservoirs and aquifers. An improperly plugged well could allow oil to escape from one pool to another, intrude into fresh water supplies, or cause fires or seepage. AOGCC regulations contain several pages of technical specifications on plugging a well, which involve setting a series of cement plugs to seal each stratum. As of March 28, 2002, 412 individual well sites on the North Slope have been plugged and abandoned—most of these well sites are in the Prudhoe Bay and Kuparuk units or were exploratory well sites in other units. As of that date, 3,108 well sites remain active (see table 3). In contrast, AOGCC’s post-production DR&R requirements for the surface area of a well site, which are known as location clearance requirements, are not nearly as specific as its well-plugging provisions. As shown in figure 7, AOGCC’s regulations for location clearance require the operator to remove equipment and other associated infrastructure from the location, fill and grade all pits, and leave the location in a clean and graded condition before a well site can be granted final clearance and the surety bond returned to the owner. AOGCC’s location clearance provisions are not specific as to the physical reach of DR&R around the well site—that is, whether it extends to the general vicinity of the well, to the well pad, or to the entire oil field. Further, AOGCC regulations defer to the relevant state or federal land management agency for the appropriate level of dismantlement, removal, and restoration. AOGCC location clearance requirements have yet to be tested because the oil companies have not abandoned all the well sites of any producing well pads on the North Slope. An AOGCC official stated that location clearance for a well site is not granted until all the wells on a well pad are plugged and abandoned. However, this official stated that as of December 2001 there were no instances where all wells on a production well pad located on the North Slope had been plugged and abandoned. As a result, AOGCC commissioners stated that they had not granted location clearances for any producing well sites on the North Slope. Figure 8 contains photos of producing well pads in the Prudhoe Bay and Kuparuk units. The Alaska Department of Natural Resources administers lease agreements for oil industry activities on state-owned land in Alaska’s North Slope. However, these agreements do not specifically describe DR&R requirements for the infrastructure and wetlands on which the infrastructure was built. ADNR has used several different lease forms on the North Slope. Many producing North Slope leases, including Prudhoe Bay, used a form that was in use until 1979. The rights upon termination provisions contained in the original and most current ADNR Competitive Oil and Gas Leases are similar (see fig. 9). Specifically, both leases give the lessee the right to remove from the leased area all machinery, equipment, tools, and materials. But the leases also provide that “when so directed by the state” or “at the option of the state,” the lessee may leave its infrastructure behind. While the current lease termination provisions require the lessee to rehabilitate the leased areas to the “satisfaction of the state,” ADNR has not defined what constitutes the “satisfaction of the state.” The older lease has no specific rehabilitation provisions, stating that the lessee must “deliver up said lands in good order and condition.” In addition to lease agreements, DR&R requirements are also addressed in unit agreements. The unit agreement contains termination provisions that are similar to those contained in the state oil and gas lease. For example, Article 15 of the state’s standard unit agreement for 2001 reads “at the option of the State, all improvements such as roads, pads, and wells must either be abandoned and the sites rehabilitated by the Unit Operator to the satisfaction of the State, or be left intact and the Unit Operator absolved of all further responsibilities….” Similarly, the unit agreement states that the “Unit operator shall deliver up the Unit Area in good condition.” The various owners of a unit are responsible for unit-wide DR&R. However, DR&R requirements are not activated for leases that are organized into a unit until the unit agreement is terminated, though the unit operator may voluntarily elect to perform some DR&R prior to termination. An ADNR official in the Division of Oil and Gas maintained that the state would not release a unit operator from its unit-wide DR&R obligations until all leases in the unit expired. In addition to well permit and lease requirements, the state has established requirements and programs to address air and water contaminated by pollution. The Alaska Department of Environmental Conservation is charged with enforcing requirements for such things as the disposal of drilling mud and cuttings, the flaring of hydrocarbon gases, the discharge of wastewater, and the cleanup of oil spills. While many of these responsibilities affect oil company’s ongoing activities, ADEC also determines if hazardous substances, including oil, have contaminated a site following oil industry activities. ADEC has standards to which a site must be minimally cleaned before it is considered uncontaminated. For example, ADEC has overseen the cleanup of oil company reserve pits in which drilling wastes were contained. The U.S. Army Corps of Engineers issues permits to oil companies on the North Slope. These permits contain very general dismantlement, removal, and restoration requirements and only rarely contain specific requirements. Corps permits are issued under a variety of statutes for actions that affect wetlands or navigable waters whether located on federal, state, local, native, or private lands. Of these authorities, section 404 of the Clean Water Act, which allows for the placement of fill or dredged material, such as gravel for the construction of roads, pads, and airstrips, is the most common type of permit that the Corps issues in the North Slope. The Corps’ DR&R requirements are contained in its permits as a general condition, which states that upon abandonment, the Corps “may require restoration of the area.” The level of restoration that may be required is not specified in Corps regulations nor is it generally specified in the permit. Corps of Engineers officials noted that Corps permits are issued for all types of operations involving wetlands throughout the United States. As such, they indicated that their permits’ general restoration language provides more flexibility to adapt the level of restoration to site-specific needs. Corps officials told us that specific restoration requirements, such as gravel removal upon abandonment of a site, are generally not appropriate, but may be warranted under special circumstances. In these instances, specific restoration requirements are established as special conditions to the permit. For example, the permit for the placement of gravel in the Alpine oil field in the Colville River Unit contains special conditions specifying areas where the permittee will remove the gravel, rehabilitate the gravel footprint area, and restore the hydrology of the project area upon abandonment. For other permits, when special circumstances do not occur, Corps officials stated that restoration requirements are better determined at the time of abandonment. The Corps was unable to determine how many of its more than 1,100 North Slope permits carried special conditions regarding dismantlement, removal, and restoration, though officials estimated that less than 1 percent of all their permits contained such conditions. In addition to the permit itself, the Corps can also incorporate DR&R requirements into abandonment plans. The Corps requires permit holders to submit an abandonment plan when an oil company is planning to abandon a site. As of May 2001, only seven abandonment plans have been submitted, five of these stemming from offshore oil industry activities. According to Corps officials, the initial requests for abandonment plans do not contain minimum restoration requirements. Corps officials noted, however, that approved plans do contain site-specific restoration requirements. For abandonment of offshore facilities, such as gravel islands, removal of gravel would likely only be required if the gravel were found to be contaminated. For such projects in deep water, the abandonment requirements call for the removal of gravel bags used for erosion protection, removal of all hardware, plugging the well, and allowing the gravel island to erode naturally into the sea. Corps of Engineers officials stated that the landowners or land manager should bear the primary responsibility for establishing DR&R requirements. In the case of current oil production on the North Slope, the landowner is the state of Alaska. Corps officials state that the Corps typically works with the state to determine appropriate dismantlement, removal, and restoration requirements and generally accepts the state’s recommendations, provided that important aquatic resources are protected and there are no overriding factors of national public interest. For example, the Corps approved the abandonment of several offshore exploratory islands that were subject to state leases and state-imposed DR&R requirements. Alaska’s Department of Natural Resources established the DR&R requirements for the oil companies: plugging and abandoning the wells, removing all equipment, and allowing the gravel islands to erode naturally. If disagreements occur between the state and the Corps, they are usually resolved at the local level. However, in most circumstances, the Corps retains the authority to enforce its permit requirements for a site. While the North Slope Borough and two Alaska Native corporations have the authority to impose DR&R requirements for certain North Slope oil fields, this authority is not always exercised; when it is, the requirements that are established vary. Specifically, the North Slope Borough has zoning authority over state and privately owned lands within its boundaries. The borough’s Department of Planning and Community Services is responsible for ensuring proper land use through the zoning process. While the zoning regulations give the borough the authority to require a DR&R plan as a condition for project approval, an official stated that the borough has not required such a plan for any oil industry activities on the North Slope. Instead, the official stated, the borough would coordinate with state and federal authorities to develop dismantlement, removal, and restoration requirements as part of any abandonment plan. The Kuukpik Corporation, which represents the Nuiqsut Village, owns a portion of the surface land on which the Alpine oil field is located (part of the Colville River Unit). According to the General Manager of the Kuukpik Corporation, a 1997 surface use agreement between ARCO and the Kuukpik Corporation requires that all chemicals and wastes, well fixtures, equipment, fill, pads, roads, grading, and other improvements be removed and all lands reclaimed and revegetated with native flora. In implementing this agreement, the operator is to provide Kuukpik with a plan for reclamation prior to initiating any activities. According to a Kuukpik official, although the corporation has not yet enforced this aspect of the agreement, it is confidant that the oil company will meet its DR&R obligations. The Arctic Slope Regional Corporation, which shares subsurface rights with the state of Alaska for certain oil leases, including those in the Alpine oil field, by statute must defer to the state regarding termination provisions in the lease agreement. Specifically, the joint ASRC and ADNR oil and gas lease for the Alpine field states that at the option of the state, all improvements such as roads, pads, and wells must be abandoned and the site rehabilitated by the lessee to the satisfaction of both the state and ASRC. With regard to whether a lessee satisfactorily completes DR&R, an ASRC official stated that the lessee would need to satisfy the state, ASRC, and any village corporations that may have surface ownership. The state of Alaska, oil companies, and environmental groups hold different opinions on the adequacy of the state’s current DR&R requirements. State officials believe that their DR&R requirements are sufficient and allow for greater flexibility to maximize eventual DR&R activities. Oil companies operating on the North Slope, while finding the state requirements to be acceptable, would prefer more specific guidance that allows them to better plan and estimate their future DR&R liability. Because the state has not specified what DR&R it will ultimately require, the oil companies have made different assumptions on their levels of liability. Finally, representatives from some environmental groups in Alaska believe that the state requirements are too vague and could allow the oil companies to walk away from their responsibilities. The general lack of agreement on what the requirements should be has led the state to not develop a land use plan for the North Slope. State of Alaska officials, including the Governor’s Special Counsel, Alaska’s Commissioner of Revenue, and the head of the Oil, Gas, and Mining Section of Alaska’s Attorney General’s office, stated that specific dismantlement, removal, and restoration requirements are not necessary for the restoration of the North Slope. They maintain that the DR&R requirements contained in state oil and gas leases are clear and contractually enforceable. Specifically, one state official emphasized, the principal requirement to close a lease is to dismantle and remove structures, equipment, and personal property, and to restore the land to a condition that is satisfactory to the state. He noted that this could include returning the site to its original condition. The oil companies, state officials maintain, have cooperated with the state to date and have cleaned up some contaminated sites on the North Slope, even those where others caused the contamination. According to these state officials, general requirements are preferable to specific requirements because they provide the state and the oil companies with more flexibility. Specifically, given the fact that no one can predict when North Slope oil production will cease, general requirements allow the state to hold out for new technologies and processes that may change DR&R requirements. For example, until 1987, it was standard practice to contain drilling wastes in reserve pits. However, following a lawsuit by environmental groups, North Slope operators have developed and adopted a practice of grinding and re-injecting the wastes into the subsurface, a practice that the state and environmental groups prefer. Oil companies told us they accept the state’s broad DR&R requirements. The companies agree that general requirements provide flexibility to 1) evaluate each site on its own merits and tailor restoration accordingly, 2) allow for changes in technology that affect how DR&R is performed, and 3) allow for changes in land use decisions. However, the two major operators on the North Slope—BP and Phillips Petroleum—also stated a preference for more specific DR&R guidance and policy from the state. According to spokesmen from these two companies, more specific guidance would allow the oil companies to better plan for existing activities and allow the companies to make better, cost-based restoration decisions. Currently, the general requirements have resulted in uncertainty surrounding the issue of how much infrastructure and gravel will be left in place. For example, an ExxonMobil spokesman stated that his company currently assumes that the state will only require a minimal amount of gravel to be removed on the North Slope; for this reason, the company does not include the cost of gravel removal when estimating its future DR&R liability. A Phillips Petroleum spokesman stated that his company assumes that some gravel will have to be removed, but could not specify how much. Finally, a BP spokesman stated that his company anticipates leaving some gravel in place, but also could not disclose the amount. He also stated that the Endicott Production Islands (Duck Island Unit)—two man-made gravel islands connected to shore by a 5-mile gravel causeway—would most likely be left in place and allowed to erode naturally after all the associated facilities are removed (see fig. 10). Environmental groups in Alaska are critical of the state’s DR&R requirements because the requirements are, in their view, vague and indefinite. Officials from the Trustees for Alaska, the Alaska Conservation Foundation, and the Sierra Club stated that the state’s general requirements provide no assurance that DR&R will ever occur. Some officials believe that the state will waive oil company liability for performing DR&R on the North Slope in exchange for the production of oil that is only marginally profitable for the companies. The officials explained that the state has very little incentive to impose DR&R costs on the same oil companies that serve as the principal source of state revenue and payments to state residents. They believe that if the state must choose between oil companies spending money on dismantlement, removal, and restoration or spending money on new oil production, the state will choose new oil production. These groups cite several historical examples, from the limited environmental review that took place before the initiation of oil industry activities on the North Slope to the current need for the state’s reserve pit cleanup program— begun only after environmental groups settled a lawsuit with ARCO for violating the Clean Water Act. The state of Alaska once attempted to develop more specific DR&R guidance for the North Slope, but internal disagreement over the extent of restoration, including what gravel should be removed from the land, derailed those efforts. In the early 1990s, a state-industry task force was formed to clarify lease-closure policy. The task force recommended that gravel be allowed to remain at certain sites after lease closure. The state chose not to adopt this recommendation because Alaska’s Department of Fish and Game insisted on the complete removal of all gravel and restoration of the land to its natural condition. In addition, the state of Alaska has not developed a land use plan for the North Slope or identified the condition to which the state would like its lands returned after oil production ceases. Alaska’s Department of Natural Resources’ Division of Mining, Land, and Water is responsible for developing land use plans to guide the use, development, and disposal of state lands. Thus far, a state official reports, the ADNR has prepared area plans covering roughly 70 percent of state-owned land. However, according to an official in the Division of Mining, Land, and Water, there is no land use plan for the North Slope because its current use, resource development, is the state plan for the area. Some state and Alaska Native officials have stated that once oil production ceases, they believe the state should have a long-term goal of guaranteeing that the North Slope would support wildlife habitat and native subsistence. DR&R requirements in the major oil-producing states vary; some states have general requirements like Alaska’s, while others are much more explicit. We surveyed dismantlement, removal, and restoration requirements in nine other states: California, Florida, Louisiana, Michigan, New Mexico, Oklahoma, Pennsylvania, Texas, and Wyoming. In total, these nine states and Alaska account for nearly 90 percent of the oil produced in the United States, excluding federal offshore production. All nine states surveyed have an oil and gas regulatory structure that is similar to Alaska’s. Specifically, all 10 states have one office that regulates oil and gas industry activities at the wellhead (similar to AOGCC) and another office that manages oil and gas leases on state-owned lands (similar to ADNR). All the states we surveyed have specific requirements for plugging and abandoning oil and gas wells that are similar to Alaska’s. However, whether these wellhead requirements contained specific surface restoration requirements varied. For example, while well-plugging and abandonment provisions in all the states we surveyed mandated the removal of surface material and the filling and closure of all holes, only four states—Florida, Oklahoma, Pennsylvania, and Wyoming—mandated revegetation of the surface area, while only three states—Florida, Oklahoma, and Wyoming— mandated returning the site to a natural condition. Alaska, California, Louisiana, and New Mexico reported no such requirements. We found greater variance in the survey responses regarding dismantlement, removal, and restoration requirements found in state oil and gas leases. For example, Florida requires a site to be restored to original condition to the greatest extent practicable. California reported that specific DR&R requirements are not determined until completion of an environmental review under the California Environmental Quality Act. In contrast, New Mexico, Oklahoma, Pennsylvania, and Wyoming reported that their oil and gas leases have mandatory requirements to remove surface material, such as equipment, debris, and structures; close holes; and revegetate the area upon lease termination. DR&R requirements in Alaska’s oil and gas leases can require the lessee to rehabilitate the roads, pads, and wells “at the option of the state.” (See app. I for additional information on DR&R requirements in the states we surveyed.) The actual cost to dismantle and remove oil industry infrastructure and restore the land on Alaska’s North Slope cannot be determined, but several indicators show that it is likely to amount to billions of dollars. Estimating the eventual cost of these actions is complicated by several factors, including the lack of specific requirements from the state and uncertain timeframes for restoration. Oil companies operating on the North Slope are the only entities that have estimated future dismantlement, removal, and restoration costs. Under generally accepted accounting principles, companies are required to report their liabilities annually, but these estimates are reported in aggregate for worldwide operations and specific estimates for the North Slope are not available to the public. However, limited information obtained from oil company annual reports, a tax court case, and other sources indicates that the current DR&R liability for existing infrastructure on the North Slope is in the billions of dollars. Oil company spokesmen gave us two reasons that explain why estimating future DR&R costs for the North Slope is difficult. First, lacking specific federal, state, and local DR&R requirements, oil companies must make assumptions about the amount of DR&R they will ultimately be required to perform. A Phillips Petroleum spokesman pointed out that it is hard to develop a cost estimate for removing infrastructure when one does not know what infrastructure will be removed and what will remain in place. He explained that the state and local governments might decide to keep some of the infrastructure, such as roads and airstrips, but that determination has not been made and probably will not take place until after oil production ceases. Spokesmen from ExxonMobil and Phillips Petroleum stressed, for example, that estimating future DR&R costs is dependent upon gravel removal requirements. Second, the length of time remaining in the life of oil production on the North Slope—20 to 30 years or more based on estimates of the economic viability of the North Slope oil fields and the Trans-Alaska Pipeline System—combined with the potential development of natural gas production adds further uncertainty to estimating DR&R costs. Spokesmen from five oil companies that currently have ownership interests in oil production on the North Slope told us that a number of other factors could change over time and could also affect their eventual DR&R costs, including: the addition of new infrastructure—wells, pipelines, roads, airstrips, and production facilities—as development continues; dismantlement and removal of some facilities, including the plugging of wells, before units are abandoned; increases in the cost of services such as labor and transportation; future market value of useable equipment and scrap material; technological advances in drilling, production, and rehabilitation; alternative uses for facilities or gravel, such as for natural gas changes in environmental regulations or abandonment stipulations. There is no definitive estimate of the cost of performing DR&R on the North Slope, but available evidence suggests that the total liability is in the billions of dollars. Generally accepted accounting principles require that oil companies estimate their future DR&R liability, but this liability only needs to be reported on a worldwide basis. Oil company spokesmen told us that their individual company estimates for DR&R liabilities on the North Slope were for internal use and not available to the public. Companies fear that if they make their internal estimates available, they could someday be used for a purpose other than the accounting estimates they were intended to be. Nevertheless, limited financial reporting, a tax court case, and a few limited studies indicate that the costs are likely to be substantial. Generally accepted accounting principles require oil companies to estimate their future DR&R liability. The Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission require oil companies to estimate future DR&R costs in order to determine annual depreciation and amortization rates. However, accounting principles do not require oil companies to separately report their DR&R liability for each operation, such as those on the North Slope. The intent of these principles is to match DR&R costs with associated oil revenue during the period in which the oil is produced, rather than when the actual expense is incurred. In contrast, environmental contamination treatment costs—the costs to remove, contain, neutralize, or prevent existing or future contamination—are generally expensed in the current period, rather than capitalized, if the cost is probable and can be estimated. As a result of the differing treatment of asset retirement costs and a desire to better disclose liabilities, the Financial Accounting Standards Board recently issued new rules for disclosing asset retirement liabilities. For financial statements issued for fiscal years beginning after June 15, 2002, oil companies will have to report the discounted amount of their DR&R liability at the time an asset is placed into service. Spokesmen representing oil companies that operate on the North Slope told us that they were uncertain, at this time, how this new rule would be implemented or how it would affect their companies’ balance sheets. None of the five oil companies with substantial ownership interests in current oil production on the North Slope were willing to provide their estimated DR&R liability for these operations. Spokesmen from these companies stated that their estimates have been calculated for accounting purposes only and were not intended for public review. While oil companies publish their worldwide liability estimates, they are not required to make public regional or field-wide estimates. The companies were reluctant to provide their accounting estimates for purposes other than their own internal accounting. The BP spokesmen stated that any current cost estimates may not be valid with tomorrow’s technology, and that costs calculated today represent a set of assumptions that will probably differ from when the actual costs are ultimately incurred. Although no comprehensive estimates are available for future dismantlement, removal, and restoration costs for the North Slope, there are a number of indicators that, although not precise, imply that the order of magnitude of such costs could be in the billions of dollars. Specifically Phillips Petroleum’s acquisition of ARCO Alaska increased its total DR&R liability by $1.6 billion. Phillips Petroleum reported in its 2000 annual report that its acquisition of ARCO Alaska increased its total estimated future dismantlement, removal, and restoration costs from $1.0 billion to $2.6 billion. Prior to the merger, ARCO accounted for 30 percent of the North Slope oil production. Abandonment costs are a function of construction costs. For the proposed Liberty offshore project, MMS assumes that abandonment will cost roughly 5 percent of the original investment cost. With an estimated investment cost of $500 million, MMS estimated that the planned Liberty project could eventually cost an estimated $25 million to abandon. However, the MMS figure excludes gravel and pipeline removal. In another case, a detailed DR&R study of TAPS estimated that it will cost $1 billion (1977 dollars) or approximately 11 percent of the original $9 billion (1977 dollars) construction cost to dismantle and remove the pipeline and restore the land to a natural condition. A recent study of oil and gas industry capital investment on the North Slope from 1968 through 2001 estimated a cumulative investment of $20.6 billion (1977 dollars), which if revalued in 2004 dollars (the earliest estimated time that major DR&R activities are assumed to begin on the North Slope) would be $53.6 billion. Estimating future DR&R costs based on this investment level and a DR&R cost percentage ranging from 5 to 11 percent of the total investment yields a DR&R estimate of $2.7 billion to $6 billion for existing North Slope infrastructure (2004 dollars). Exxon estimated nearly $1 billion in DR&R costs for oil wells and oil production equipment and facilities at Prudhoe Bay. In a May 2000 U.S. Tax Court case, Exxon submitted detailed engineering studies to support its estimate that future DR&R costs for the Prudhoe Bay Field infrastructure installed as of 1984 would total $928 million. (Exxon estimated that its share amounted to 22 percent of this cost based on its then current ownership percentage of the Prudhoe Bay field.) The DR&R cost estimate excluded any gravel removal or revegetation costs. The $928 million included $111.6 million in well-site DR&R costs—$85 million for plugging 645 wells and $26.6 million for closing the pits next to the wells and cleaning up the 37 well sites. In 1970, the cost of plugging each well was estimated at $131,976 (1980 dollars). While the court found the estimated costs of well-plugging and related site restoration reasonably estimable, the court stated that the estimated DR&R costs relating to field-wide oil production equipment and facilities located in the Prudhoe Bay oil field were not sufficiently fixed and definite to base the tax accruals sought by Exxon. The court noted that neither the Alaska Oil and Gas Conservation Commission regulations for the years at issue, nor the particular oil and gas leases involved, contained express language imposing fixed and definite DR&R obligations on the oil companies relating to field-wide production facilities located in the Prudhoe Bay oil field. The court further noted that Alaska’s general policy to permit development, while at the same time insisting that the environment be preserved or, if necessary, restored to the fullest reasonable extent, did not establish any specific oil company DR&R obligations with regard to Prudhoe Bay that could be legally recognized for federal income tax purposes. According to ExxonMobil spokesmen, the company has already accrued $200 million in dismantlement, removal, and restoration costs for its North Slope operations, including its interest in Prudhoe Bay. Despite incurring responsibility for some costly dismantlement, removal, and restorations that resulted from improperly abandoned sites, the state of Alaska’s current financial assurances cover only a small portion of the potential cost of DR&R for existing infrastructure on the North Slope. In the past, several drilling and service companies that supported early North Slope oil industry activities went out of business and improperly abandoned their operations and sites. Without adequate financial assurances, the state of Alaska was left financially responsible for the costs of dismantlement, removal, and restoration. Oil companies currently operating on the North Slope have assisted the state in this cleanup effort and are spending millions of dollars to restore some of these abandoned sites. The state is the only entity on the North Slope that requires oil companies to post bonds for their activities on state lands. However, the state bond limits are set without regard to the potential future costs of DR&R. The Corps of Engineers, the local government, and Alaska Native landowners all have the authority to impose financial assurances, but have never done so, preferring to defer to the state. Still, in Alaska, where the cost of restoration might be significant, bonding requirements are higher than those of most other oil-producing states that we surveyed. The state of Alaska is faced with a number of improperly abandoned sites on the North Slope. Most of these sites were the result of early oil industry activities by various oil companies and oil-related service companies, some of which have gone out of business. The state has identified 217 contaminated sites on state-owned North Slope lands; many sites are the responsibility of various federal agencies based on activities that occurred before statehood, as well as TAPS-related and various oil and service companies. Of these, the state has cleaned up and closed about 25 sites and is working with responsible parties, when possible, to clean up the rest. The state does not know how many non-contaminated sites on the North Slope also require DR&R. The state has sought the assistance of the remaining North Slope oil companies to help fund and, in some cases, perform the cleanup of abandoned sites when no responsible party remains. For example, as part of the BP-ARCO merger, the state obtained an agreement from BP and Phillips Petroleum to clean up 14 abandoned North Slope sites. These sites, called “orphan sites,” were suspected of being contaminated by hazardous substances. One of the commitments BP and Phillips Petroleum made under the agreement was to spend $10 million to assess these 14 sites and clean them up by 2007. Additionally, BP and Phillips Petroleum agreed to identify, collect, and dispose of abandoned empty barrels found on the North Slope. According to state officials, the parties that caused the contamination or left the barrels are either unknown or unable to clean up the sites. The officials noted that some of these sites were contaminated and abandoned before environmental requirements were established and during a period when the state had little environmental oversight of activities on the North Slope. Further, in many of these cases, the companies were operating under state land use permits that contained minimal bonding requirements, not state oil and gas leases. In these cases, according to these officials, the state has little recourse against such companies. The state also asserts that in the absence of its agreement with BP and Phillips Petroleum, the state would have had to clean up the orphaned sites using state funds and on a less aggressive schedule. By the end of 2001, the state and the oil companies had inspected the abandoned contaminated sites, characterized them by type of contamination, and ranked them by risk priority. The state and the oil companies had also inventoried several abandoned oil drum sites, and the oil companies had completed dismantlement, removal, and restoration at five of the orphan sites. One example of the dismantlement, removal, and restoration of a site abandoned on state lands is an area called Service City. Oil field service companies that operated near Prudhoe Bay used Service City. Beginning in the mid-1960s, these companies, operating under state leases, used the site for staging, servicing, and storing oil field equipment and supplies. By 1986, the area was essentially abandoned, leaving behind metal buildings, equipment, lead acid batteries, and tons of other debris and waste. By 1989, the leases for this area were not active, and some leases were in default for nonpayment of rent. As a result, the state revoked the area leases in 1990. That same year, BP took the lead for cleaning up Service City, working under a cooperative agreement between the state and three oil companies—BP, ARCO, and ExxonMobil. The cleanup and restoration of Service City is still ongoing and, according to BP, has already cost about $2 million. The state of Alaska’s bonding requirements—established by the Alaska Oil and Gas Conservation Commission for well sites and by the Alaska Department of Natural Resources for oil and gas leases—cover multiple purposes and if called by the state would only cover a small portion of the potential total DR&R liability on the North Slope. AOGCC requires each operator to post a single bond to ensure that every well in the state is properly drilled, operated, maintained, repaired, and abandoned. ADNR’s bonding provisions also allow a company to post a single bond to ensure its compliance with all lease conditions for all leases in the state, including provisions for royalty payments to the state and lease termination provisions. In both cases, the bond amounts are far less than the cost to reclaim a single well site, let alone all wells and other existing infrastructure on state-owned land on the North Slope. AOGCC’s bonding requirements are insufficient to fully cover the cost of well-plugging and abandonment liabilities on the North Slope. AOGCC requires a bond of not less than $100,000 to cover a single well, or a blanket bond of $200,000 covering all of an operator’s wells in Alaska. The bond remains in effect until the company abandons all wells covered by the bond and AOGCC provides final location clearance. According to its Commissioners, the AOGCC currently has blanket bonds from five companies to cover all the wells on state-owned land on the North Slope. With plugging and abandonment costs for a single well running as much as $250,000, according to a 1991 state of Alaska legislative audit report, current bonding could fund only a small fraction of plugging and abandonment costs for all of the wells in the state, let alone the thousands of wells on the North Slope. The same audit report recommended that AOGCC increase its bond amounts. The state did not adopt the audit report recommendation, and AOGCC Commissioners acknowledge that bonding amounts are still inadequate to fund all well-plugging and abandonment, particularly for companies that operate many wells under a single blanket bond. However, these officials noted that companies are now required to plug and abandon wells that are no longer being used on an ongoing basis. Current ADNR bonding levels are far below the potential cost of dismantling and removing existing infrastructure and restoring the land used for oil industry activities on the North Slope. Although ADNR regulations require a bond of at least $10,000 before oil companies can commence operations in the state, an ADNR official stated that currently ADNR requires a $100,000 bond for single well operations. ADNR regulations also allow a lessee to furnish a statewide bond of $500,000 to cover all of its oil and gas leases in the state. In place of separate bonds for each lease committed to a unit agreement, ADNR requires the unit operator to furnish a statewide oil and gas lease bond of $500,000. The ADNR can also require an unusual risk bond in addition to single well and statewide bonding requirements. State of Alaska regulations provide the ADNR Commissioner with the discretion to require additional financial assurances based on, among other factors, the degree of risk involved for the operations proposed or conducted on the lease, which includes, according to an ADNR Division of Oil and Gas official, the financial background of the lessee. However, this official told us that the ADNR has no formal mechanism or procedure in place to systematically evaluate the creditworthiness of a lessee. ADNR has required a lessee to post additional financial assurances in two cases. Specifically, in 1998, the state required XTO Energy (formerly Cross Timbers Oil Company) to post additional financial assurances before approving its acquisition from Shell Oil of two offshore oil platforms in the Cook Inlet. Later in 2000, ADNR required an oil company in bankruptcy proceedings to post a $3.8 million bond prior to obtaining approval to install a well platform in Cook Inlet. Although state officials acknowledge that the financial assurances obtained in oil and gas leases are minimal, they maintain that the major operators on the North Slope are large corporations with the capacity to pay their eventual DR&R costs. A state official also noted that additional financial requirements, such as those imposed by the state on XTO Energy, might become more common if current leaseholders sold their interests to smaller companies as oil production on the North Slope declined. According to a state official, as oil fields age and oil recovery becomes marginally profitable, it is common practice in the industry for the large operators to sell their interests to smaller companies. Since these smaller companies may have fewer resources to meet existing DR&R liabilities, the official noted that the state might require additional financial assurances. However, the state currently has no criteria to determine when additional financial assurances are needed. The U.S. Army Corps of Engineers, the North Slope Borough, the Kuukpik Village Corporation, and the Arctic Slope Regional Corporation have not required oil companies to provide any financial assurances that funds will be made available to perform DR&R when oil production ceases on the North Slope. The Corps may attach financial assurance requirements to its permits, but it has never done so on the North Slope. According to the Corps, without specific restoration requirements, it is difficult to quantify the size of the bond and, further, there is no need to duplicate bonds required by other agencies. The Corps considers it the responsibility of the landowner—in this case, the state of Alaska—to ensure that funds are available to perform DR&R activities. The North Slope Borough has financial assurance provisions in its zoning regulations, but the borough’s Director of Planning and Community Service stated that they have not specifically required oil companies to provide surety as a condition for zoning approval. Borough zoning regulations accept evidence of self- insurance, proof of financial responsibility, or the existence of sufficient surety filed with another government entity as fulfilling the borough’s surety requirements. The Kuukpik Corporation’s Surface Use Agreement with Phillips Petroleum contains a provision that allows the corporation to require financial assurances such as a performance bond or letter of credit. However, the General Manager of the Kuukpik Corporation stated that thus far, he does see a need for bonding since future DR&R costs are undetermined. The ASRC’s Director of Lands stated that he relies on the state of Alaska bonding requirements to ensure that funds will be available to perform DR&R. Although the two major oil companies currently responsible for oil production on the North Slope generally agree that the state’s existing bond amounts would not cover the potential cost of future DR&R, they do not believe that increasing bond amounts is necessary. Spokesmen for BP and Phillips Petroleum said that their companies would do whatever the state ultimately decided in terms of DR&R, and both companies plan to meet or exceed their DR&R obligations. The spokesmen also stated that their companies have the assets to cover the costs of DR&R. Further, the Phillips Petroleum spokesman noted that requiring full financial assurances by increasing bond amounts ignores the fact that the companies have already accounted for this obligation on their financial statements. Additionally, spokesmen for both companies stated that all the North Slope operators are well capitalized and, therefore, the funding for DR&R is substantiated by the general credit of the companies and their partners. The Phillips Petroleum spokesman noted that, for this reason, the state has full assurance that whatever DR&R is required will occur. A BP spokesman further noted that his company has to behave in a responsible manner on the North Slope and elsewhere in order to operate in the United States. Finally, spokesmen for both BP and Phillips Petroleum added that instead of requiring the companies to spend money on financial assurance, a more beneficial return for all parties involved would result from allowing the companies to invest their resources in more North Slope research— including technology improvements for future DR&R—and for further exploration and production. Bond amounts required by Alaska for oil companies operating on the North Slope are generally higher than those reported by the other nine oil- producing states we surveyed. Like Alaska, the other nine states have two offices that require bonding for oil and gas activities. These states have an office (like Alaska’s AOGCC) that regulates the subsurface integrity of the oil or gas field and requires bonding to ensure that each well is properly plugged and abandoned. Each state also has another office (like Alaska’s ADNR) that focuses on the management of oil and gas leases on state lands, and these offices also use bonds to ensure compliance with all the provisions of the lease, including DR&R provisions. Alaska’s AOGCC’s minimum bonding amounts of $100,000 for single well bonds and $200,000 for statewide blanket bonds are generally higher than the bonding requirements of the other states we surveyed. Except for Alaska, Michigan, and Pennsylvania, the other states reported that the actual amount of a single well bond is determined by the depth of the well multiplied by an amount that ranged from $1 per foot to $10 per foot of depth. Three states—California, Florida, and Michigan—reported having higher blanket bonding levels than Alaska. Specifically, California has a $1 million blanket bond that covers all of a company’s wells in the state, Florida has a $1 million blanket bond that covers a maximum of 10 wells in the state, and Michigan has a $250,000 blanket bond. In addition, Louisiana, Michigan, and Texas reported that their blanket bonding amounts are based in part on the number of wells in the state. For oil and gas leases on state lands, only two states—California and Pennsylvania—have financial assurance amounts greater than Alaska’s. California, with only offshore oil and gas leases, reported that current assurances range up to $1.25 million. Pennsylvania assesses a well-bonding requirement of up to $100,000 per well, and some of its leases may contain numerous wells. Florida’s bond amounts are the same as Alaska’s, while three other states—New Mexico, Oklahoma, and Wyoming—reported having the discretion, like Alaska, to increase bonding levels on a case-by- case basis. Finally, Texas and Louisiana reported that they relied on their oil and gas well regulatory agency for DR&R requirements and thus had no financial assurance provisions in their oil and gas leases. To date, most North Slope oil production has taken place on state-owned lands and has, therefore, been subject to state DR&R requirements and financial assurances. However, as oil production on state lands declines, oil companies and the state of Alaska are looking to federal lands—the NPR-A, the Arctic Refuge, and offshore—to maintain North Slope oil production. Currently, DR&R requirements and financial assurances for these federal lands vary, depending on the responsible federal agency. For example, in the NPR-A, where only oil exploration has occurred, BLM has not yet developed DR&R requirements for oil production activities to meet its goal of returning disturbed land to its previous use. Furthermore, although BLM regulations allow for escalating bond amounts up to the full cost of DR&R, the current bond amounts in the NPR-A would only cover a fraction of the potential future DR&R liability. In contrast, for federally regulated offshore oil activities, MMS has developed explicit DR&R requirements for both oil exploration and production, and its bond amounts are based on an escalating scale that depends on, among other things, the estimated cost of future reclamation. Further, in the Arctic National Wildlife Refuge, which the Congress is currently considering whether to open to oil and gas development, no specific restoration goal or DR&R requirements exist for reclaiming the refuge if oil production occurs, and existing financial assurances are not adequate to cover the potential cost of restoration. Historically, oil exploration on federal lands on the North Slope was conducted through contracting for the Department of the Navy and the U.S. Geological Survey (USGS). The Navy exploration predated any DR&R requirements, and financial assurances were through the federal government. Without DR&R requirements, early oil exploration activities resulted in improperly abandoned well sites and unrestored land—two problems that remain to this day. In contrast to varying federal DR&R requirements and financial assurances for oil industry activities on the North Slope, the Trans-Alaska Pipeline System and the hardrock mining, coal mining, and nuclear power industries have explicit DR&R requirements that are set prior to the initiation of any activities. In addition, the federal agencies with regulatory authority over these three sectors require full assurance that funds will be available to meet these requirements. With oil production declining on state-owned lands, oil companies and the state of Alaska are seeking to develop production on federally regulated lands and waters of the North Slope. Three areas under the jurisdiction of the Department of the Interior are being considered: the National Petroleum Reserve-Alaska, which is managed by BLM; the Outer Continental Shelf (OCS), which is managed by MMS; and the coastal plain of the Arctic Refuge, which is managed by the Fish and Wildlife Service. The status of oil industry activities in each of these areas follows. BLM manages the entire NPR-A, which according to USGS estimates holds oil reserves of between 800 million and 15.4 billion barrels. Following the completion of a 1998 Integrated Activity Plan/Environmental Impact Statement (IAP/EIS) on the potential impact of oil activities in the northeastern part of the NPR-A, BLM began to lease certain areas for oil and gas exploration. By May 2001, oil companies reported that they had discovered oil reserves in the NPR-A. The next step in this process is for the oil companies to submit a production plan. According to BLM, this may occur as early as 2003. However, before oil production can begin, BLM must complete another National Environmental Policy Act (NEPA) analysis, likely an EIS, to assess the environmental effects of such production. To date, the only offshore oil production from the Outer Continental Shelf has occurred at BP’s Northstar unit, which is located primarily in state- regulated water. The Northstar field is estimated to contain 175 million barrels of oil. In 1998, BP submitted another development and production plan to MMS for a proposed offshore project called Liberty, which would have been located solely in federally regulated water, 6 miles off of Alaska’s north coast. BP estimated that the Liberty field contained 120 million barrels of economically recoverable oil. However, in January 2002, because of the high cost of developing the similar Northstar field, BP announced plans to focus its resources on its core oil production areas closer to Prudhoe Bay and to not pursue development of the Liberty project as proposed at this time. BP is re-evaluating alternative development strategies for this area. MMS officials told us that other oil companies were still examining the potential for oil exploration projects on the Outer Continental Shelf. Finally, for the last 40 years, the Congress has been debating opening the coastal plain of the Arctic Refuge (known as the “1002 Area”) to oil and gas exploration. The USGS estimates that federal lands in the 1002 area likely contain between 4.3 billion and 11.8 billion barrels of technically recoverable oil, not all of which will be economically recoverable. Federal requirements for dismantling and removing oil industry infrastructure and restoring federal land when production ceases vary from agency to agency. Although BLM has an overall restoration goal for the NPR-A, it has specific requirements only for plugging and abandoning wells. Because only oil exploration activities have occurred in the NPR-A, BLM has yet to develop DR&R requirements for when oil production facilities are abandoned. The MMS has specific well-plugging and abandonment requirements that require the removal of all obstructions built for offshore oil activities. MMS can make exceptions to these requirements based on an end-of-the-life project review. For example, MMS requirements for some site-specific infrastructure, such as buried pipelines and gravel islands constructed for drilling sites, are not specified until the end of the field’s productive life. While the FWS has a general DR&R policy for oil industry activities in the National Wildlife Refuge System, specific requirements are developed at individual refuges. Because oil industry activities are not authorized in the Arctic Refuge, FWS has not yet developed any DR&R requirements for the refuge. Finally, the Corps of Engineers, which issues permits for certain activities that result in the loss of wetlands and for offshore structures, has the same very general restoration language in its permits for activities on federal land as it does for those on state land. According to BLM’s Field Manager in Alaska, BLM has an overall restoration goal of returning any land disturbed by oil industry activities in the NPR-A to a condition that is similar to its previous use. To achieve this goal, BLM has developed an overall general oil field abandonment standard for the northeast NPR-A as part of the development of an Integrated Activity Plan/Environmental Impact Statement. In addition, BLM has specific requirements for plugging and abandoning all types of wells and specific DR&R requirements for oil exploration activities. However, in the NPR-A, because the only oil-related activities that have occurred to date involve exploration, BLM has yet to develop DR&R requirements for oil production activities. BLM’s overall restoration goal for the NPR-A is to return the land to a condition that will support its previous use. In developing its 1998 IAP/EIS for the northeast NPR-A, the BLM identified the previous uses of the NPR-A to be primarily fish and wildlife habitat and subsistence use. Specifically, several areas within the northeast NPR-A contain wildlife habitat that includes important nesting, staging, and molting habitat for a large number of water birds and shore birds and also contains caribou calving and insect- relief habitat. The northeast NPR-A also contains numerous water bodies that provide spawning, migration, rearing, and over-wintering habitat for both anadromous and resident species of fish. Fish harvested from these waters are an important subsistence resource for the Alaska Native residents of Barrow and Nuiqsut. In addition, residents of Nuiqsut obtain approximately one-third of their subsistence diet from caribou. In its 1998 IAP/EIS, BLM also developed a general DR&R standard for oil industry activities in the northeastern part of the NPR-A. The standard states that upon field abandonment or expiration of a lease, all facilities shall be removed and sites rehabilitated to the satisfaction of BLM. BLM may, however, determine that it is in the public’s best interest to retain some or all of the facilities at the site. In addition, BLM has specific requirements for plugging and abandoning all wells in the NPR-A, whether they are used for oil exploration activities or oil production. Currently, the only oil-related activity occurring in the NPR-A is exploration. In addition to the general standard for oil field abandonment and specific requirements for plugging and abandoning wells, BLM has also developed specific requirements for oil exploration activities in the NPR-A. For example, BLM requires that all exploration activities occur during the winter months so that ice pads are used to support exploration well rigs and ice roads are used to service the well sites. According to BLM, these requirements limit the impact of exploration activities on the surface area. Further, at the end of the exploration season, BLM requires the companies to remove all drilling equipment and supplies, haul all debris to an approved disposal site, and chip and scrape ice pads to pick up any spills. Finally, after the ice pads and ice roads melt in the summer, the companies are required to conduct an inspection of each location and to pick up any remaining debris. BLM officials stated that the agency plans to develop specific DR&R requirements for oil production activities in the NPR-A when oil companies apply for production permits. According to BLM officials, once oil companies request production permits, BLM will be required to conduct another NEPA analysis, likely an EIS. The officials stated they plan to use the NEPA analysis process to develop specific measures, including specific DR&R requirements, to mitigate the impact of oil production activities in the NPR-A and return the land to a condition that will support its previous use. Specifically, when a company submits an application for development, BLM requires the applicant to also submit a surface reclamation plan. Such a plan must be approved by BLM and is made a condition of the permit. Reclamation of the land may include reclaiming disturbed areas, reshaping topography, disposing of waste, and revegetating affected areas. For example, surface reclamation plans may require the reclamation of well pads by removing the fill material to the approximate height of the original ground contours and applying a specific seeding mixture to that land during a particular time of the year. Furthermore, BLM’s current regulations require oil companies to submit and obtain approval of well-abandonment plans before operators can begin well-plugging and abandonment activities. Well-abandonment plans not only address the plugging and abandonment of wells, but also include plans for removing drilling equipment and reclaiming the disturbed surface. In May 2001, oil companies conducting exploratory work in the NPR-A announced their first oil discoveries. According to BLM officials, the oil companies may submit production plans for these areas within the next year. MMS has an overall goal of restoring offshore areas used for oil industry activities to their previous condition. Specifically, MMS regulations for offshore oil industry activities include specific well-plugging and abandonment requirements and, for restoration, generally require the removal of all obstructions in the water. For some site-specific infrastructure, however, such as buried pipelines and the gravel used to construct man-made islands, restoration requirements are not specified until the end of the field’s productive life. MMS requires oil companies to submit a notice of intent to abandon a well before the companies start abandonment operations. The notice must show the reason for abandonment and include supporting data and a description of the proposed abandonment work. For well-plugging and abandonment, MMS regulations generally require that all structures be removed and all wellheads, casings, and other obstructions be removed to a depth of at least 15 feet below the seafloor or to a depth approved by the district supervisor. However, on the North Slope, during the EIS process for offshore projects, it was determined that specific restoration requirements for site-specific buried pipelines and man-made gravel islands used as drilling platforms would be determined later. Specifically, MMS may allow pipelines to be cleaned and abandoned in place if they constitute no hazard to navigation and commercial fishing and do not interfere with other uses of the Outer Continental Shelf. In addition, where oil companies have constructed gravel islands in the Beaufort Sea to conduct oil exploration activities, MMS has allowed these islands to erode naturally, as opposed to requiring their removal. MMS says that it has consulted with a federal/state task force that examined the effect of oil exploration activity on biological resources in the Beaufort Sea. The task force determined that leaving gravel islands in place is ecologically preferable to removing them, because it causes the least amount of disturbance. However, environmental groups and some local inhabitants are still concerned about the environmental consequences of leaving the islands in place. Finally, once an oil company completes its well-plugging and abandonment efforts, MMS requires the lessee to submit a well-abandonment report describing the manner in which the work was accomplished and certifying that the area was cleared of all obstructions. As of September 2001, there have been 30 exploratory wells drilled in the Beaufort Sea. According to MMS, all 30 wells have been permanently plugged and abandoned, and the drilling facilities have been removed. Initially, all oil-related activity in federally regulated waters off the North Slope was exploratory. However, in November 2001, BP and the Department of the Interior announced the first offshore oil production activity on the North Slope at BP’s Northstar project. Although the Northstar facilities are located in state waters, the oil reservoir extends into federal waters. Consistent with its regulations, MMS will require detailed plans for the plugging and abandonment of wells on federal leases. FWS has an overall goal of restoring to their original condition those wildlife refuges in which oil industry activities occur. Specifically, FWS has a general policy that requires the removal of all structures and equipment when oil industry activities cease, as well as the restoration of the area to its original condition, or as near to it as possible. FWS does not have more specific restoration requirements for oil activities that occur in the national wildlife refuge system. Instead, FWS allows its individual refuge managers to develop more specific restoration requirements, usually in consultation with BLM; these requirements are imposed as conditions to BLM leases and permits and to their own special-use permits and right-of-way permits. Although oil industry activity is currently not permitted in the Arctic Refuge, if the Congress were to authorize such activity in a manner similar to other refuges, both BLM and FWS would manage it. Specifically, BLM would regulate subsurface activities by issuing drilling permits and would regulate the drill site surface area by issuing oil and gas leases in which FWS would provide recommendations on stipulations for all activities, including DR&R requirements. Under the National Wildlife Refuge System Administration Act, the Secretary of the Interior, through the FWS, manages surface activities within refuges. Specifically, FWS would regulate the surface area not covered by BLM leases through the issuance of special- use and right-of-way permits. Special-use permits authorize commercial activities, such as seismic surveys, in national wildlife refuges. Further, in Alaska, Title 11 of ANILCA provides for rights-of-way across federal conservation areas, such as the Arctic Refuge, for transportation and utility systems. Specifically, right-of-way permits are provided for the construction of such things as roads and pipelines that are related to the commercial activity. These permits would contain requirements for restoration, revegetation, and the curtailment of erosion on the surface of the land. For example, in the Kenai National Wildlife Refuge in Alaska, a right-of-way permit was required for the reconstruction of a gravel road. The permit stated that upon cessation of drilling operations, the company would remove culverts, re-grade the roadway, and restore the area to its original topography and drainage patterns. The U.S. Army Corps of Engineers issues permits to oil companies on the North Slope that contain very general dismantlement, removal, and restoration requirements and only rarely contain specific requirements. The Corps issues permits for certain actions that affect wetlands or navigable waters regardless of land ownership. The Corps’ DR&R requirements are contained in its permits as a general condition that states that upon abandonment “restoration of the area may be required.” This is the same language that is used in all Corps permits, including those issued for oil industry activities on state-owned lands on the North Slope. For federal lands, the Corps’ position on restoration requirements is the same as its position on state-owned land; it believes that the landowner holds primary responsibility for DR&R requirements. In the case of the NPR-A, the Arctic Refuge, and the Outer Continental Shelf, the landowner is the responsible federal resource management agency. The Corps would prefer to accept the federal agencies’ recommendations for dismantlement, removal, and restoration of an area, provided that important aquatic resources are protected and there are no overriding factors of national public interest. However, the Corps does maintain the authority to enforce the provisions of its permits if disputes with the landowner occur. As of April 2002, the Congress had considered a number of bills and amendments that would authorize the opening of the Arctic Refuge’s coastal plain to oil and gas industry activities. In some cases, the bills and amendments included language that specified the condition to which the lands used for oil and gas activities should be returned after oil and gas production ceases. For example, in August 2001, the House of Representatives passed H.R. 4, which authorizes oil and gas activities in the Arctic Refuge. Concerning land restoration, H.R. 4 requires reclamation of the land to a condition capable of supporting the uses which the lands were capable of supporting prior to any oil exploration, development, or production activities, or, upon application by the lessee, “to a higher or better use” as approved by the Secretary of the Interior. H.R. 4 also requires the removal of all oil and gas facilities, structures, and equipment upon completion of operations. However, the bill also states that the Secretary of the Interior may exempt from removal those facilities, structures, or equipment that the Secretary determines would assist in the management of the Arctic Refuge. A Senate bill and an amendment to open the Arctic Refuge to oil and gas exploration, S. 388 and S.A. 3132, respectively, contain a reclamation standard identical to that in H.R. 4. The inclusion of the phrase “or to a higher or better use” to the surface reclamation goal contained in H.R. 4, S. 388, and S.A. 3132 could compromise the guidance that the land be reclaimed to a condition capable of supporting its previous use, which is predominantly wildlife habitat. Under H.R. 4, S. 388, and S.A. 3132, if the lessee requests, the restoration goal is subject to interpretation by the Secretary of the Interior on what would be a higher or better use of the land. According to a November 2001 report by the Congressional Research Service that discussed legal issues related to proposed drilling in the Arctic Refuge, under general zoning law, “higher or better” uses are those that “bring the greatest economic return.” As such, those uses that are “higher and better” than undeveloped wildlife habitat could include many possibilities, such as the development of the area for tourism. The reclamation requirements contained in H.R. 4, S. 388, and S.A. 3132 for the Arctic Refuge are similar to the state of Alaska’s general requirement for the dismantlement, removal, and restoration of its land on the North Slope. As previously discussed, this general requirement has resulted in differing interpretations of what will ultimately be required in terms of dismantlement, removal, and restoration on the North Slope by the parties involved. In April 2002, the Senate voted to block S.A. 3132, which would have authorized drilling for oil and gas in the Arctic Refuge. However, the Senate and House energy bills must still be reconciled in conference, where, once again, members of Congress have the opportunity to reconsider. Generally, existing bond amounts for oil industry activities for federal lands on the North Slope will not cover the potential costs of eventual dismantlement, removal, and restoration activities. Financial assurances, such as bonds, can ensure that if a company defaults on a lease or contract, the obligations will still be completed. The amount of the financial assurance can be fixed or can vary and be based on, among other things, such factors as the company’s experience and financial viability and the estimated cost of future restoration. While BLM has some bonding requirements on its land and on FWS refuges, its $300,000 bond for all leases a company holds in the NPR-A and its $25,000 amount for a statewide bond on refuges are unlikely to meet all restoration costs that could be incurred on the lands. Although both BLM and MMS have the authority to ensure that full funding be available for restoration activities, only MMS has implemented a general bonding structure that provides for higher bond amounts as the scope of oil industry activity increases. The Corps has not required any financial assurance that funds will be available to conduct DR&R requirements as part of its permit process on the North Slope. In the NPR-A, the Bureau of Land Management requires oil companies to post a bond for oil activities conducted on federally leased land. BLM bonds are used to ensure compliance with all the terms of the lease, including the payment of rentals and royalties and the performance of DR&R. Specifically, BLM requires a minimum bond of $100,000 per lease, or a $300,000 bond for all leases a company holds in the NPR-A, or a rider upgrading a nationwide bond to $300,000. Currently, most companies operating in the NPR-A have nationwide bonds; these bond amounts will only cover a small fraction of the potential future DR&R liability. Although BLM has the authority to require full financial assurance to fund the cost of DR&R, it has not yet done so. According to BLM officials, its current bond amounts are not intended to cover the full cost of future restoration activities, but instead serve as an assurance of performance. Generally, BLM officials in Alaska do not believe it necessary for major oil companies operating in the NPR-A to provide full financial assurance that they will comply with their lease requirements, including DR&R. BLM officials noted that these companies are large international firms whose future business depends on the successful completion of all lease requirements and whose total assets will easily cover the full cost of DR&R. BLM’s field manager in Alaska stated that when the companies go from exploration to production in the NPR-A, BLM plans to determine whether the existing bonding amounts are adequate. At that time, if BLM deems it necessary, it can increase the required bond amounts. In addition, this official noted that if a large company sells its NPR-A interests to a smaller firm, BLM would again review the need to increase bond amounts. In national wildlife refuges, BLM also issues leases for oil exploration, development, and production activities and requires companies to post a bond. FWS may require additional bonding from companies operating in a wildlife refuge as part of a right-of-way permit. Specifically, in wildlife refuges, BLM requires a minimum bond amount of $10,000 per lease, $25,000 for a statewide bond, or $150,000 for a nationwide bond. In addition, if oil companies’ activities such as the construction of roads or pipelines disturb refuge lands outside the BLM leased area, FWS requires the companies to post bonds as part of the process to obtain right-of-way permits. The amounts of these bonds vary according to the scope and type of activity. FWS does not prescribe a set amount for the bond. According to an FWS official in Alaska, in the limited instances where FWS has required bonds, the bonds have not exceeded $150,000. FWS officials stated that they believe neither BLM’s nor FWS’s bonding requirements are sufficient to cover the potential cost of future land restoration. Some of the bills recently considered by Congress regarding the opening of the Arctic Refuge to oil and gas development also address the financial assurance issue. For example, S. 388 included a bonding requirement to ensure the financial responsibility of the lessee. Specifically, the Senate bill required the Secretary of the Interior to establish bonding requirements “to ensure the complete and timely reclamation of the lease tract and the restoration of any lands or surface waters adversely affected by lease operations after the abandonment or cessation of oil and gas operations on the lease.” The bonding arrangement in S. 388 would have been in addition to any existing bonding requirements that could be applied by the federal agency or agencies responsible for managing oil industry activities in the Arctic Refuge. Under S. 388, the Secretary of the Interior, in accordance with an approved exploration or development and production plan, would determine the specific amount of the bond or financial arrangement. In contrast, H.R. 4 didn’t address financial assurances or contain provisions for bonding. Under this bill, bonding requirements for the Arctic Refuge could be the same as those authorized for other refuges. As previously discussed, requiring the minimum BLM and FWS bond amounts would not be sufficient to cover the potential cost of future land restoration. MMS has the authority to require companies conducting operations in federally regulated waters to provide full financial assurance that funds will be available to conduct dismantlement, removal, and restoration activities. MMS’s bonding requirements for its offshore leases on the Outer Continental Shelf are based on an escalating scale and depend on what activity is occurring. Specifically, MMS regulations state that every owner of an OCS oil and gas lease must maintain a $50,000 lease bond or a $300,000 area-wide bond for all oil and gas leases in the state. The intended purpose of these bonds is to ensure compliance with all the terms and conditions of the lease. In addition, if exploration or development and production activities occur, MMS requires total bond amounts to increase to $200,000 and $500,000, respectively. Furthermore, under MMS regulations, the regional director has the authority to require additional bonding if a determination is made that additional financial assurances are needed to cover potential underpayment of royalties or obligations to remove infrastructure, such as drilling platforms, and clear the seafloor of obstructions. According to MMS officials, the complete bonding package is intended to cover the delinquent royalties, abandonment, and final site clearance and takes into account, among other things, the company’s experience and financial viability, as well as the estimated future cost of restoration. The history of oil industry activities on federal lands of the North Slope demonstrates the importance of adequate financial assurances for the taxpayers. The federal government’s oil exploration activities on the North Slope have resulted in its current DR&R responsibility for many improperly abandoned well sites. These well sites are now commonly known as legacy wells. Starting in 1945 and continuing through 1981, the U.S. Navy and the USGS drilled 126 wells in the area now known as the NPR-A. According to BLM, the federal government is currently responsible for the cleanup of 102 of these wells. Ownership of the other 24 wells was transferred to the North Slope Borough to assist in gas production for local use. According to BLM, of the 102 wells, the Navy drilled 76 of them in the 1940s and 1950s, and drilled a single well in 1975 that was properly plugged and abandoned. The USGS was responsible for drilling the remaining 25 wells. According to BLM, 3 of the 25 USGS wells have been properly plugged and abandoned, 1 has not been properly plugged and abandoned, and USGS is currently using 21 for climate studies. According to USGS, these study wells are extremely valuable for long-term climate information and should remain unplugged. As a result of inadequate dismantlement and restoration requirements, about 80 wells drilled on federal lands under the federal government’s direction remain improperly plugged and abandoned. The federal government is responsible for cleaning up the improperly abandoned wells and drill sites. In 1976, the Navy initiated a cleanup program for its own well sites, which USGS assumed in 1977. In later years, USGS assumed responsibility for cleaning up both the Navy’s and its own sites. Although no precise records exist, during a 7-year period the agencies collected and removed thousands of tons of debris and over 50,000 55- gallon drums, at a cost of over $7 million (late 1970s and early 1980s dollars) from NPR-A sites. Additionally, in 1995, the state’s Department of Environmental Conservation decided that no further cleanup work was required on 27 NPR-A drilling waste sites to reduce their risk to the area’s surface waters. However, according to BLM officials, most of the abandoned wells and surrounding sites still need additional work, including the proper plugging of wells and restoration of the surface area. The officials also noted that some of these legacy wells have leaked oil, gas, and other substances, and have the potential to create a future environmental hazard. However, remote locations and severe weather make it difficult to access the well sites and very expensive to reclaim them. For example, in 1999, BLM authorized a study of the cost to properly plug and abandon 11 Navy well sites in the Umiat area of the NPR-A. The contractor conducting the study estimated the cost to be almost $7 million. However, in 2001, when the Corps of Engineers approved the plugging and surface remediation of 2 of the 11 Umiat well sites under an existing contract, the total cost had escalated to about $16 million. According to the Corps, this cost escalation was caused primarily by increases in the cost of accessing the area, unanticipated problems with plugging one of the wells, and an increase in the amount of surface that needed to be rehabilitated. Further insights on the cost of cleaning up of these old well sites are provided in a September 2001 BLM draft internal working document. The document estimates that just plugging the wells in NPR-A will cost more than $100 million over the course of 10 to 20 years. Another example of an abandoned site on federal land is at Sagwon, Alaska. Sagwon served as an oil company aviation base and staging area. It was built in the 1960s and was used commercially until the mid-1970s. However, it was not until 1975 that the owner obtained a lease from BLM to operate an airport on the property. In 1985, after the site had been abandoned, BLM approached the lessee, asking it to remove roughly 4,500 metal drums and several tons of scrap metal, clean up unused drilling fluids, and remove other miscellaneous debris left on the site. The lessee refused and later filed for bankruptcy. In 1993, BLM asked oil companies that may have used the airfield to help clean up the site. In response, BP, ARCO, and Alyeska (TAPS’s operating company) voluntarily agreed to clean up the 2,500-acre site. According to BP officials, by the time the cleanup was finished in 2000, it cost $2 million to complete and required the removal of 138 tons of waste from the site. Although the surface dismantlement, removal, and restoration is finished, according to a BLM official, some subsurface issues remain. DR&R requirements and financial assurances for similar infrastructure and other energy-related industries are more explicit than those applied to the oil industry on the North Slope. The Trans-Alaska Pipeline System, which is similar in purpose and geography to other oil industry infrastructure on the North Slope, has DR&R requirements and fixed financial arrangements. TAPS established these requirements prior to construction of the pipeline and negotiated the financial arrangements later. Furthermore, both hardrock and coal mining have reclamation requirements for surface lands that are determined before the initiation of any mining activities. Federal regulators also require mining companies to demonstrate full financial assurance that these requirements will be met. Finally, decommissioning requirements for all nuclear power plants are established by federal regulation; the regulations also require financial assurances sufficient to fully fund decommissioning. The Trans-Alaska Pipeline System has DR&R requirements contained in the 1974 right-of-way lease agreement between the federal government and the state of Alaska. Specifically, the 30-year right-of-way lease contains a stipulation that when the pipeline is no longer used (“completion of use”) the lessee shall “promptly remove all improvements and equipment…and shall restore the land….” In general, this stipulation has been understood to mean the complete dismantlement and removal of the above-ground portion of the pipeline (the buried portion of the pipeline would be purged of residue and capped in place) and associated infrastructure and restoration of the land on which the pipeline was built. The lease does not provide specific restoration requirements; instead, it requires the lessee to restore the land to a condition that is approved by federal and state officers. Even so, the U.S. Tax Court found in May 2000 that “in contrast to the generally vague language of the leases relating to oil company obligations… language in the TAPS right of way…is more specific.” Regarding financial assurances, the Federal Energy Regulatory Commission, which regulates pipeline fees, permits the pipeline owners (Alyeska) to collect tariffs from pipeline users sufficient to fully fund eventual DR&R. The amount collected by TAPS’s owners for DR&R has varied by year of operation, ranging between $127 million in 1980 and $2.4 million in 1999, for a total of $1.5 billion in collections through 1999. The tariffs were last adjusted in 1985 under a settlement agreement between the TAPS’s owners, the state of Alaska, and the Department of Justice. The pipeline’s owners do not have to place collected funds for DR&R in escrow or any other special account. Instead, TAPS’s owners can reinvest those funds as they choose, but retain a liability to fund DR&R costs. If funds collected exceed the cost of DR&R, as some assert they will, the owners of the pipeline may realize additional benefits if they are not required to refund excess funds collected. The federal government requires other extractive industries, such as hardrock mining and coal mining, to restore surface land that is disturbed during mining operations and related activities. For example, both BLM, which regulates hardrock mining on its lands, and Interior’s Office of Surface Mining (OSM), which regulates the surface aspects of coal mining itself or through states with approved programs for regulation of surface coal on any land, require operators to obtain approval of their reclamation plans before mining operations can begin. As part of the approval process, operators are required, by regulation, to develop a reclamation plan that describes in detail how land that is disturbed will be restored after mining activities cease. The plan must describe how the operator will reclaim the land to meet specific requirements, such as backfilling and grading the mine pit; reshaping the disturbed land to blend with pre-mining natural topography; achieving successful revegetation; and removing roads and structures that are not approved for retention. Mining operators are required to perform the activities specified in their approved reclamation plan or face a financial penalty. Both BLM and OSM require the hardrock and coal mining industries, respectively, to provide financial assurance sufficient to cover the full cost of reclamation before mining operations can begin. Under federal regulations, companies that engage in hardrock mining on BLM lands or surface coal mining on any lands must submit a cost estimate for the DR&R activities specified in their reclamation plan before the start of mining activities. The cost estimate must represent the full amount that the regulatory authority—BLM, OSM, or state—would need to reclaim the disturbed area if the mining operator were unwilling or unable to complete the planned reclamation. The estimate must also include the regulatory agency’s cost to contract with a third party to do the work and administer the contract. Mining operators may provide financial assurance in many different forms, such as pledged assets of the operator including cash, certificates of deposit, negotiable bonds, and investment-grade securities; surety bonds; or irrevocable letters of credit. The Nuclear Regulatory Commission, the federal entity that regulates the nation’s civilian use of nuclear power and materials, requires its licensees, as a condition for obtaining a license to operate a nuclear power plant, to agree to decommission (i.e., clean up) the plant after operations cease. The commission has specific requirements for acceptable radiation levels that decommissioning must accomplish. Such requirements vary depending upon, among other things, the proposed future use of the land. For example, a decommissioned site may have unrestricted future use if the residual radiation at the site would not cause a person to receive a total effective dose equivalent in excess of 25-millirems of radiation per year after decommissioning, and this level of reduction is as low as is reasonably achievable. The commission does not require the licensee to submit a decommissioning plan before obtaining a license. Rather, within 2 years following permanent cessation of a plant’s operations, the licensee must provide the commission with a plan describing the decommissioning activities that the licensee will perform to meet a radiation standard. Such activities may include removing the spent nuclear fuel, dismantling structures containing radioactive materials that were created in the power- generating process, and removing other materials that were contaminated during the process. The Nuclear Regulatory Commission does not release the plant licensee from its liability for the site until decommissioning is completed and the license is terminated. Nuclear power plant licensees must also provide financial assurance that the decommissioning work will be done, and must provide the assurance before plant decommissioning begins. Beginning at plant licensing, and at various times throughout a plant’s operations, the commission reviews the adequacy of the financial assurance. The financial assurance amount must be equal to or greater than the amount specified in the commission’s regulations; amounts are based on the type of reactor and its power level. Plant licensees may provide financial assurance in one or more of the following ways: periodic deposits (at least annually) into a trust fund outside of the owner’s control; prepayment of the entire estimated decommissioning liability into a trust fund outside of the owner’s control; obtaining a surety bond, insurance, letter of credit, or line of credit payable to a trust established for decommissioning costs; or guaranteeing the payment of decommissioning costs, provided that the guarantor (usually an affiliate or parent company of the owner) passes specific financial tests. In the past, the lack of dismantlement, removal, and restoration requirements and inadequate financial assurances have led to some improperly abandoned sites and subsequent environmental problems on both federal and state land located on Alaska’s North Slope. To date, most oil production has occurred on state-owned land, and for this reason the state of Alaska has borne responsibility for cleaning up these sites when oil companies or their related industries have failed to do so. However, with oil exploration activities underway in the NPR-A and on the Outer Continental Shelf, and the Congress currently debating whether to open the Arctic Refuge’s coastal plain to oil and gas development activities, the need for federal dismantlement, removal, and restoration requirements, and assurances that funds will be available to implement those requirements, is becoming increasingly important. Presently, the Bureau of Land Management has not established specific DR&R requirements for oil production activities in the NPR-A. In addition, its current minimum bond amounts are fixed, do not reflect differences in company experience and financial viability, and would only cover a fraction of the potential future cost of DR&R. Furthermore, since the Congress has not yet authorized oil and gas industry activities in the Arctic Refuge, neither the Bureau of Land Management nor the Fish and Wildlife Service has developed specific DR&R requirements for the refuge. The Fish and Wildlife Service, like the Bureau, uses bond amounts that are not sufficient to meet the potential future cost of restoration. Both agencies need to ensure that their financial guarantees are adequate in case a company is unwilling or unable to pay for returning the land to whatever standard has been established. To do otherwise would leave the taxpayer with an unacceptable risk. Paramount to the development of any DR&R requirements should be a determination of what the ultimate restoration goal of these areas should be. In the NPR-A, this decision has been made; that is, the Bureau wants the land returned to a condition that will support its previous uses, such as fish and wildlife habitat and subsistence use by Alaska Native villagers. What remains to be done is for the Bureau to establish specific DR&R requirements that will allow companies to meet that goal. Should the Congress decide to open the Arctic Refuge to oil industry activities, it would be important for the Congress to consider establishing a legislatively mandated restoration goal for the disturbed area. This would allow the Secretary of the Interior to establish specific DR&R requirements aimed at meeting that goal. In turn, specific requirements would provide oil companies with another piece of information they need to make better investment decisions on whether the potential benefits of oil industry activities in the Arctic Refuge are worth the cost. Goals, like all plans, can change over time. However, if a restoration goal for the Arctic Refuge is not established before oil exploration begins, there will only be continued debate similar to that faced by the state of Alaska on its restoration requirements for state-owned land on the North Slope. In addition, establishing a mechanism that would ensure that funds were available to meet those requirements would protect taxpayers, should lessees default. In order to ensure that the lands of the National Petroleum Reserve-Alaska are properly restored after oil and gas activities there cease, we are recommending that the Secretary of the Interior instruct the Director of the Bureau of Land Management to issue specific dismantlement, removal, and restoration requirements that will allow the BLM to meet its overall goal of returning the land to a condition that will sustain its previous uses, including fish and wildlife habitat as well as subsistence uses. In addition, we recommend that the BLM review its existing financial assurances for oil and gas activities in the National Petroleum Reserve-Alaska to determine whether they are adequate to ensure the availability of the funds needed to achieve its overall restoration goal. Any future decision to open additional federal lands to oil and gas activities, including those on Alaska’s North Slope, is a public policy decision that rests with the Congress. In making such a decision, one factor that would be important to consider is the restoration of the land after oil and gas activities are completed. If the Congress wants to provide guidance on the condition to which these lands should be returned following the completion of such activities, it should consider providing in the authorizing statute a restoration goal that will allow the federal agency or agencies responsible for developing dismantlement, removal, and restoration requirements to have a clear understanding of what the Congress wants achieved, and specific assurances that the federal agency or agencies responsible for implementing dismantlement, removal, and restoration requirements will obtain adequate financial assurances that funds will be available to meet the goal of returning the land to a condition that the Congress has specified. The Department of the Interior agreed with our recommendation that the Bureau of Land Management issue specific dismantlement, removal, and restoration requirements that will allow the Bureau to meet its overall goal of returning the land to a condition that will sustain its previous uses, including both fish and wildlife habitat and subsistence uses. The department stated that the Bureau plans to accomplish this by attaching special stipulations and conditions of approval on a lease-by-lease basis. The state of Alaska, however, disagreed with this recommendation. The state commented that dismantlement, removal, and restoration requirements can be better addressed when oil production ceases and the obligation actually becomes due. The state believes that this approach provides greater flexibility and will allow the state to ultimately issue requirements that reflect changes in, among other things, technology and the regulatory environment. The state also commented that our recommendation does not recognize the scope of the government’s power to change the regulatory standards it adopts and ignores the fact that specific standards that seem appropriate today may not be appropriate at some distant point in the future. We did not draw any conclusions nor make any recommendations concerning the appropriateness or inappropriateness of the state of Alaska’s current dismantlement, removal, and restoration practices for its lands. Currently, the state has no restoration goal for its North Slope lands that have been used for oil and gas activities. Without a restoration goal, we agree with the state that it would be difficult to issue specific DR&R requirements. We also acknowledge in our report that restoration goals and the specific processes used to achieve those goals can change as technology, science, and circumstances change. However, the Bureau of Land Management has established a restoration goal for its lands used for oil and gas activities in the National Petroleum Reserve-Alaska. That goal is to return the lands to a condition that will sustain its previous uses, including both fish and wildlife habitat and subsistence uses. As such, we believe, and the Department of the Interior concurs, that it is appropriate for the Bureau to establish specific dismantlement, removal, and restoration requirements to achieve that goal prior to the initiation of oil production activities. Doing so will provide the oil companies with better information on what is expected of them, which will allow them to make better investment decisions, and if they decide to proceed, will allow for better planning and budgeting to achieve restoration. The state of Alaska also commented that it disagrees with GAO that the Congress, when considering opening additional federal lands to oil and gas activities, should consider establishing a restoration goal for that land in the authorizing statute. In general, the state believes that, as with dismantlement, removal, and restoration requirements, restoration goals can be better set at some future date closer to the actual time that oil and gas activities cease. The state points out in its own comments that both oil companies and environmentalists, two groups that are usually opposed, would prefer to know what restoration activities the state has planned for the North Slope because each currently perceives a risk that their view of the appropriate level of DR&R may not be adopted by the state in the future. By recommending the establishment of restoration goals for federal lands prior to the start of oil and gas activities, it is our intent to alleviate such concerns and allow all interested parties the opportunity to make informed decisions on these matters before the land is used. Further, establishing goals prior to oil and gas activities would provide for greater transparency and allow for agreements to be reached on what restoration will be required. The Department of the Interior also agreed with our recommendation that the Bureau of Land Management review its existing financial assurances for oil and gas activities in the National Petroleum Reserve-Alaska to determine if they are adequate to ensure that funds will be available to achieve its overall restoration goal. The department stated that this review would focus on protecting the environment and taxpayers, should lessees default. The state of Alaska, however, commented that it disagrees with this recommendation. According to the state, GAO is suggesting that financial assurances greater than those required by the state of Alaska should be adopted for federal lands on the North Slope, even though Alaska’s bonding requirements are among the highest in the nation. Our report does not make any comparison of the state of Alaska’s financial assurances to those of federal agencies that manage land on the North Slope. Further, the report does not make any determination regarding what level of financial assurance should exist. GAO does report that the Bureau’s current minimum bond amounts are fixed, do not reflect differences in oil company experience and financial viability, and would only cover a fraction of the potential future cost of DR&R. We also state that the level of financial assurance required will vary depending on such factors. As a result, we continue to believe that the Bureau should review its existing financial assurances for oil and gas activities in the National Petroleum Reserve-Alaska to determine whether they are adequate to assure the availability of funds necessary to achieve its overall restoration goal for the land after oil and gas activities cease. | This report discusses the nature and extent of dismantlement, removal, and restoration requirements for oil industry activities that are occurring on both federal and state lands located on the North Slope of the state of Alaska. The state of Alaska, which owns the lands where most of the North Slope's current oil production occurs, has adopted general dismantlement, removal, and restoration requirements that contain no specific stipulations on what infrastructure must be removed or to what condition the lands used for oil industry activities must be restored once production ceases. Alaska's requirements are similar to those of some states but less explicit than those of other states, which create a fixed obligation to fully restore the land according to specific requirements. Until the state of Alaska defines the condition in which it would like its lands returned, there is no way to accurately estimate the cost of dismantling and removing the infrastructure and restoring the disturbed land on Alaska's North Slope. Existing financial assurances, such as bonding requirements, ensure the availability of only a small portion of the funds that are likely to be needed to dismantle and remove the infrastructure used for oil industry activities and to restore state-owned lands. Current dismantlement, removal, and restoration requirements and financial assurances for federal lands on the North Slope vary by agency, but are generally insufficient to ensure that any federal lands disturbed by oil industry activities will be restored. |
PT treatment consists of a planned program to relieve symptoms, improve function, and prevent further disability for individuals disabled by chronic or acute disease or injury. Health conditions that require physical rehabilitation, such as low back pain, bursitis, stroke, Parkinson’s disease, or arthritis, may benefit from PT services. Beneficiaries are eligible to receive outpatient PT under Medicare Part B, which covers diagnosis and treatment of impairments, functional limitations, disabilities, or changes in physical function and health status. Medicare-covered outpatient PT services are provided in institutional settings such as hospital outpatient departments and skilled nursing facilities, as well as noninstitutional settings such as physicians’ offices and PT clinics. To be covered by Medicare, outpatient PT services must be medically necessary, furnished while the beneficiary is or was under the care of a physician, and provided under a written plan of care established by an appropriate medical professional, such as a physician or physical therapist. The plan of care is required to contain, among other information, the amount, duration, and frequency of PT services. The plan of care must be certified by a physician or nonphysician practitioner within 30 days of the initial therapy treatment, and must be recertified at least every 90 days after the initial treatment. Medicare does not require that a beneficiary obtain a physician referral to initiate PT services. However, if a physician referral for PT services is documented in the medical record, it provides evidence that the patient was under the care of a physician. PT services are billed using Healthcare Common Procedure Coding System (HCPCS) codes; examples of HCPCS codes for PT services include therapeutic exercises and massage therapy. Each Medicare claim for PT can include one or more HCPCS codes, as well as one or more 15-minute “units” for each timed code. The total number of PT services provided to Medicare beneficiaries increased nearly 30 percent from 2004 through 2010. Over this period, the number of self-referred PT services was generally flat, while the number of non-self-referred PT services increased. In addition, expenditures increased over this time period for both self-referred and non-self-referred PT services, but this increase was larger for services that were not self-referred. The total number of PT services provided to Medicare beneficiaries increased nearly 30 percent from 2004 through 2010, despite a small decrease in the total number of FFS beneficiaries over this same period. From 2004 to 2010, the number of services per 1,000 FFS beneficiaries that we identified as self-referred was generally flat—about 320 services in both 2004 and 2010 (see fig. 1).referred PT services per 1,000 FFS beneficiaries grew by about 41 percent, from about 903 in 2004 to about 1,275 services in 2010. Because of the rapid growth in non-self-referred PT services, the In contrast, the number of non-self- proportion of PT services that were self-referred decreased from about 24 percent in 2004 to about 18 percent in 2010. The overall increase in PT services is likely due, in part, to an increase in the proportion of Medicare beneficiaries receiving these services. In 2004, approximately 4 percent of all Medicare FFS beneficiaries received PT services; this increased to approximately 6 percent in 2010. However, from 2004 through 2010, the number of beneficiaries that received self- referred PT services increased only 12 percent, while the number of beneficiaries that received non-self-referred PT services increased nearly 44 percent. In addition, the number of both self-referred and non-self- referred PT services temporarily declined in 2006, likely due to the reinstatement of the therapy payment cap on PT services. Expenditures for both self-referred and non-self-referred PT services grew from 2004 to 2010, but the increase was smaller for self-referred services (see fig. 2). Specifically, expenditures for self-referred services increased from $389 million to $428 million, an increase of about 10 percent. In contrast, expenditures for non-self-referred services increased from $1.2 billion in 2004 to $1.9 billion in 2010, an increase of about 57 percent. The larger increase in non-self-referred expenditures from 2004 to 2010 reflects the disproportionate increase in the number of beneficiaries receiving non-self-referred PT services over this period as well as more rapid growth in the number of 15-minute units billed for non- self-referred PT services. The overall relationship between provider referral status and the average number of PT services referred per provider was mixed and varied on the basis of referring provider specialty, Medicare beneficiary practice size, and geography. For example, self-referring family practice and internal medicine providers in urban areas, on average, generally referred more PT services in 2010 than their non-self-referring counterparts. Self- referring orthopedic surgeons, on average, generally referred fewer PT services than non-self-referring orthopedic surgeons. In addition, self- referring providers generally referred more beneficiaries for PT services, on average, than non-self-referring providers after accounting for differences in provider specialty, Medicare beneficiary practice size, and geography.fewer PT services per beneficiary than non-self-referring providers. Providers’ referrals for PT services increased the year after they began to self-refer at a greater rate than non-self-referring providers. In 2010, the relationship between provider referral status and number of PT services referred across all beneficiaries differed on the basis of geography, provider specialty, and Medicare beneficiary practice size. In urban areas, self-referring providers generally referred more PT services, on average, than non-self-referring providers, with some exceptions (see table 1). For example, self-referring family practice providers in urban areas referred more services, on average, than non-self-referring family practice providers in every beneficiary practice size category. In contrast, self-referring orthopedic surgeons in urban areas referred fewer PT services, on average, in every beneficiary practice size category except the middle category (101 to 250 beneficiaries). In rural areas, self-referring providers in the three specialties generally referred fewer PT services, on average, than non-self-referring providers, with some exceptions, as shown in table 2. For example, self-referring family practice providers with a beneficiary practice size greater than 500, and orthopedic surgeons in rural areas with a beneficiary practice size of 251 through 500 beneficiaries referred more PT services, on average. Self-referring providers generally referred more beneficiaries for PT services during 2010, on average, but referred fewer PT services per beneficiary compared with non-self-referring providers. Specifically, in urban areas, self-referring providers in family practice, internal medicine, and orthopedic surgery referred more beneficiaries for PT services on average, than their non-self-referring counterparts in every Medicare beneficiary practice size category. However, the magnitude of the differences between the two groups varied by specialty and practice size. For example, the average number of beneficiaries referred by self- referring orthopedic surgeons was 13 to 29 percent higher than for their non-self-referring counterparts, depending on the beneficiary practice size category, while the average number of beneficiaries referred by self- referring family practice providers was approximately 43 to 87 percent higher than for their non-self-referring counterparts, depending on the beneficiary practice size category (see table 3). In general, self-referring providers in rural areas also tended to refer more beneficiaries for PT services across provider specialties and practice size categories. In rural areas, self-referring providers in family practice in our smallest beneficiary practice size category and orthopedic surgery with a practice size of 51 to 100 beneficiaries referred fewer beneficiaries for PT services, on average, than their non-self-referring counterparts. However, in all other instances, self-referring providers in rural areas referred more beneficiaries for PT services, on average, than their non-self-referring counterparts. For example, self-referring internal medicine providers in rural areas referred about 25 to 94 percent more beneficiaries than their non-self-referring counterparts, depending on the beneficiary practice size category (see table 4). While self-referring providers generally referred more beneficiaries during 2010, beneficiaries referred by self-referring providers in family practice, internal medicine, and orthopedic surgery received fewer PT services, on average, compared with beneficiaries referred by non-self-referring providers. For example, in urban areas, beneficiaries referred by self- referring family practice providers received 12 to 28 percent fewer PT services, on average, compared with beneficiaries referred by non-self- referring family practice providers, depending on the beneficiary practice size category (see table 5). In rural areas, beneficiaries referred by self-referring providers in family practice, internal medicine, and orthopedic surgery received fewer PT services, on average, than their non-self-referring counterparts in every practice size category (see table 6). Observed differences between self-referring and non-self-referring providers within each specialty in the number of PT services referred are not likely due to differences in the overall health status of the beneficiaries they referred. We found that self-referring and non-self-referring providers referred beneficiaries who were similar with respect to their average Medicare risk scores and disability status (see table 7). For example, self-referring and non-self-referring family practice providers referred beneficiaries whose average estimated cost to Medicare in 2010 was about 30 percent higher than for the average FFS beneficiary (31 and 33 percent higher, respectively). Some of the differences between self-referring and non-self-referring providers in the number of PT referrals may be due to differences in the severity or type of medical conditions of the beneficiaries that they referred for PT treatment. Although data on the severity of beneficiaries’ medical conditions requiring PT treatment were not available for our study period, we found some differences in the extent to which self-referring and non-self-referring providers referred beneficiaries for selected diagnoses (see table 8). For example, self-referring family practice, internal medicine, and orthopedic surgery providers were more likely to refer beneficiaries who were treated for spine conditions. Non-self- referring providers in these specialties were more likely to refer beneficiaries who were treated for neurologic conditions or rehabilitation. In addition, we found some differences in the types of PT treatments used by self-referring and non-self-referring providers. For example, during 2010, self-referring providers in family practice and internal medicine were more likely to refer beneficiaries who were treated with ancillary services such as massage therapy and electrical stimulation. In contrast, non-self-referring providers in these specialties were more likely to refer beneficiaries who were treated with gait training and therapeutic activities (see app. II, which presents tables that show the distribution of PT services by provider specialty and self-referral status). PT service referrals for providers in family practice, internal medicine, and orthopedic surgery increased the year after they began to self-refer at a higher rate relative to non-self-referring providers of the same specialty. We compared the average number of PT service referrals made by providers that began self-referring beneficiaries for PT services in 2009 and continued doing so in 2010 (“switchers”) with the average number of service referrals made by providers who were non-self-referring between 2008 and 2010. The percentage increase in average PT service referrals for switchers between 2008 and 2010 ranged from approximately 7 percent for orthopedic surgeons to 33 percent for family practice providers. In contrast, the percentage increase in the average number of PT service referrals for non-self-referring providers during this time was lower, ranging from approximately 4 percent for orthopedic surgeons to 14 percent for family practice providers (see table 9). The percentage point difference in the number of PT services referred between switchers and non-self-referring providers was higher for family practice and internal medicine providers (approximately 20 percent and 18 percent, respectively) and lower for orthopedic surgeons (approximately 4 percent). This is consistent with our earlier finding that self-referring family practice and internal medicine providers tended to have higher relative referral rates, on average, than their non-self-referring counterparts in 2010, while this effect was much more limited for orthopedic surgeons. By improving patients’ physical functioning, strength, or mobility, PT treatment offers many Medicare beneficiaries the opportunity to restore function that they may have lost due to illness or injury. Proponents of PT self-referral contend that it has the potential to improve coordination of care and provide convenient access to PT services. Our review indicates that PT service use and expenditures grew considerably from 2004 to 2010, despite a slight decrease in the total number of FFS beneficiaries over this period. The primary driver of this growth was growth in non-self- referred services. These results differ from our prior work on self-referral of other Medicare services—namely, advanced imaging, anatomic pathology, and intensity-modulated radiation therapy—in which we reported that self-referred services and expenditures grew faster than non-self-referred services and expenditures. One potential reason for this difference is that non-self-referred PT services can be performed by providers who can directly influence the amount, duration, and frequency of PT services through the written plan of care required by Medicare. In contrast, non-self-referred services we examined for our prior work tend to be performed by providers who have more limited ability to generate additional services or referrals; for example, radiologists generally do not have the discretion to order more imaging services or more intense imaging procedures. Regardless, substantial growth in PT services raises concerns about higher costs for Medicare and beneficiaries. Although this growth is primarily due to non-self-referred services, we found notable differences between non-self-referring and self-referring providers. For example, we found that average PT service referrals, average PT beneficiary referrals, and average PT services per beneficiary differed based on whether the providers self-referred; further, PT service referrals increased the year after a provider began to self-refer at a higher relative rate to non-self- referring providers of the same specialty. Better understanding the differences in referral patterns between self-referring and non-self- referring providers may provide useful information to help manage growth in PT services. In 2013, CMS began collecting additional information on beneficiary functional status on all PT claims. These data may help CMS to better assess the appropriateness and effectiveness of PT treatment provided by both self-referring and non-self-referring providers. We provided a draft of this report to HHS, which oversees CMS, for comment. HHS thanked GAO for the opportunity to review the draft and stated that it had no comments. We obtained written comments from four professional associations selected because they represent an array of stakeholders with specific involvement in referring PT services: the American Academy of Family Physicians (AAFP), which represents physicians in family practice; the American Academy of Orthopaedic Surgeons (AAOS), which represents orthopedic surgeons; the American College of Physicians (ACP), which represents physicians in internal medicine; and the American Physical Therapy Association (APTA), which represents physical therapists. The following sections contain a summary of these organizations’ comments on our methodology and findings and our response to these comments. We incorporated any technical comments provided where appropriate. AAFP appreciated the opportunity to review the draft report, but expressed a concern that our methodology to define self-referring providers as those with at least one self-referred PT service to a professional office may skew our results if the majority of the PT services referred by several self-referring providers were not self-referred. We applied this same threshold in our previous work on self-referral, as it is a conservative method for determining providers’ self-referral status. Furthermore, we examined the distribution of self-referred PT services to professional offices during 2010 and found that providers who self-refer tended to self-refer a majority of the PT services utilized. AAFP also provided some context for our findings, noting that some factors may account for our finding that overall spending for PT services increased. For example, AAFP stated that health insurers have encouraged providers to use imaging procedures, surgery for back pain, and medications that manage pain (such as opioids) less frequently. According to AAFP, some providers may be choosing to use less imaging and treat fewer patients with surgery or opioids and instead manage these patients by referring them for PT services. AAFP considers PT a more cost-effective yet less invasive way to treat patients. In addition, AAFP believes that one possible explanation for GAO's finding that self- referring providers referred fewer PT services per beneficiary, on average, than non-self-referring providers, is that providers who self-refer are likely to fully understand the variety of services that are available in the PT facility for which they have an ownership interest. AAOS appreciated the opportunity to review the draft report and was pleased to see that the data showed that self-referring orthopedic practices generally self-referred the smallest number of PT services per beneficiary on average when compared to other specialty groups in our study. However, AAOS stated that it did not believe there was a rationale for examining “switchers”—providers who became self-referrers during our period of study—because we found that self-referring providers referred fewer services per beneficiary on average. We conducted an analysis of switchers to isolate the effects of self-referral, using a methodology similar to our previous reports on self-referral in Medicare. As noted in the draft report, the average number of PT service referrals made by providers that began self-referring beneficiaries for PT services in 2009 increased at a higher rate relative to non-self-referring providers of the same specialty during our period of study. Specifically, among these “switchers,” the percentage increase in average PT service referrals between 2008 and 2010 was approximately 4 percentage points higher for orthopedic surgeons, 18 percentage points higher for internal medicine providers, and 20 percentage points higher for family practice providers. AAOS made two additional points for our consideration. First, AAOS noted that self-referring orthopedic surgeons may also refer some services outside of their practice. Our analyses provided a picture of self- referral at both the service and provider levels. Specifically, for our analysis of trends between 2004 and 2010 in the utilization of and expenditures for self-referred and non-self-referred services, we examined each PT service to determine if it was self-referred or not by matching the Taxpayer Identification Number (TIN) on the claim with a crosswalk of the TINs associated with each provider submitting claims. This method allowed us to examine utilization and spending for each PT service—self-referred and non-self-referred. For our analysis of self- referring providers, as we note in the draft report, we considered a provider to be non-self-referring if the provider referred at least one beneficiary for a PT service in a professional office and did not self-refer any PT services. Conversely, we considered a provider to be self- referring if the provider self-referred at least one beneficiary for a PT service that was provided in a professional office during our period of study. Second, AAOS noted that nine states have changed their laws governing self-referral to PT services during the study period and that this may impact our results. We agree that this may impact our results, but examining state laws governing self-referral were outside the scope of this report. ACP stated that a major conclusion of our report, that the primary driver of growth in Medicare expenditures and utilization of PT services was due to non-self-referred PT services, differs from our prior work on self-referral for advanced imaging, anatomic pathology, and intensity-modulated radiation therapy services. According to ACP, this finding demonstrates the complex effects of self-referral on Medicare utilization and expenditures, which may be influenced by type of service as well as the other variables outlined in this report, such as provider specialty, geographic location, and Medicare beneficiary practice size. ACP also stated that the primary payment model can also affect the relationship between self-referral, expenditures, and utilization. For example, and other value- practices that participate in Medicare Shared Savingsbased payment models likely refer in a different manner than those paid predominantly through the traditional Medicare FFS payment system. While we agree that different payment models could affect physicians’ referral patterns, such payment models generally had not been implemented by Medicare at the time of our study. ACP also stated that it is important to consider the extent to which services are ordered on the basis of recognized appropriate use criteria. However, using appropriate use criteria can involve assessing the severity of symptoms in order to determine the appropriate course of treatment, and data on severity were not available at the time of our study. ACP believes that self-referral alone cannot explain expenditure growth differences and that, if utilized appropriately, self-referral allows for increased quality oversight by ordering physicians, better care coordination, and the potential for the provision of lower-cost care compared to alternative settings, such as hospitals. APTA acknowledged the thoroughness of the draft report and appreciated our comprehensive analysis. According to APTA, our findings that self- referring providers referred more beneficiaries for PT services, and that PT referrals for switchers in the three specialties we examined increased relative to non-self-referring providers, are consistent with other studies that found that providers have a financial interest to self-refer. However, APTA also expressed concerns about some of our results. Specifically, APTA noted that patient condition, physical impairments, and comorbidities have a major impact on the amount, duration, and frequency of PT services provided, and without this information it is difficult to draw conclusions about the impact of self-referral arrangements on the frequency of PT services. For example, APTA noted that the frequency of PT use could be attributed to differences in the complexity of the conditions of patients treated by self-referring compared with non-self-referring providers. It also expressed concern that the measures of health status in this report—such as disability status, average risk score, and Clinical Classification Software (CCS) diagnostic categories—are limited in their ability to explain differences in PT frequency. In this report, we state that some of the differences between self-referring and non-self-referring providers in the number of PT referrals may be due to differences in the severity or type of medical conditions of the beneficiaries that they referred for PT treatment. We also acknowledge that data on the severity of beneficiaries' medical conditions requiring PT treatment were not available for our study period. Given the lack of severity data, we examined risk scores, age, and disability status, and described these measures as "overall health status variables," and we present data on beneficiary diagnostic categories without labeling them as measures of severity. We also note that APTA agreed with our conclusion that data CMS began collecting in 2013 may help the agency to better assess the appropriateness and effectiveness of PT treatment for both self-referring and non self-referring providers. APTA also expressed concerns that including data on PT referrals to facilities, such as outpatient hospitals and skilled nursing facilities, may have affected the results shown in the tables in appendix II of this report, which compare the distribution of Medicare PT services for self-referring and non-self-referring providers. According to APTA, our assumption that all PT services referred to facilities were non-self-referred neglects a significant portion of self-referral arrangements. APTA also stated that because patients in facility settings tend to be more medically complex than patients seen in physician offices, these tables may make an unfair comparison. As we note in the limitations section of this report, we acknowledge that we may have understated the occurrence of certain self-referral arrangements, such as referring physician ownership of hospitals, by assuming that all PT services referred to facilities were non- self-referred. For example, some providers may have referred beneficiaries for PT services to hospital(s) in which they had a financial interest in the entire hospital, and, due to data limitations, we did not analyze the extent to which this type of referral may have occurred. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Secretary of Health and Human Services and relevant congressional committees, and others. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. This appendix describes the scope and methodology used to analyze our study objectives: (1) trends in the number of and expenditures for self- referred and non-self-referred Medicare physical therapy (PT) services from 2004 through 2010, and (2) how provision of these services differs among providers on the basis of whether they self-refer. For both objectives, we used 100 percent of fee-for-service (FFS) claims from the Medicare Part B Carrier file, which contains final action Medicare Part B claims for noninstitutional providers, such as physicians. For the second objective, we also used 100 percent of FFS claims from the Medicare Outpatient Claims file, which includes final action Medicare Part B claims for five types of facilities that also provide PT services: outpatient hospitals, skilled nursing facilities, comprehensive outpatient rehabilitation facilities, rehabilitation agencies, and home health agencies. Each Medicare claim contains data for one or more services for a particular beneficiary. Each service is identified on a claim by its Healthcare Common Procedure Coding System (HCPCS) code, which the Centers for Medicare & Medicaid Services (CMS) assigns to products, supplies, and services for billing purposes. To identify all PT services covered by Medicare, we used outpatient therapy HCPCS codes published in the Federal Register and in CMS’s Annual Therapy Update to identify the universe of outpatient therapy HCPCS codes in use from 2004 through 2010. We then used the HCPCS code claim modifier (for Carrier file claims) and Revenue Center code (for Outpatient file claims) to distinguish PT services from occupational therapy or speech-language pathology services. Because there is no indicator or flag on the claim that identifies whether services were self-referred or non-self-referred, we developed a claims-based methodology to identify services as either self- referred or non-self-referred. Specifically, we classified services as self- referred if the provider that referred the beneficiary for a PT service and the provider that performed the PT service were identical or had a To determine providers’ financial relationships, we financial relationship.used the Taxpayer Identification Number (TIN), which is either the Social Security Number or Employer Identification Number that an individual or organization uses to report tax information to the Internal Revenue Service. A TIN could be that of the provider, the provider’s employer, or another entity to which the provider reassigns payment. There may be one or multiple TINs for a medical group practice depending on the organizational structure of the practice. To identify the associated TINs for the referring and performing providers, we created a crosswalk of the performing provider’s unique physician identification number, or national provider identifier (NPI), to the TIN that appeared on the claim and used that to assign TINs to the referring and performing providers. To describe the trends in the number of and expenditures for self-referred PT services from 2004 through 2010, we used the 100 percent Medicare Part B Carrier file for each year to calculate utilization and expenditures for self-referred and non-self-referred PT services. We focused on PT referrals to professional offices, such as physician offices or PT clinics, because the financial incentive for providers to self-refer is most direct when the service is performed in a professional office. To calculate utilization, we counted the number of PT HCPCS codes. We also calculated the average number of 15-minute units provided per PT service.variable, which includes payments by Medicare and the beneficiary. We also conducted some analyses with an alternative definition of “non-self-referring provider.” Our alternative definition of “non-self-referring provider” included providers who referred at least one beneficiary for a PT service in a professional office or a facility and did not self-refer any PT services. This alternative definition included an additional 49,062 providers in family practice, internal medicine, and orthopedic surgery who referred beneficiaries for PT services exclusively to facilities during 2010. With this alternative definition, we computed higher relative rates of self-referral for the average number of Medicare beneficiary referrals for PT services and for the average number of PT services provided per beneficiary (except for family practice providers). We decided to use our original definition of non-self-referring provider because it generally produced more conservative results. provider location). We identified providers’ specialties on the basis of the specialties listed on the claims. We report results for three physician specialties that referred nearly 75 percent of PT services during 2010 that had a unique referring provider identification number—family practice (20 percent), internal medicine (26 percent), and orthopedic surgery (28 percent). We calculated beneficiary practice size by computing the number of unique Medicare FFS beneficiaries that providers treated in a professional office in 2010 for any medical condition covered by Medicare. We defined urban settings as metropolitan statistical areas, a geographic entity defined by the Office of Management and Budget as a core urban area of 50,000 or more population. We used rural-urban commuting area codes—a Census tract-based classification scheme that utilizes the standard Bureau of Census Urbanized Area and Urban Cluster definitions in combination with work commuting information to characterize all of the nation’s Census tracts regarding their rural and urban status—to identify providers as practicing in metropolitan statistical areas. We considered all other settings to be rural. In addition, we examined the extent to which the characteristics of the beneficiaries referred by self-referring and non-self-referring providers differed. We used CMS’s risk score file to identify each beneficiary’s risk score, age (specifically, whether the beneficiary was age 85 or older), and disability status. The risk score is an estimate of each beneficiary’s overall health status. It is the ratio of expected Medicare payments for that beneficiary under Medicare FFS relative to the average health care payments for all Medicare FFS beneficiaries.Classification Software (CCS) categories maintained by the U.S. Agency for Healthcare Research and Quality to identify the diagnostic category for which each beneficiary received PT treatment. The CCS categories are based on International Classification of Diseases, 9th Revision, Clinical Modification (ICD-9-CM), a uniform and standardized diagnostic and procedural coding system. The CCS categories group ICD-9-CM codes into a smaller number of clinically meaningful categories. The CCS diagnostic categories for PT that we used include Arthritis/Other Connective Tissue and Joint Disorders, Fractures/Traumatic Joint Disorders, Neurological, Spine, Sprains/Strains, V codes/Miscellaneous Rehab, and Other PT diagnoses. For the second analysis, we determined the extent to which the number of PT service referrals made by providers changed after they began to self-refer. Specifically, we identified a group of providers, whom we called “switchers,” that were non-self-referring in 2008 and self-referring in 2009 and 2010. We then calculated the change in the number of PT referrals made from 2008 (i.e., the year before the switchers began self-referring) to 2010 (i.e., the year after they began self-referring). We compared the change in the number of referrals made by these providers to the change in the number of referrals made over the same time period by providers who were non-self-referring between 2008 and 2010. Differences in the average number of PT services referred by non-self-referring providers between 2008 and 2010 reflect changes during this period that were not related to self-referral, such as changes in the number of beneficiaries who needed PT services or changes in the severity or types of the medical conditions treated with PT. Differences in the average number of PT services referred by switchers may reflect these changes as well as changes associated with self-referral. The difference in the percentage change in the number of PT services referred by switchers and non-self- referring providers is an estimate of the change in providers’ referrals for PT services that may be associated with self-referral. Our study has some limitations. First, we may not have identified all self- referred PT services, because CMS uses the referring provider identifier on PT claims to identify the provider who certified the beneficiary’s plan of care, and in some cases the referring provider may be different from the certifying provider. In addition, Medicare claims data do not capture all financial relationships between performing and referring providers. Second, we may have understated the occurrence of certain self-referral arrangements, such as referring physician ownership of hospitals, by assuming that all PT services referred to facilities were non-self-referred. Third, our analysis that compares PT diagnostic categories for beneficiaries referred by self-referring and non-self-referring providers is based on data that CMS does not use to determine payment for PT services. Consequently, providers do not have a financial incentive to accurately report diagnostic data for PT services on Medicare claims. Finally, it is outside the scope of this report to examine the medical necessity, clinical appropriateness, or effectiveness of PT services beneficiaries received. We took several steps to ensure that the data used to produce this report were sufficiently reliable. Specifically, we assessed the reliability of the CMS data we used by interviewing officials responsible for overseeing these data sources, including CMS and Medicare contractor officials. We also reviewed relevant documentation, compared means and frequencies of selected variables with published data, and examined the data for obvious errors, such as missing values and values outside of expected ranges. We determined that the data were sufficiently reliable for the purposes of our study, as they are used by the Medicare program as a record of payments to health care providers. As such, they are subject to routine CMS scrutiny. We conducted this performance audit from February 2012 through April 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. Appendix II: Distribution of Medicare Physical Therapy Services for Self-Referring and Non- Self-Referring Providers, 2010 Physical therapy (PT) service Electrical stimulation (HCPCS 97032) Electrical stimulation, other than wound (HCPCS G0283) Gait training therapy (HCPCS 97116) Manual therapy (HCPCS 97140) Massage therapy (HCPCS 97124) Neuromuscular reeducation (HCPCS 97112) Physical therapy evaluation (HCPCS 97001) Therapeutic activities (HCPCS 97530) Therapeutic exercises (HCPCS 97110) Ultrasound therapy (HCPCS 97035) Electrical stimulation, other than wound (HCPCS G0283) Gait training therapy (HCPCS 97116) Manual therapy (HCPCS 97140) Massage therapy (HCPCS 97124) Neuromuscular reeducation (HCPCS 97112) Physical therapy evaluation (HCPCS 97001) Therapeutic activities (HCPCS 97530) Therapeutic exercises (HCPCS 97110) Ultrasound therapy (HCPCS 97035) Electrical stimulation, other than wound (HCPCS G0283) Gait training therapy (HCPCS 97116) Manual therapy (HCPCS 97140) Massage therapy (HCPCS 97124) Neuromuscular reeducation (HCPCS 97112) Physical therapy evaluation (HCPCS 97001) Therapeutic activities (HCPCS 97530) Therapeutic exercises (HCPCS 97110) Ultrasound therapy (HCPCS 97035) In addition to the contact named above, Jessica Farb, Assistant Director; Thomas Walke, Assistant Director; Daniel Lee; Elizabeth Morrison; Merrile Sing; Jennifer Whitworth; and Rachael Wojnowicz made key contributions to this report. | Rising Medicare expenditures for PT services have long been of concern, and questions have been raised about the role of self-referral in this growth. Self-referral occurs when a provider refers patients to entities in which the provider or the provider's family members have a financial interest. GAO was asked to examine self-referral for PT services and Medicare spending for these services. This report examines (1) trends in the number of and expenditures for self-referred and non-self-referred Medicare PT services and (2) how provision of these services differs among providers on the basis of whether they self-refer. GAO analyzed Medicare Part B claims data from 2004 through 2010 and examined three measures of PT referral for each referring provider: number of PT services referred, number of beneficiaries referred, and number of PT services provided per beneficiary. GAO compared PT referrals for self-referring and non-self-referring providers after accounting for referring provider specialty, Medicare beneficiary practice size, and geographic (urban or rural) location. GAO also compared selected characteristics of the beneficiaries referred by self-referring and non-self-referring providers. The Department of Health and Human Services stated that it had no comments on a draft of this report. From 2004 to 2010, non-self-referred physical therapy (PT) services increased at a faster rate than self-referred PT services. During this period, the number of self-referred PT services per 1,000 Medicare fee-for-service beneficiaries was generally flat, while non-self-referred PT services grew by about 41 percent. Similarly, the growth rate in expenditures associated with non-self-referred PT services was also higher than for self-referred services. The relationship between provider self-referral status and PT referral patterns was mixed and varied on the basis of referring provider specialty, Medicare beneficiary practice size, and geography. GAO examined three measures of PT referral for each referring provider for the three provider specialties that referred nearly 75 percent of PT services in 2010—family practice, internal medicine, and orthopedic surgery. The overall relationship between provider referral status and the first measure of PT referrals—the average number of PT services referred per provider—was mixed. GAO found that self-referring family practice and internal medicine providers in urban areas, on average, generally referred more PT services than their non-self-referring counterparts. In contrast, self-referring orthopedic surgeons, on average, generally referred fewer PT services than non-self-referring orthopedic surgeons. Self-referring providers in all three specialties that GAO examined generally referred more beneficiaries for PT services, on average, but for fewer PT services per beneficiary compared with non-self-referring providers. For these two measures of PT referrals, differences between self-referring and non-self-referring providers generally persisted after accounting for referring providers' specialty, Medicare beneficiary practice size, and geographic location, although the magnitude of these differences varied on the basis of these factors. For example, the average number of beneficiaries referred by self-referring family practice providers in urban areas was approximately 43 to 87 percent higher than for their non-self-referring counterparts, depending on Medicare practice size. In contrast, beneficiaries referred by self-referring family practice providers in urban areas received 12 to 28 percent fewer PT services, on average, depending on practice size, compared with their non-self-referring counterparts. GAO also found that in the year a provider began to self-refer, PT service referrals increased at a higher rate relative to non-self-referring providers of the same specialty. For example, family practice providers that began self-referring in 2009 increased PT referrals 33 percent between 2008 and 2010. In contrast, non-self-referring family practice providers increased their PT service referrals 14 percent during this same period. |
Researchers have defined poverty in a variety of ways. It can be defined as deprivation experienced in material terms, such as hunger or poor housing quality; in economic terms, such as inadequate income; or in social terms, such as isolation from the community or feelings of low self-esteem. In U.S. government statistics, poverty is defined as economic deprivation—that is, lacking the economic resources to meet basic needs—which can put families at high risk of material deprivation. Although some might prefer to directly measure a family’s level of material deprivation, this is impractical for an annual statistic because it is difficult to objectively assess the quality of a family’s standard of living and then to combine measures for various basic needs (such as food, shelter, and clothing) into a single indicator that can be readily analyzed. In 1969, the federal government officially adopted a poverty measure to determine how many people across the country had incomes that were inadequate to meet expenses for basic needs. The official measure determines a family’s poverty status by comparing its resources, defined as before-tax money income, with a standard income level, or “threshold,” designated for that family’s size and composition. Information on income received in the previous calendar year is collected from households by the Bureau of the Census using the March Income Supplement of the Current Population Survey (CPS), which is jointly sponsored by the Bureau of the Census and BLS. Poverty statistics are published each year that allow comparisons of economic well-being across families, population groups, and regions and over time. Thresholds for families of different size and composition were initially defined as three times the cost of a minimum diet for a family of that size. This approach was based on the finding of the U.S. Department of Agriculture’s (USDA) 1955 Household Food Consumption Survey that, on average, families of three or more persons spent one-third of their income on food. Costs of a minimum diet for various family sizes were calculated from USDA’s Economy Food Plan, the least costly food plan designed by USDA. Since then, the poverty thresholds, of which there are currently 48, have been updated annually, to adjust for price inflation nationwide using the Consumer Price Index (CPI). In 1995—the year of the most recent update—a family of four with cash income of less than $15,569 was considered to be living in poverty. The problems in the official measure of poverty are well documented. The value of the resources a family receives from noncash government assistance programs like the Food Stamp Program was never included in the formal definition of income, in part because the poverty measure was developed before the advent of such programs. In considering the 1981 Commerce Department appropriations, the Senate Appropriations Committee criticized the official poverty statistics for ignoring the “billions of dollars of Government in-kind benefits, such as food stamps, housing subsidies and medical care.” In the conference committee report, the House and Senate conferees urged the Secretary of Commerce to “continue research and testing of techniques for assigning monetary values to in-kind benefits, and for calculating the impact of such benefits on income and poverty estimates.” In the early 1980s, the Bureau of the Census embarked upon research programs to examine the effects of both government in-kind (noncash) benefits and taxes on poverty and other measures of income distribution and has published the results since 1982. A 1990 review of concepts and approaches to measuring poverty concluded that although the official poverty thresholds “represented a reasonable approach, given existing data, . . . in the 1960s, the rather minimal consumption data on which they were based became outdated long ago.” For example, recent surveys find that food now represents about one-seventh rather than one-third of average family expenditures. In addition, the report noted that the methods used to update thresholds over time and to adjust for differences in family size and type were questionable and sometimes inconsistent. In 1995, NRC’s Panel on Poverty and Family Assistance published an in-depth review of the U.S. poverty measure addressing concepts, measurement methods, and information needs. In addition to reviewing the literature and numerous experts’ views, with help from federal agencies, the panel conducted data analyses to assess the effects of its recommended poverty concept and alternative measures on the numbers and characteristics of persons in poverty. It concluded that the official measure of poverty required revision and recommended that OMB adopt a revised measure. Specifically, the panel recommended that new thresholds be developed using actual consumer expenditure data to represent a budget for basic needs and adjusting that budget to reflect the needs of different family types and geographic differences in housing costs. It recommended that family resources be redefined as the sum of money income and near-money benefits, minus necessary expenses (such as taxes), and thus the net amount available to buy the goods and services in that poverty budget. (App. I reproduces the panel’s recommendations in their entirety, including some issues not discussed in this report.) More recently, a researcher criticized the reliance of the official poverty measure on reported income, pointing out that some families are misidentified as poor because they can increase their purchasing power by either taking out loans or drawing on their savings to avoid material deprivation. He and others have suggested that a family’s economic well-being is more appropriately assessed with a measure of what it spends on goods and services than with a measure of its income. In developing, as well as evaluating, a poverty measure, certain assumptions and choices must be made as one addresses two fundamental decisions: first, how to define a family’s resources and, second, how to select a threshold, or standard, to represent a “minimally adequate standard of living.” While the two decisions are distinct, the two definitions must be consonant with each other so that the eventual comparison of a family’s resources with a standard is considered fair. For example, if government medical benefits are considered as part of a family’s resources, then need for medical care should be considered in defining the threshold. Although many technical choices must be made in developing a valid and practical measure of family economic well-being for the purposes of determining poverty status, we identified three key choices to be made: whether to directly measure a family’s spending on basic necessities or to use income and other economic resources as a proxy for its ability to buy those necessities, which economic resources should be considered available for meeting a family’s basic needs, and whether existing data sources are adequate or should be modified to improve the reliability of poverty estimates. Some poverty researchers have proposed examining families’ consumption of goods and services, rather than their income, to assess more directly whether they are able to obtain a minimal standard of living. Many on the NRC panel and some of the experts we interviewed were sympathetic with that view. The panel report noted that consumption is more closely related conceptually to material deprivation—the core concept underlying poverty—than is income. However, as we previously noted, efforts to directly measure material deprivation meet with both conceptual and practical difficulties. For example, some readily identified deprivations, such as loss of housing, may not result from low income but from imprudent spending or difficulties with one’s landlord. And defining housing adequacy would require subjective judgments to select standards for living space; cooking and plumbing facilities; and heating and, perhaps, cooling needs. Even when expert-defined standards exist, assessing the nutritional adequacy of a family’s diet, for example, would likely require a costly expert assessment and the collection of detailed data on family meals. Thus, measures of material deprivation are more often recommended as a supplement to, than as a replacement, for data on family resources. Instead, researchers who assess poverty status through consumption typically use as their measure the dollar value of a household’s reported spending (excluding taxes, gifts, and savings). The primary source for these data is the Consumer Expenditure Survey (CEX), which collects detailed data from households on their expenditures. Because we do not know whether a family’s level of expenditures is sufficient to meet its material needs, the dollar value of expenditures is really only a proxy for the family’s level of material deprivation. However, some researchers still prefer to look at what families spend rather than their income because expenditures reflect what they were able to obtain with all their available economic resources (including savings, assets, and credit), whereas income is only a proxy for those resources. There were mixed views in the field about whether income or expenditures were more conceptually consistent with the intended uses of the poverty measure. A perceived disadvantage of measuring family well-being with income is that it tends to overstate the material deprivation of families who experience a temporary economic setback and of those low-income families who can use savings to maintain their level of expenditures. But, precisely because families can smooth out the effects of dips in income, expenditures tend to vary less among families and over time than income does. Thus, for policy planning and evaluation purposes, an expenditure-based measure might not be as sensitive an indicator of families’ economic need as income would be. In contrast, a perceived advantage of measuring poverty with family income is that much of government antipoverty policy is expressed and analyzed in terms of change in total or disposable family income. If poverty was measured on the basis of expenditures, forecasting the effects of a change in economic policy would require estimating how the expected change in family income would affect a family’s expenditures, which are more difficult to predict than income. In the end, the NRC panel concluded, and experts we interviewed concurred, that, at least at present, measuring poverty for official purposes with expenditures was simply not feasible. The only available national survey of household expenditures, the CEX, is not currently appropriate for measuring poverty. Its sample size is too small to support the level of detail on demographic subgroups that we now obtain from the income surveys. Because the CEX is also expensive to administer and time consuming to process, experts considered it prohibitively costly to greatly expand the survey in its current form. Moreover, the panel reported concerns about its design and response rate that raised questions for them about its quality and appropriateness as a source for an expenditures-based poverty measure. For example, because estimates of different types of expenditures are currently derived from different samples answering different surveys, the panel had questions about how to obtain a comprehensive resource estimate for individual families. (App. II provides more detail on this survey.) Nevertheless, because the conceptual advantages of an expenditure measure of poverty have appeal, the NRC panel also recommended research into improving available expenditure data. For more than a decade, critics have pointed out that the official poverty measure’s use of gross cash income does not fully represent the resources families actually have available to meet basic needs. Specifically, gross cash income excludes the value of in-kind benefits (like food stamps and public housing rental subsidies), which clearly increase the resources available for basic needs, and fails to account for taxes and payment of child support, which reduce available resources. Since the poverty measure was developed, there have been significant increases in payroll taxes and noncash government transfers for low-income families, as well as significant changes in income taxes, so these omissions have become more problematic over time. The NRC panel believed that it was also critical to take into account both in-kind benefits and tax payments in order for the poverty measure to reflect the antipoverty effects of government tax and assistance policies. We found disagreement among the experts, however, about how far to go in making these adjustments to cash income. The NRC panel recommended adding the value of near-cash, nonmedical in-kind benefits (such as food stamps, rental housing subsidies, school lunches, and home energy assistance) to families’ gross money income and deducting income taxes, Social Security taxes, payment of child support, out-of-pocket medical expenditures, and child care and other work-related expenses (up to a limit). One of the panel members dissented from the panel’s recommendations on how to incorporate out-of-pocket medical expenses and the value of public medical insurance (Medicaid and Medicare). Over the years, efforts to find a generally acceptable method for valuing public medical insurance have been unsuccessful, in part because the value of insurance to recipients depends on whether they need to use it. In addition, the dollar value of expenses covered by insurance can be so large that it exceeds the amount of money a low-income family has available for other needs, yet it cannot be spent on those needs. The panel’s suggestion to deduct out-of-pocket medical expenses from income, instead of adding the value of insurance coverage to income, avoids ascribing unrealistically large amounts of resources to families who never made use of their insurance and those whose insurance covered unusually high expenses. But one panel member preferred to treat health care as another basic need such as food, shelter, and clothing, and incorporate out-of-pocket medical expenses as part of the family budget used to develop the thresholds. Deciding which income adjustments to make also depends on how accurate these adjustments can be made, at reasonable expense. The Bureau of the Census, which has developed ways to approximate values for food and housing assistance received and taxes paid for the families that are surveyed to produce the poverty statistics, has used those figures to calculate adjusted poverty rates on an experimental basis. However, Bureau of the Census officials were not confident about the success of this approach for some of the other recommended income adjustments without expanding the CPS questionnaire. One expert stressed that if estimates are used, it is important that they accurately reflect the real choices made by lower-income families, because using average family expenditure values could introduce bias into the poverty estimates. Another consideration raised by government officials in deciding whether and how to change the way family economic resources are officially defined for measuring poverty is the implications of such a change for those government programs that link receipt of assistance to the official poverty measure. Some programs determine eligibility, in part, by comparing an applicant’s income with the poverty guidelines (which are derived from the thresholds) or some multiple of them. Poverty guidelines are issued annually by the U.S. Department of Health and Human Services (HHS) by smoothing the official poverty thresholds for different size families, increasing the levels for Alaska and Hawaii, and updating them for price inflation. To aid coordination of assistance programs, it is preferable for programs to share a common definition of “income”; one way to simplify a program’s application process is to limit its resource definition to gross monetary income, based on readily obtained information. The panel believed that its disposable income definition of family resources is a substantial improvement over the current measure, and so encouraged consideration of, but did not directly recommend, the use of this definition by programs that currently compare gross income to the administrative poverty guidelines. The panel recognized that, in programs that currently employ a fairly crude measure of gross income, implementing its proposed resource definition would require obtaining additional data on applicants’ in-kind benefits and expenses. The panel also recognized that this could place a burden on both clients and administrators. As an alternative, the panel suggested that such programs could choose to use a simplified definition of disposable income if the programs were willing to give up some precision in determining eligibility status in order to minimize data burden. Part of the argument for using expenditures rather than income to measure a family’s economic well-being is the claim that many apparently low-income households underreport their income. This claim is primarily based on the finding that in the single national household survey that collects extensive data on family expenditures (the CEX), low-income families report higher levels of expenditures than income. Although the Bureau of the Census acknowledges some income underreporting in the survey that is used to derive the official poverty statistics (the CPS), this problem is understood to be somewhat greater in the CEX, which was not specifically designed to measure income. The NRC panel recommended changing the data source for poverty statistics from the CPS to the Survey of Income and Program Participation (SIPP), which is also conducted by the Bureau of the Census. The CPS is basically a labor force survey that is supplemented in March of each year with a large battery of income questions used for measuring poverty. In contrast, the SIPP was specially designed as a survey of household income and, through both different questions and more frequent interviews, provides more detailed and more accurate data on income than the CPS. In addition, because the CPS survey does not collect certain data on expenses (notably taxes, child care, and child support payments), estimates of the likely value of such payments (that is, imputations) would be required to make some of the recommended income adjustments. In the absence of some of the information needed, the technical adequacy of the imputations becomes increasingly important. Thus, many experts prefer the SIPP because they believe it provides a more accurate report of income for low-income people and provides most of the information required for the additional income adjustments recommended by the panel. (App. II provides more detail on these surveys.) Currently, the decennial census, due to its broad coverage, is the primary source of poverty rates for small areas such as cities and counties; yet, it does not gather the detailed information that would be required to implement the panel’s proposed resource definition. Officials of the Bureau of the Census indicated that they have tested several limited questions in the National Content Survey (the main content-testing vehicle for the year 2000 census) on the receipt of in-kind benefits and payments for child support but that no expansions are planned to the census long-form questionnaire at this time. Thus, if the panel’s definition of family resources was adopted, simulations would be required to produce comparable estimates from the census. Differences between estimates from the two surveys would likely result, but some comparability problems exist currently between poverty estimates derived from the CPS and the census. OMB has not yet acted on the panel’s recommendations to revise the poverty measure but has discussed forming an interagency working group with BLS, the Bureau of the Census, and other interested agencies to explore general issues in measuring income and poverty and consider alternative measures to be developed and tested. BLS has not yet begun a comprehensive study of how to improve the CEX as a tool to measure family resources for the purposes of determining their poverty status per se, as the panel recommended, but awaits direction from OMB and additional funds to undertake such research. However, efforts are under way to address some of this survey’s data quality problems that were noted by the panel. Staff of the Bureau of the Census, in a joint project with BLS staff, have begun to examine the feasibility of implementing the panel’s recommendations for a revised resource definition. After replicating the panel’s procedures on the CPS, they concluded that “he Panel’s recommendation that resources be measured as disposable income places much faith in the Census Bureau’s ability to expand data collection efforts or do better modeling in an environment in which small annual changes in poverty are perceived as important, since there is no national survey that currently collects all the information necessary to portray a family’s poverty status under the proposed measure.” Bureau of the Census staff report that researchers within the Bureau are currently examining nearly every dimension of the resource measure they employed (including the valuation of housing subsidies and imputation of work, child care, and out-of-pocket medical expenses) and are currently working on implementing the resource measure in the SIPP instead of the CPS. In 1996, the sample design of the SIPP was changed in order to focus on collecting longitudinal information on change in families’ income and behavior over time. As a result, the SIPP is no longer able to provide nationally representative estimates of family income each year. The Bureau of the Census has developed a proposal to supplement the SIPP’s new sample design to ensure this survey’s ability to provide national estimates from year to year, comparable to current practice. However, additional funds would be required for this new design. The Bureau is also considering an alternative process for conducting the 2010 decennial census that would involve collecting more detailed data from samples of respondents throughout a 10-year period rather than only once every 10 years. However, it is not clear at this time whether this process will be adopted and, if so, whether it would include the detailed information on family resources and expenses needed to implement a disposable income definition. Nevertheless, because government analysts are also just beginning to recognize the implications for existing surveys of the new reporting requirements of the 1996 welfare reform legislation, we believe it is critical that all proposed changes to the SIPP and census be carefully coordinated. The current thresholds, or levels of income below which families of different sizes are considered poor, are based on family consumption patterns of 4 decades ago and contain certain logical inconsistencies. As a consequence, many experts believe that the thresholds should be revised, but there is less consensus on how to do so. Although many technical choices will need to be made in developing thresholds, we highlight four key choices: on what basis to set the level of a poverty threshold, whether to accommodate changes over time in standards of living as well how to quantify the difference in need among families of different size and whether and how to accommodate geographical differences in the cost of living. The NRC panel concluded that “lthough judgement enters into nearly all aspects of the poverty measure . . . questions of the threshold concept and level are more inherently matters of judgment than other aspects of a poverty measure.” Many of the experts we interviewed believed that scientists should not set the poverty thresholds on their own but instead should provide information about what it means to live at one income level or another (in terms of expenditures or living conditions) and let policymakers make the judgment. That is, the poverty level is viewed as essentially an arbitrary point selected to represent what society defines as constituting a “minimally adequate standard of living.” However, the panel noted that several sources are available to inform the selection of a particular income level: public opinion on what level of income is believed necessary to “get along,” the distribution of family or household income, and poverty budgets that estimate what income levels families need to obtain basic necessities. From 1946 to 1989, the Gallup poll has asked the following question: “What is the smallest amount of money a family of four (husband, wife, and two children) needs each week to get along in this community?” Denton Vaughan’s 1993 analysis of these data found that the “get-along” amount, while remaining below the median level of post-tax income for four-person families, has increased over the years along with increases in median family income. In contrast, the official poverty level, in constant dollars, while similar to the “get-along” amount from 1947 to 1950, declined sharply thereafter relative to both median income and the “get-along” amount through the early 1970s. Vaughan concluded that the official poverty threshold, by remaining fixed while real incomes and expectations rose, “is no longer fully consistent with the standards of the American people.” The NRC panel recommended against using these or similar poll findings directly to set the poverty level because (1) responses are quite variable, both over time and with the exact wording of the question and (2) the knowledge that their response would be used to set the poverty standard (and thus, perhaps, benefit levels) might affect the way in which people respond. Indeed, a government official pointed out that precisely because these surveys did not directly ask what level of resources families should be guaranteed, these responses were not appropriate for setting guidelines that would determine public assistance benefit levels. However, opinion surveys were considered a valid way of tapping societal norms, so experts suggested that their results be used as a confirmatory source to help bracket figures derived from other sources. Alternatively, poverty can be treated as a relative notion and the poor defined as all those with income below a particular point on the distribution of family or household income, such as the bottom fifth or those below a point representing 50 percent of the median income. This approach emphasizes the socially defined aspect of poverty, that “hose whose resources are significantly below the resources of other members of society, even if they are able to eat and physically survive, are not able to participate adequately in their relationships, and therefore are not able to participate fully in society.” The NRC panel noted that relative thresholds are easy to understand and calculate, are thus often used in international comparisons of poverty, and are self-updating. The panel also noted that some find the relative, arbitrary, and self-updating features of relative thresholds to be drawbacks, instead. For example, creating a purely relative poverty level (such as the bottom fifth of the distribution) was unappealing because it would mean that the statistic would no longer serve as a measure of progress against poverty. Every year, no matter how much family incomes improved, one fifth of the population would automatically be defined as poor. That problem can be avoided, however, by defining the threshold as a percentage of median income, which would not require a particular proportion of the population to be labeled as poor. The third major approach to setting a poverty threshold is to develop some form of poverty budget based on expert judgment of families’ needs, the observed expenditures of low-income families, or some combination of the two. Poverty budgets based on expert judgments “have the appeal of being based on the notion of minimum standards of physical needs,” but “large elements of relativity and subjective judgment invariably enter the process” because few established standards exist to guide the choice of what to include in these budgets. The dilemma is that there are many different ways to meet basic nutritional needs, for example, but to cost out a poverty budget, the expert must select one nutritionally adequate diet over another, which requires subjective judgment. Therefore, in practice, experts must base their judgments on either their own beliefs about the needs of low-income families or on observations of families’ spending patterns. The primary choice in developing a poverty budget is whether to specify in detail a comprehensive poverty-level family budget or to cost out one or a few categories of spending that can then be multiplied by a factor to represent the rest of a family’s needs. Comprehensive detailed budgets that attempt to mimic an entire family’s budget have the advantage of appearing to be absolute rather than relative and provide a concrete picture of what it would look and feel like to live at that particular income level. But the experts also cautioned that a carefully detailed budget was very burdensome to create and required a substantial number of subjective judgments to justify (such as about what to include and at what cost). In contrast, a budget based on specifying one or two budget categories, such as food, paired with a multiplier to cover the rest of a family’s needs, is much simpler to create, but using a large multiplier can distort the measure over time if it is not reassessed. This is precisely what happened with the official poverty measure. The original formula (three times the cost of a poverty food budget) no longer reflects contemporary family consumption patterns because costs of different budget categories have changed differentially. Food costs have not risen as much as other costs since the 1950s and standards of living have climbed, so food now represents about one-seventh rather than one-third of family budgets. Thus, a literal update of the original poverty measure would multiply the current cost of a poverty food budget by seven rather than by three. To ground the thresholds in families’ basic needs yet avoid the numerous judgments involved in detailing a comprehensive budget, the NRC panel recommended developing a budget for a four-person reference family for the three categories of food, clothing, and shelter needs from actual family expenditure data, along with a small multiplier to account for other needs. It recommended basing the budget on a fixed proportion of the median expenditures of two-adult, two-child families on these basic needs. It further recommended that that proportion and the multiplier be selected in concert with both expert judgment and public opinion concerning what constitutes a minimally acceptable standard of living. As one expert argued, since poverty is, in the end, a social construct, triangulation between threshold levels generated through expert judgment, family expenditure data, and public opinion polling is most likely to achieve the desired consensus. Another consideration in deciding whether and how to revise the poverty thresholds is the implications of such a change for those government programs that link receipt of assistance to the administrative poverty guidelines. Some programs providing cash, in-kind benefits, or services to low-income persons have as one of their income eligibility criteria that their income be compared with the poverty guidelines or some multiple of them; others have their own income standards. Currently, the administrative poverty guidelines issued by HHS are a simplified version of the poverty thresholds. If changes to the poverty thresholds were made, OMB officials indicated that the administrative guidelines would not necessarily be affected, unless a separate decision was made that revised measures were more appropriate for those programs that use the guidelines. Nevertheless, even changing the level of these poverty guidelines would only have direct caseload and budget implications for some programs, and only if the newly eligible people applied for services. This is because only some of the programs that link eligibility to the poverty guidelines are entitlement programs, that is, they must provide benefits to all eligible applicants (for example, Medicaid, food stamps, School Lunch, and School Breakfast). In others, legislatively set budget limits determine how many eligible people who apply for services will actually be assisted and how many will be put on waiting lists. The NRC panel recommended that program agencies carefully review the proposed measure to determine whether it is appropriate as an eligibility standard and whether it may need to be modified to better serve program objectives. “Other considerations, such as funding constraints and competing use of scarce tax dollars, may dictate that assistance program benefits be set at a level below the statistical poverty thresholds.” No matter what level is selected to represent the income needed to purchase a “minimum adequate standard of living,” some mechanism is needed to maintain its currency over time. Currently, the thresholds are updated annually for price inflation, but we found mixed views on whether to also update them regularly for real changes in income levels or expenditures. As noted before, by not reestimating the food share of families’ budgets, the current method’s adjustment of the 1960s’ thresholds for price inflation alone is believed to have misestimated the effect of changes in the cost of living on the entire poverty budget. In support of routinely adjusting for changes in standards of living, the panel noted that, historically, the levels of estimated minimum standards—whether from expert budgets, programmatic standards, or public opinion polling—have in fact risen over time with real (that is, inflation-adjusted) growth in both income and consumer expenditures. Additionally, of course, it would be administratively simpler to have a routine mechanism for updating the thresholds, rather than wait until serious concerns arise to instigate a major reevaluation and revision. To keep the thresholds current, the NRC panel proposed updating them annually to reflect changes in median family expenditures on food, clothing, and shelter, with the amount averaged over the previous 3 years to reduce the thresholds’ volatility over the cycles of the economy. However, other experts were concerned that such annual adjustments would turn the poverty measure into a relative standard that would no longer provide a stable target for assessing government programs’ progress. Moreover, they were concerned that, in the short run, a relative threshold tied to median income (or expenditures) could end up yielding perverse results. For example, in an economic recession, as median expenditures declined, so would the poverty threshold, potentially leading to lower rather than higher poverty rates. NRC’s proposed updating mechanism would not create a truly relative measure because the threshold would be updated on the basis of families’ expenditures on food, clothing, and shelter, which represent about 45 percent of total expenditures for four-person households and do not tend to rise as fast as income. Additionally, updating thresholds with median expenditures averaged over the past 3 years would moderate the effect of year-to-year economic fluctuations. Thresholds for different types of families were initially developed in an effort to ensure the equivalence of the poverty level, conceptually, across families whose different circumstances implied different needs. The USDA food plans were developed to reflect presumed differences in the food needs of children and elderly individuals and those of nonelderly adults, and the thresholds were developed to accommodate the economies of scale enjoyed by larger families compared with smaller ones. However, it was pointed out in 1990 that the initial equivalence scales (that is, the set of differences between thresholds for different families) were not entirely systematically based on variation in family consumption patterns and the data that were used are now out of date. Additionally, the scales exhibit some abnormalities in terms of natural economies of scale for different family sizes. Analysts want the thresholds to reflect only those sources of variation in family needs for which empirical evidence of sizable systematic variation exists. While elderly people do have different consumption patterns from the nonelderly, evidence that the elderly have consistently lower income needs is limited. Thus, the panel proposed dropping the distinction made in the current method that provides a lower threshold for elderly individuals living alone than that for nonelderly adults. In response to a legal challenge, the distinction between female and male heads of households was removed in 1981. A large body of research has developed a variety of approaches for creating equivalence scales to represent the variation in needs among different family types. However, no single approach can be clearly demonstrated to be more accurate than the others because of conceptual difficulties in assessing whether two families of different types are equally well-off. For example, although married couples with one child may spend less on food outside the home than those without children, we have no measure of whether they are equally well-off. Thus, it is difficult to identify the extent of economies of scale from simply comparing different families’ expenditure patterns. Moreover, in any consumption-based analysis, care must be taken to avoid simply institutionalizing the status quo. If larger families also tend to have lower incomes than smaller families, their smaller per capita spending could represent the effects of their lower income rather than lower needs. In the absence of an objective procedure for determining the relative costs of living for families of different sizes and composition, the NRC panel proposed using a statistical formula to produce thresholds for various combinations of adults and children so that the resultant equivalence scale would at least be logical and internally consistent. The panel developed a formula reflecting the general form of the varied formulas in the literature, which treats the cost per child as a fixed proportion of the cost per additional adult and provides for the scale economies of larger families. It also made suggestions for the choice of the actual terms of the formula. These choices need to be carefully examined because, by raising or lowering the thresholds for different families from what they are now, the demographic profile of people defined as living in poverty can be substantially changed. For example, the panel found that applying one of the proposed scales while retaining the current threshold for a two-adult, two-child family would reduce the threshold for single people and thus increase the poverty rate for that group. Another important source of variation in family circumstances that affects the cost of meeting families’ basic needs is geography. It has long been recognized that, “because some parts of the country have higher prices than other parts, families that live in relatively expensive areas actually may need higher incomes to maintain the same level of consumption as lower income families in less expensive places.” The experts we interviewed agreed that it was conceptually appropriate to adjust the poverty thresholds to account for reliable differences across areas in the cost of living but were unsure about whether adequately reliable data would be available to do so. Another noted that such a change could cause the Congress to consider the effects that such a change would have on the distribution of funds to states and localities from federal programs whose distribution formulas currently consider the differences in poverty rates between areas. Long-standing data and conceptual problems have prevented any adjustment of poverty measures for geographic differences in cost of living in the past and may continue to do so. Currently, no standard index of comparative prices exists that reflects variation both within and across regions and that covers all areas of the country. Previous efforts to develop such an index have been stymied by lack of comprehensive and comparable price data on samples large enough to provide reliable estimates for areas within regions, as well as by the problem of how to adjust for differences in local preferences or standards of living. That is, while it seems reasonable to account for differences in types of expenditures that are directly related to the climate, such as heating costs, some other differences, such as food preferences, may also represent differences in quality that are related to differences in income levels between areas. As an alternative to a comprehensive interarea price index, the NRC panel proposed adjusting the poverty thresholds with an interarea price index for shelter, because shelter costs show considerable geographical variation and are a major component of consumer spending. The NRC panel proposed developing an interarea housing cost index for metropolitan areas of various population sizes within nine regions and developed an experimental one themselves, using a modified version of the “fair market rent” methodology developed by the U.S. Department of Housing and Urban Development (HUD). To administer rental housing subsidies, HUD sets “fair market rents” at the 45th percentile of the rent distributions in metropolitan areas and nonmetropolitan counties for apartments that meet specified quality standards and that are occupied by recent movers. The NRC panel applied this methodology to rental housing data from the 1990 census to develop index values for metropolitan and nonmetropolitan areas. We previously reported, however, that experts have criticized the use of the HUD method for creating an interarea price index for adjusting poverty thresholds because HUD’s estimates do not cover all types of rental housing; fail to adjust for interarea differences in the quality of housing; and, of course, capture only one component of the cost of living. While experts agreed it was rationally justified to adjust the thresholds for geographic cost-of-living differences, we found little consensus on which methodology would be both reasonably accurate and practical for creating and maintaining such an index. One concern is that no single data source, including the decennial census, had both adequately reliable data on metropolitan and nonmetropolitan areas within regions and the detail on housing characteristics required to accurately distinguish differences in prices from those in quality. Another concern is that housing prices may differ as much within metropolitan areas as they do between them. Moreover, because housing markets can experience large changes within a 10-year period, developing a method to produce reliable updates between decennial censuses is important to ensure that the geographic adjustments do not create more error than they were intended to reduce. However, there was no consensus among the experts we interviewed that a solution to the periodic updating problem had been found. Staff of BLS, in a joint project with the Bureau of the Census, have begun exploratory work to examine the feasibility of implementing the panel’s proposals for developing poverty thresholds should they be asked to do so. Applying the panel’s recommended procedures to expenditure data from 1987 to 1994, they found the thresholds seem to be stable over time. However, in testing alternative valuation procedures, they found that replacing a homeowner’s shelter costs with a rental equivalence value produced higher thresholds and thus higher poverty rates. They report that BLS researchers are currently examining (or planning to examine) numerous issues related to the panel’s recommendations, including other methods to estimate the service flows from owned housing and vehicles, the impact of using data from consumer units reporting a full year of expenditures, and which Consumer Price Index to use to update the basic bundle of expenditures. Professor David Betson, a member of the panel, has continued research on the evidence underlying the current and alternative equivalence scales and the consequences of alternative scales for who is considered poor. In a preliminary summary, he reports that several different sets of scales are consistent with the research on spending on children but yield quite different results for single adults. Yet, with limited research evidence on the scale relating one and two adults, additional research will be required to choose among these scales. Additionally, BLS has been conducting some experimental work on interarea indexes of price differences that may help resolve concerns regarding the quality of available data for adjusting the thresholds for geographical differences in the cost of living. Specifically, BLS is using sophisticated statistical techniques to isolate the relative differences in prices among geographic locations when, as is done in developing the CPI, price information is collected for similar but not identical items across localities. If these techniques are deemed successful, an interarea price index could be developed and regularly updated from BLS’ existing data sources. However, the CPI sample would still need to be increased to produce estimates for rural areas. Some of the issues involved in updating the poverty measure seem to be fairly well resolved in the scientific community. Although a family’s economic resources are only a proxy for its ability to obtain an adequate standard of living, they clearly provide the most reliable data for assessing and comparing families’ ability to meet their needs. Similarly, we found agreement that the measure of a family’s economic resources should include near-money government benefits and exclude income and payroll taxes. But additional discussion and research may be needed for experts to reach consensus on other issues, such as how to incorporate government medical assistance in a measure of disposable income and how to accommodate geographical differences—and changes—in the cost of living. Even though some adjustments are clearly preferable conceptually, not all will be considered worth the effort and expense required. Updating the thresholds, in contrast, poses issues for which scientific evidence can only bracket a set of alternatives. Determining what constitutes a minimally adequate standard of living is, in essence, a social judgment that should reflect both societal and experts’ views. A broader discussion would also seem to be appropriate for the issue of whether to incorporate changes over time in standards of living as well as in prices. The Bureau of the Census, within the U.S. Department of Commerce; BLS, within the Department of Labor; and the Office of Information and Regulatory Affairs (OIRA), within OMB, provided written comments on a draft of this report. Both OIRA and the Bureau of the Census stated that the report was a good summary of the important issues regarding improvements in the official measure of poverty. But OIRA also believed that in considering these issues, it should also be noted that broadening the definition of income to include noncash transfers and the net effect of direct taxes is bound to lower the measured poverty rate unless the thresholds are adjusted to reflect a higher level of economic well-being. Each agency provided some technical comments and corrections that we have incorporated, as appropriate, throughout the text. BLS focused its comments on issues surrounding the use of the CEX. BLS noted that it is engaged in ongoing efforts to improve the CEX collection instrument to ensure that its data are of the highest quality but thought criticism of it was overstated in several places. We have changed the text to clarify that these comments pertained to use of the survey to measure individual families’ economic well-being, a purpose outside its current mission. The agencies’ comments appear in appendixes III, IV, and V. We are sending copies of this report to the Chairman, Senate Committee on Finance; the Secretary of Commerce and the Director of the Bureau of the Census; the Secretary of Labor and the Commissioner of BLS; the Director of OMB and the Administrator of the Office of Information and Regulatory Affairs; and interested congressional committees. We will also make copies available to others on request. If you have any questions concerning this report or need additional information, please call me on (202) 512-7215 or Stephanie Shipman, Assistant Director, on (202) 512-4041. Reprinted with permission from C. Citro and R. Michael, eds., Measuring Poverty: A New Approach (Washington, D.C.: National Academy Press, 1995), pp. 4-15. The official U.S. measure of poverty should be revised to reflect more nearly the circumstances of the nation’s families and changes in them over time. The revised measure should comprise a set of poverty thresholds and a definition of family resources—for comparison with the thresholds to determine who is in or out of poverty—that are consistent with each other and otherwise statistically defensible. The concepts underlying both the thresholds and the definition of family resources should be broadly acceptable and understandable and operationally feasible. On the basis of the criteria in Recommendation 1.1, the poverty measure should have the following characteristics: The poverty thresholds should represent a budget for food, clothing, shelter (including utilities), and a small additional amount to allow for other needs (e.g., household supplies, personal care, non-work-related transportation). A threshold for a reference family type should be developed using actual consumer expenditure data and updated annually to reflect changes in expenditures on food, clothing, and shelter over the previous 3 years. The reference family threshold should be adjusted to reflect the needs of different family types and to reflect geographic differences in housing costs. Family resources should be defined—consistent with the threshold concept—as the sum of money income from all sources together with the value of near-money benefits (e.g., food stamps) that are available to buy goods and services in the budget, minus expenses that cannot be used to buy these goods and services. Such expenses include income and payroll taxes, child care and other work-related expenses, child support payments to another household, and out-of-pocket medical care costs, including health insurance premiums. The U.S. Office of Management and Budget should adopt a revised poverty measure as the official measure for use by the federal government. Appropriate agencies, including the Bureau of the Census and the Bureau of Labor Statistics, should collaborate to produce the new thresholds each year and to implement the revised definition of family resources. The Statistical Policy Office of the U.S. Office of Management and Budget should institute a regular review, on a 10-year cycle, of all aspects of the poverty measure: reassessing the procedure for updating the thresholds, the family resource definition, etc. When changes to the measure are implemented on the basis of such a review, concurrent poverty statistics series should be run under both the old and new measures to facilitate the transition. A poverty threshold with which to initiate a new series of official U.S. poverty statistics should be derived from Consumer Expenditure Survey data for a reference family of four persons (two adults and two children). The procedure should be to specify a percentage of median annual expenditures for such families on the sum of three basic goods and services—food, clothing, and shelter (including utilities)—and apply a specified multiplier to the corresponding dollar level so as to add a small amount for other needs. The new poverty threshold should be updated each year to reflect changes in consumption of the basic goods and services contained in the poverty budget: determine the dollar value that represents the designated percentage of the median level of expenditures on the sum of food, clothing, and shelter for two-adult/two-child families and apply the designated multiplier. To smooth out year-to-year fluctuations and to lag the adjustment to some extent, perform the calculations for each year by averaging the most recent 3 years’ worth of data from the Consumer Expenditure Survey, with the data for each of those years brought forward to the current period by using the change in the Consumer Price Index. When the new poverty threshold concept is first implemented and for several years thereafter, the Census Bureau should produce a second set of poverty rates for evaluation purposes by using the new thresholds updated only for price changes (rather than for changes in consumption of the basic goods and services in the poverty budget). As part of implementing a new official U.S. poverty measure, the current threshold level for the reference family of two adults and two children ($14,228 in 1992 dollars) should be reevaluated and a new threshold level established with which to initiate a new series of poverty statistics. That reevaluation should take account of both the new threshold concept and the real growth in consumption that has occurred since the official threshold was first set 30 years ago. The four-person (two adult/two child) poverty threshold should be adjusted for other family types by means of an equivalence scale that reflects differences in consumption by adults and children under 18 and economies of scale for larger families. A scale that meets these criteria is the following: children under 18 are treated as consuming 70 percent as much as adults on average; economies of scale are computed by taking the number of adult equivalents in the family (i.e., the number of adults plus 0.70 times the number of children), and then by raising this number to a power of from 0.65 to 0.75. The poverty thresholds should be adjusted for differences in the cost of housing across geographic areas of the country. Available data from the decennial census permit the development of a reasonable cost-of-housing index for nine regions and, within each region, for several population size categories of metropolitan areas. The index should be applied to the housing portion of the poverty thresholds. Appropriate agencies should conduct research to determine methods that could be used to update the geographic housing cost component of the poverty thresholds between the decennial censuses. Appropriate agencies should conduct research to improve the estimation of geographic cost-of-living differences in housing as well as other components of the poverty budget. Agencies should consider improvements to data series, such as the BLS area price indexes, that have the potential to support improved estimates of cost-of-living differences. In developing poverty statistics, any significant change in the definition of family resources should be accompanied by a consistent adjustment of the poverty thresholds. The definition of family resources for comparison with the appropriate poverty threshold should be disposable money and near-money income. Specifically, resources should be calculated as follows: estimate gross money income from all public and private sources for a family or unrelated individual (which is income as defined in the current measure); add the value of near-money nonmedical in-kind benefits, such as food stamps, subsidized housing, school lunches, and home energy assistance; deduct out-of-pocket medical care expenditures, including health deduct income taxes and Social Security payroll taxes; for families in which there is no nonworking parent, deduct actual child care costs, per week worked, not to exceed the earnings of the parent with the lower earnings or a cap that is adjusted annually for inflation; for each working adult, deduct a flat amount per week worked (adjusted annually for inflation and not to exceed earnings) to account for work-related transportation and miscellaneous expenses; and deduct child support payments from the income of the payer. Appropriate agencies should work to develop one or more “medical care risk” indexes that measure the economic risk to families and individuals of having no or inadequate health insurance coverage. However, such indexes should be kept separate from the measure of economic poverty. The Survey of Income and Program Participation should become the basis of official U.S. income and poverty statistics in place of the March income supplement to the Current Population Survey. Decisions about the SIPP design and questionnaire should take account of the data requirements for producing reliable time series of poverty statistics using the proposed definition of family resources (money and near-money income minus certain expenditures). Priority should be accorded to methodological research for SIPP that is relevant for improved poverty measurement. A particularly important problem to address is population undercoverage, particularly of low-income minority groups. To facilitate the transition to SIPP, the Census Bureau should produce concurrent time series of poverty rates from both SIPP and the March CPS by using the proposed revised threshold concept and updating procedure and the proposed definition of family resources as disposable income. The concurrent series should be developed starting with 1984, when SIPP was first introduced. The Census Bureau should routinely issue public-use files from both SIPP and the March CPS that include the Bureau’s best estimate of disposable income and its components (taxes, in-kind benefits, child care expenses, etc.) so that researchers can obtain poverty rates consistent with the new threshold concept from either survey. Appropriate agencies should conduct research on methods to develop poverty estimates from household surveys with limited income information that are comparable to the estimates that would be obtained from a fully implemented disposable income definition of family resources. Appropriate agencies should conduct research on methods to construct small-area poverty estimates from the limited information in the decennial census that are comparable with the estimates that would be obtained under a fully implemented disposable income concept. In addition, serious consideration should be given to adding one or two questions to the decennial census to assist in the development of comparable estimates. The Bureau of Labor Statistics should undertake a comprehensive review of the Consumer Expenditure Survey to assess the costs and benefits of changes to the survey design, questionnaire, sample size, and other features that could improve the quality and usefulness of the data. The review should consider ways to improve the CEX for the purpose of developing poverty thresholds, for making it possible at a future date to measure poverty on the basis of a consumption or expenditure concept of family resources, and for other analytic purposes related to the measurement of consumption, income, and savings. The official poverty measure should continue to be derived on an annual basis. Appropriate agencies should develop poverty measures for periods that are shorter and longer than a year, with data from SIPP and the Panel Study of Income Dynamics, for such purposes as program evaluation. Such measures may require the inclusion of asset values in the family resource definition. The official measure of poverty should continue to use families and unrelated individuals as the units of analysis for which thresholds are defined and resources aggregated. The definition of “family” should be broadened for purposes of poverty measurement to include cohabiting couples. Appropriate agencies should conduct research on the extent of resource sharing among roommates and other household and family members to determine if the definition of the unit of analysis for the poverty measure should be modified in the future. In addition to the basic poverty counts and ratios for the total population and groups—the number and proportion of poor people—the official poverty series should provide statistics on the average income and distribution of income for the poor. The count and other statistics should also be published for poverty measures in which family resources are defined net of government taxes and transfers, such as a measure that defines income in before-tax terms, a measure that excludes means-tested government benefits from income, and a measure that excludes all government benefits from income. Such measures can help assess the effects of government taxes and transfers on poverty. Agencies responsible for federal assistance programs that use the poverty guidelines derived from the official poverty thresholds (or a multiple) to determine eligibility for benefits and services should consider the use of the panel’s proposed measure. In their assessment, agencies should determine whether it may be necessary to modify the measure—for example, through a simpler definition of family resources or by linking eligibility less closely to the poverty thresholds because of possible budgetary constraints—to better serve program objectives. The states should consider linking their need standard for the Aid to Families With Dependent Children program to the panel’s proposed poverty measure and whether it may be necessary to modify this measure to better serve program objectives. The following is a summary of the description of the three surveys in Citro and Michael, Measuring Poverty, pp. 391-420. The Consumer Expenditure Survey (CEX) is a continuing survey of households that primarily collects data on consumer expenditures through a quarterly Interview Survey and a 2-week Diary Survey about the U.S. civilian noninstitutionalized population, including military in civilian housing, students in college housing, and group homes. The CEX is sponsored by the Bureau of Labor Statistics (BLS) and conducted by the Bureau of the Census. The Interview Survey sample size is 6,800 consumer units interviewed in-person at 3-month intervals for 5 quarters; each month, one-fifth of the sample is new, and one-fifth is completing its final interview. The Diary Survey sample is an additional 6,000 consumer units, each of which records daily expenditures for 2 consecutive weeks. Consumer units are defined as a single person living alone or sharing a household with others but financially independent; family members sharing a household; two or more persons living together who share responsibility for two of three major expenses—food, housing, and other expenses. The respondent is any member of the consumer unit aged 16 or older with most knowledge of the unit’s finances. BLS makes use of data from both the Interview and Diary Surveys to develop a total picture of expenditures. Researchers who analyze expenditure data typically work with the Interview Survey, from which users can construct annual data on expenditures and income. The CEX Interview Survey includes data on demographic characteristics and work experience and job characteristics in the prior 12 months of unit members aged 14 and over. Detailed expenditure data are collected quarterly on rent, housing assistance subsidies, mortgage and home equity loan payments, and other home ownership costs such as condominium fees; expenses of telephone, utilities, and fuels, and home and household equipment maintenance and repair; purchases of household equipment, appliances, furnishings, clothing, watches, and jewelry; lease payments for and purchases of vehicles; vehicle maintenance, repair, parts and accessories, licensing, and other operating expenses; premiums for health and other insurance; coverage by Medicaid and Medicare; medical and health expenditures and reimbursements; educational expenses; trips and their expenses; and gifts for people outside the family. Global or usual expenditures are obtained for books, subscriptions, membership, and entertainment expenses; expenses for supermarkets and food stores, liquor, tobacco, and food away from home; food stamp benefits and other meals provided free; selected services and goods (for example, laundromats); miscellaneous expenses (including babysitting); and occupational expenses and contributions (including alimony, child support, and charitable contributions). An inventory is taken of major household appliances and features of the dwelling unit, including descriptions of each owned property, and the rental value of the owned home. Data are obtained on financial assets, including credit balances and finance charges paid, and changes in financial assets. Data on income for the prior 12 months are obtained on wages, self-employment, Social Security, and Supplemental Security Income for each member aged 14 and over; and, for the household as a whole, on workers’ compensation and veterans’ benefits, public assistance, and interest and dividend income; income from trusts, pensions, and annuities; net income or loss from roomers or rental property; and income from alimony, child support, or other contributions from persons outside the consumer unit. Data are also obtained on taxes paid through paycheck deductions, additional federal and state income taxes, property and other taxes, and other taxes not reported elsewhere (sales taxes are included in the component expenditures). The Current Population Survey (CPS) is a monthly survey of households that collects primarily labor force data about the U.S. civilian noninstitutionalized population. BLS sponsors the core of the CPS, which is designed to provide monthly unemployment rates. The Bureau of the Census sponsors the March Income Supplement to the CPS, in which respondents are asked supplementary questions about money income received in the previous calendar year. The CPS sample size is about 60,000 households; households are considered in the sample for 4 months, out of the sample for 8 months, and in again for 4 months. The sample is updated continually to account for new residential construction and periodically to incorporate information from the decennial census. The March CPS supplement includes military people living in civilian housing and an additional sample of 2,500 housing units that contained at least one adult of Hispanic origin as of the preceding November interview. The core CPS interview elicits information on demographic characteristics and labor force participation (such as hours worked, reason for part-time work, industry, and occupation in which subjects worked in the prior week, usual hours, and usual earnings). The March CPS supplement includes information on labor force participation and job history in the prior calendar year for each household member aged 15 or older; private and public health insurance coverage; annual income for each household member aged 15 or older by detailed source—about 30 types of regular cash income, including wages and salaries; net self-employment income; Social Security and other government program cash benefits; child support; alimony; private, government, and military pensions; retirement and insurance payments; money from relatives or friends; interest and dividend income; and Pell grants and other educational financial aid; and participation in noncash benefits programs, such as energy assistance, food stamps, public housing, and School Lunch. The Survey of Income and Program Participation (SIPP) is a continuing panel survey conducted and sponsored by the Bureau of the Census. The sample covers the U.S. civilian noninstitutionalized population and members of the armed forces living off post or with their families on post. The reporting unit is the household, and the respondents are household members aged 15 or older. Up until 1996, each sample of households (panel) was interviewed every 4 months for 32 months, and the sample size varied from 12,500 to 23,500 households per panel; new panels were introduced every year. Under the SIPP’s current design, a new panel will be introduced every 4 years (that is, with no overlap across panels) and interviewed every 4 months for 48 months, and the panel size will be increased to 37,000 households. The current SIPP core interview elicits the following: demographic characteristics; monthly information on labor force participation, job characteristics, and earnings; monthly information on public and private health insurance coverage; detailed monthly information on sources and amounts of income from public and private transfer payments and on noncash benefits; and information for the 4-month period on income from assets. In total, about 65 separate sources of cash income are identified for each household member aged 15 or over, together with benefits from 7 in-kind programs; for a few sources, annual amounts are obtained in special interview supplements called “topical modules.” Data are also collected, once or twice in each panel, on a wide range of subjects, including annual income and income taxes; educational financing and enrollment; eligibility for selected programs (including expenditures on shelter, out-of-pocket medical care costs, and dependent care); housing costs and financing; individual retirement accounts; and wealth (assets, including property, and liabilities). The SIPP obtains somewhat more detailed information on topics relevant to measuring poverty than the CPS does. For example, the March CPS supplement asks no questions about any type of tax payment. The Bureau of the Census, instead, models federal and state income taxes and payroll taxes of each household for its experimental poverty estimates. The SIPP includes twice for each panel questions about tax payments for the previous year. However, its questions on such topics as tax liability and adjusted gross income have high nonresponse rates, primarily because only one-third of respondents use their tax forms to answer the questions, as they are asked to do. In addition, the CPS asks whether a household received benefits from the School Lunch Program or housing assistance the previous year but asks about the amounts received only for food stamps and energy assistance. The SIPP, on the other hand, obtains monthly information on the number of people who receive and benefit amounts for food stamps and the Special Supplemental Food Program for Women, Infants and Children (WIC); information every 4 months about energy assistance and the School Lunch and Breakfast programs; and information twice a panel about public housing and subsidized housing. Finally, whereas the CPS does not ask questions about expenses for medical care or child care, the SIPP obtains detailed information on these at least once each panel. The National Research Council (NRC) panel, in reviewing research on data quality in the two surveys, found that the SIPP is favored on some indicators, such as item nonresponse rates and amounts of Social Security and other income types collected (in comparison with independent estimates), while the March CPS supplement fares better on household nonresponse rates and the amount of wages and salaries collected. Citro and Michael report that “verall, however, SIPP appears to be doing a better job at measuring income, particularly at the lower end of the income distribution. SIPP’s more frequent interviews and detailed probing for receipt of different income sources appear to be identifying more recipients of many income types than the March CPS, although the dollar amounts reported are not always more complete in SIPP than in the CPS.”As a consequence, SIPP poverty estimates are consistently several points below those from the March CPS. In addition, the panel and Bureau of the Census officials we interviewed felt that the SIPP, because of its focus on income and program participation, was in a better position than the CPS to provide both higher quality information on income and the other information on family expenditures needed for a revised definition of family resources for measuring poverty. Betson, David M. “Is Everything Relative? The Role of Equivalence Scales in Poverty Measurement.” Unpublished paper, dated March 1996, available from the author at the Department of Economics, University of Notre Dame, South Bend, Ind. Citro, Constance F., and Robert T. Michael, eds. Measuring Poverty: A New Approach. Washington, D.C.: National Academy Press, 1995. Cutler, David M., and Lawrence F. Katz. “Macroeconomic Performance and the Disadvantaged.” Brookings Papers on Economic Activity, Vol. 2 (1991), pp. 1-74. Federman, Maya, Thesia I. Garner, Kathleen Short, W. Bowman Cutter IV, John Kiely, David Levine, Duane McGough, and Marilyn McMillen. “What Does It Mean to Be Poor in America?” Monthly Labor Review, 119(5) (May 1996), pp. 3-17. Fisher, Gordon M. “Relative or Absolute: New Light on the Behavior of Poverty Lines Over Time.” Newsletter of the Government Statistics Section and the Social Statistics Section of the American Statistical Association (summer 1996), pp. 10-11. Garner, Thesia I., Geoffrey Paulin, Stephanie Shipp, Kathleen Short, and Chuck Nelson. “Experimental Poverty Measurement for the 1990’s.” Paper presented at the Allied Social Science meetings, New Orleans, La., January 4, 1997. Johnson, David. “Poverty Lines and the Measurement of Poverty.” Australian Economic Review, 113 (First Quarter 1996), pp. 110-126. Manski, Charles F., Susan E. Mayer, Robert Haveman, Janet L. Norwood, Harold W. Watts, Wendell Primus, and Walter Oi. “Assessments of the Panel Report.” Focus, 17(1) (summer 1995), pp. 15-28. Mayer, Susan E., and Christopher Jencks. “Poverty and the Distribution of Material Hardship.” The Journal of Human Resources, 24(1) (winter 1989), pp. 88-113. Rogers, John, and Maureen Gray. “CE Data: Quintiles of Income Versus Quintiles of Outlays.” Monthly Labor Review, (Dec. 1994), pp. 32-37. Ruggles, Patricia. Drawing the Line: Alternative Poverty Measures and Their Implications for Public Policy. Washington, D.C.: The Urban Institute Press, 1990. Short, Kathleen, Martina Shea, and T. J. Eller. “Work Related Expenditures in a New Measure of Poverty.” Paper presented at the American Statistical Association meetings, Chicago, Ill., August 7, 1996. Slesnick, Daniel T. “Gaining Ground: Poverty in the Postwar United States.” Journal of Political Economy, 101(1) (1993), pp. 1-38. U.S. Bureau of the Census. Estimates of Poverty Including the Value of Noncash Benefits: 1984 (Technical Paper 55). Washington, D.C.: U.S. Government Printing Office (GPO), 1985. _____. Measuring the Effect of Benefits and Taxes on Income and Poverty: 1990 (Current Population Reports, Series P-60, No. 176-RD). Washington, D.C.: GPO, 1991. _____. Income, Poverty and Valuation of Noncash Benefits: 1994 (Current Population Reports, Series P-60, No. 189). Washington, D.C.: GPO, 1996. _____. Poverty in the United States: 1995 (Current Population Reports, Series P-60, No. 194). Washington, D.C.: GPO, 1996. Vaughan, Denton R. “Exploring the Use of the Public’s Views to Set Income Poverty Thresholds and Adjust Them Over Time.” Social Security Bulletin, 56(2) (summer 1993). Alternative Poverty Measures (GAO/GGD-96-183R, Sept. 10, 1996). Poverty Measurement: Adjusting for Geographic Cost-of-Living Difference (GAO/GGD-95-64, Mar. 9, 1995). Federal Aid: Revising Poverty Statistics Affects Fairness of Allocation Formulas (GAO/HEHS-94-165, May 20, 1994). Poverty Trends, 1980-88: Changes in Family Composition and Income Sources Among the Poor (GAO/PEMD-92-34, Sept. 10, 1992). Noncash Benefits: Methodological Review of Experimental Valuation Methods Indicates Many Problems Remain (GAO/PEMD-87-23, Sept. 30, 1987). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed various issues involved in updating the federal government's measure of poverty, focusing on: (1) the issues associated with measuring a family's economic well-being and setting a standard below which families are considered poor; (2) the suggestions experts have for addressing these issues; and (3) recent developments on these issues since the National Research Council (NRC) Panel on Poverty and Family Assistance issued its report in 1995. GAO noted that: (1) the choices or issues to address in developing a routinely available, reliable measure of a family's economic resources include: (a) whether to directly measure a family's spending on basic necessities or use income and other economic resources as a proxy for their ability to buy these necessities; (b) which economic resources should be considered available for meeting a family's basic needs; and (c) whether existing data sources are adequate (for whichever resource definition is selected) or should be modified to improve the reliability of poverty estimates; (2) some issues in updating the family resource measure seem to be fairly well resolved in the scientific community, while additional discussion and research may be needed to reach consensus on some of the practical details; (3) although assessing a family's expenditures might provide a more direct picture of its economic well-being than income, measuring income is considered to be more feasible for obtaining routinely available poverty statistics; (4) the panel recommended that the official poverty measure should define a family's economic resources to include disposable money income and near-money government benefits, although experts differ on how to make some of the adjustments to cash income; (5) issues to address in developing a contemporary set of poverty thresholds to represent a "minimally adequate standard of living" for families in different circumstances include: (a) what basis should be used to set the level of the thresholds; (b) whether to accommodate changes over time in standards of living as well as in prices; (c) how to quantify the differences in needs between families of different size and composition; and (d) whether and how to accommodate geographical differences in the cost of living; (6) in contrast to defining family resources, additional research may lead to consensus on some issues in selecting a set of poverty thresholds, but other issues will require policy judgment; (7) the panel proposed a statistical formula derived from the literature to develop thresholds for different family sizes, but lacking an objective way to measure the difference in needs between families, left setting the formula's exact terms to policy judgment; and (8) the Office of Management and Budget has not yet begun a formal review of the poverty measure as the NRC panel recommended, but it plans to create a working group soon with the Bureau of Labor Statistics, the Bureau of the Census, and other interested agencies to explore general issues in measuring income and poverty and consider alternative measures to be developed and tested. |
The military services preposition stocks ashore and afloat to provide DOD the ability to respond to multiple scenarios by providing assets to support U.S. forces during the initial phases of an operation until follow-on capabilities are available through strategic lift and the supply chain has been established. Each military service maintains different configurations and types of equipment and materiel to support its own prepositioning program. The Army stores equipment sets in its Army Prepositioned Stocks, which consist of sets of combat brigade equipment, supporting supplies, and other stocks located both ashore and afloat. The Marine Corps forward deploys and prepositions sets of materiel and equipment to support a Marine Expeditionary Brigade. These capability sets are stored aboard ships in two Maritime Prepositioning Squadrons and ashore in Norway. The Navy maintains materiel in the Maritime Prepositioning Squadrons in support of the Marine Corps. Its prepositioning program provides construction support, equipment for off-loading and transferring cargo from ships to shore, and expeditionary medical facilities. Prepositioned assets in the Air Force’s war reserve materiel program are located at 43 sites worldwide as well as in munitions storage afloat. The war reserve materiel includes assets such as direct mission support equipment for fighter and strategic aircraft as well as base operating support equipment to provide force, infrastructure, and flight line support during wartime and contingency operations. DOD’s prepositioned stocks are intended to support national military objectives, which are described in strategic and operational documents. High-level military strategic guidance includes the National Defense Strategy and the National Military Strategy, which the Office of the Secretary of Defense and the Joint Staff use to develop guidance that instructs the geographic combatant commanders on what operation plans they must develop to meet operational objectives that address certain scenarios. Joint operation planning is a coordinated process used by commanders, including the geographic combatant commanders, to determine the best method of accomplishing a mission. Combatant commands develop plans with varying levels of detail, and the most detailed plans contain, among other things, time-phased force and deployment data, which include the specific units to be deployed in support of the plan and the timeline for when those forces are needed. The services then determine how best to meet the needs of the combatant commanders, which may include the use of prepositioned stocks or other types of equipment to support the commanders’ goals and ensure timely support of deployed forces during the initial phases of an operation until follow-on capabilities have been established. Combatant commanders periodically review their plans, assess the risk to those plans, and report the results to the Chairman of the Joint Chiefs of Staff. By providing needed prepositioned materiel and equipment, the military services can reduce the risks associated with a plan. Prepositioned stocks are employed by the geographic combatant commanders, who have the authority to, among other things, organize commands and forces and employ forces as they consider necessary to accomplish assigned missions. DOD apportions the services’ prepositioned materiel among the geographic combatant commands according to the joint guidance, and the afloat prepositioned stocks may be apportioned to more than one geographic combatant command. Requirements for prepositioning are developed based on an approved operation plan. The approval of the Secretary of Defense is generally required to use the prepositioned capabilities. The Global Prepositioned Materiel Capabilities Working Group, including representatives from the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics and the Joint Staff, has responsibility for, among other things, addressing joint issues concerning prepositioned stocks. The Chairman of the Joint Chiefs of Staff has provided the annual report on prepositioned stocks on behalf of the Secretary of Defense since the report’s inception. DOD’s fiscal year 2012 report on prepositioned stocks provided information on all 12 statutorily required elements; however, it only partially addressed three of those elements. Also, the report contains some inconsistencies among the services’ prepositioning data as well as some inaccuracies and omissions, which limit its usefulness to congressional decision makers. DOD provided some information on the each of the 12 reporting elements enumerated in section 2229a in its fiscal year 2012 annual report on prepositioned stocks. Specifically, we assessed that DOD addressed nine of the elements because the information provided in the report was responsive to the reporting requirements. However, we assessed that DOD partially addressed three of the elements—elements seven, ten, and twelve— because it did not provide all of the required information. Table 1 summarizes our assessment of the extent to which DOD’s report included the required elements. We assessed three of the elements as being partially addressed because DOD’s report did not provide all of the required information: Element seven requires DOD to provide a list of non-standard items slated for inclusion in the prepositioned stocks as well as a plan for funding the inclusion and sustainment of those items. DOD’s report contained a table with Marine Corps non-standard equipment slated for inclusion in that service’s prepositioned stocks that included the quantities and purpose of each item, but it did not identify a specific plan for funding the inclusion and sustainment of those items as required. Further, in this section of the report, the Army, Air Force, and Navy stated that they had not identified any non-standard equipment for inclusion in prepositioned stocks as of the time of the report. However, in responding to element one of DOD’s report, the Army had provided a table with the level of fill of non-standard items, in which it provided data on some non-standard equipment that it would be placing in its Army Prepositioned Stocks operational projects. DOD’s report also did not fully describe how those additional Army assets would be funded and sustained, instead indicating that the Army will assess enduring requirements for non-standard items being retrograded from Southwest Asia and program required funding for storage and maintenance in future budget submissions. Because the information provided did not address both required parts of element seven, we assessed that DOD’s report only partially addressed the element. Element ten requires DOD to report on the status of efforts to develop a joint strategy, integrate service requirements, and eliminate redundancies. While the report contains a paragraph describing DOD’s strategic guidance process and framework in response to this element, it does not identify specific efforts that are under way to develop a joint strategy for its prepositioning programs and to integrate service requirements and eliminate redundancies to produce greater efficiency and effectiveness in those programs. Because the information provided did not address all of the required parts of element ten, we assessed that DOD’s report only partially addressed the element. Element twelve requires DOD to list any strategic plans affected by changes to the levels, composition, or locations of the prepositioned stocks and to describe any action taken to mitigate any risks resulting from those changes. In addressing this element, DOD’s report provided a list of strategic plans from the combatant commands that have prepositioning requirements. However, the report did not provide, along with the list of plans, a description of any action taken to mitigate risks resulting from any changes to the prepositioned stocks. The Joint Staff official overseeing the development and submission of DOD’s prepositioning report said that the information describing actions to mitigate risks could be found elsewhere in other sections of the report. However, that information pertained to mitigating shortfalls affecting operation plans, as required by element six, and did not fully address actions taken to mitigate changes to the levels, composition, or locations of prepositioned stocks affecting strategic plans, as required by element twelve. While some of those mitigation actions relate to the operation plans identified as part of DOD’s response to element twelve, it is unclear the extent to which those actions will mitigate the risks to some of the other strategic plans identified in the list provided as part of element twelve. Because DOD’s report did not fully address the second part of the required element regarding changes to prepositioned stocks and actions taken to mitigate any resulting risks, we assessed this element as being only partially addressed. Inconsistencies in some of the information provided by the military services limit the usefulness of the data presented in DOD’s report. Federal internal control standards state that decision makers need complete and relevant information to manage risks and achieve efficiency and effectiveness goals. Such information can be used to compare and assess different sets of data so that agencies can analyze relationships and take appropriate actions. However, we found inconsistencies in the amount and types of data presented on each of the services in DOD’s report. In particular, DOD’s report inconsistently reported information on the services’ future funding requirements, providing decision makers with an incomplete picture of DOD’s future funding needs for prepositioning (see table 2). First, the Marine Corps reported its procurement requirements as “to be determined” rather than giving projected funding amounts, whereas that information was provided for the other services in DOD’s report. Second, the Marine Corps and the Air Force provided information that could be used to identify funding shortfalls in their prepositioning programs for each fiscal year across the five year defense plan whereas the Army and Navy did not provide this information. Third, three of the services reported working capital funds requirements or indicated that they had no working capital funds requirements. The Navy, however, did not report whether or not it had working capital funding requirements. Lastly, each of the services reported its current funding requirements, as of fiscal year 2012, and its projected funding requirements, but they did not all use the same time frame for these estimates. The Navy, as shown in table 2, reported its actual operation and maintenance and procurement funding for fiscal year 2012 and its estimated funding requirements for fiscal year 2013. In contrast, the other services provided funding requirements information for fiscal years 2012 to 2018: a difference of five fiscal years. As a result, it is not possible for users of DOD’s report to compare procurement requirements, funding requirements, actual funding, or anticipated shortfalls across the services and assess trends over time. Furthermore, DOD’s report presented the services’ funding requirements in different formats (see figure 1). Three of the services provided numerical tables to display their funding information, but the Navy used text to report its funding requirements. The lack of a standard reporting format makes it difficult for users of DOD’s report to accurately combine and assess the data from the services to identify funding trends across DOD’s prepositioning programs and perform other analyses. Moreover, we found inconsistent reporting among the services concerning the levels of fill and material condition of their prepositioned stocks. DOD’s report included information on the overall status of each service’s prepositioned stocks, but the amount of detail for specific items or categories of items within the prepositioned stocks varied among the services. For example, the Army reported the levels of fill and material condition of individual major end items and categories of prepositioned stocks, but it also provided information on the levels of fill for its prepositioned equipment sets, which are located in selected sites across the world. However, the Marine Corps and Navy did not provide similar information on the levels of fill for on-hand prepositioned equipment sets for their respective locations in the fiscal year 2012 report. Decision makers could find this information useful in monitoring the fill levels of prepositioned stocks in various parts of the world for oversight and funding purposes, such as assessing the prepositioning needs in a given combatant commander’s area of responsibility and having greater assurance that required assets would be available when and where they are needed to meet combatant command requirements. According to service officials, the reason for the inconsistent reporting in funding requirements and major end items was that without specific guidance from the Joint Staff, each of the services had adopted its own reporting approach, independent of each other. The Joint Staff did provide the services with a tasking document instructing them to update their fiscal year 2011 prepositioning data and take into account recommendations from our prior report when submitting their data. This tasking document to the services also included a copy of the 12 reporting elements. However, the Joint Staff did not direct the services to coordinate their information with each other or provide more consistent reporting instructions. In the absence of detailed guidance to provide data in specific formats, the services reported their funding requirements and major end item information for the fiscal year 2012 report based on the previous year’s submission and their own reporting preferences. Each of the services did make some changes in its reporting based on changes within its respective programs and added new information per GAO’s prior recommendations, but the type of information and formatting were consistent with how the services had provided the information in the previous fiscal year, thus yielding inconsistencies in DOD’s final report. According to GAO’s internal control management and evaluation tool, which is based on federal internal control standards, to effectively communicate information to the Congress, an agency should monitor the quality of the information being captured, maintained, and communicated as measured by accuracy, among other things. However, we found some inaccuracies and omissions in DOD’s prepositioning report, which affect the quality of the information provided to Congress by DOD. We reviewed the information in DOD’s report on each service and found examples of inaccurate information, such as incorrect calculations within data tables and reporting that seemed to conflict with data presented elsewhere in the report. For instance, the Air Force, in one table, reported the level of fill of equipment, such as fuel pumps and storage bladders, that it uses for fuel operations at austere forward locations; however, the Air Force had incorrectly calculated the change in operationally available levels of equipment from fiscal years 2011 to 2012 for many of the items in the table. Furthermore, we found some discrepancies between fiscal year 2011 data that were reported in both the fiscal year 2011 and the 2012 reports and instances where information provided in the tables did not match the report’s text. Air Force officials provided us updated tables addressing these inaccuracies as well as explanations for the discrepancies we found, but this information was not available in DOD’s report itself. In addition, we found examples of information that had been inadvertently omitted from DOD’s report; in some cases, this information could have shed light on reporting that appeared to be inaccurate. For example, in the Marine Corps’ table on the level of fill and material condition of its major end items and repair parts, we found that the change in on-hand totals from fiscal year 2011 to fiscal year 2012 seemed to be inaccurate for nearly two-thirds of the listed items. For those items, the Marine Corps provided on-hand totals for fiscal years 2011 and 2012, but reported no change between the two fiscal years even though the data seemed to indicate changes had occurred. According to Marine Corps officials, they reported “no change” for the items because those items were newly added to the fiscal year 2012 report. Since these items were not reported in fiscal year 2011, there would be no changes to report in the fiscal year 2012 report, according to Marine Corps officials. However, the fiscal year 2012 report did not provide an explanation for the differences in the data or why the Marine Corps considered there to be no change. Table 3 highlights some examples of inaccuracies and omissions that we found in DOD’s fiscal year 2012 prepositioning report. While officials from each of the services and the Joint Staff stated that they employed their own internal controls to review their respective reporting for quality assurance, the inaccuracies and omissions we found in the services’ reporting indicate weaknesses in DOD’s overall quality assurance procedures for its annual prepositioning report. In 2011, we reported that it was important for DOD to provide context in its annual prepositioning reports to enable decision makers to determine whether there have been significant changes in DOD’s prepositioning programs from the prior year and the reasons for those changes. Although DOD provided additional information in fiscal year 2012 in response to our 2011 report, without more consistency and accuracy in reporting from the services, DOD’s annual prepositioning report will continue to present incomplete information to decision makers on the status of DOD’s prepositioning programs. Also, greater consistency would improve the usefulness of the report by facilitating analyses of data across the services and across reports from different fiscal years, making it easier for decision makers to assess DOD’s progress in meeting prepositioning goals and track changes in DOD’s prepositioning programs over time. Until DOD provides complete, consistent, and accurate information on its prepositioned stocks, its report will be of limited use to Congress’s ability to oversee and make informed decisions about DOD’s use of its equipment and resources in this constrained fiscal environment. Since we last reported on this issue in September 2012, DOD has not made progress in addressing our prior recommendations to develop department-wide strategic guidance and implement a coordinated joint- service approach for managing its prepositioning programs, nor has it set a timeline for doing so. Without department-wide guidance and joint oversight, DOD may not be able to fully recognize potential efficiencies that could be gained by synchronizing the services’ prepositioning programs with each other and the new defense strategy. In response to recommendations we have made in reports on DOD’s annual prepositioning programs, DOD has stated that it planned to develop department-wide strategic guidance for its prepositioning programs; however, DOD has made no progress in developing such guidance, nor has it set a timeline for doing so. Key principles of results- oriented management emphasize the importance of strategic planning as the starting point and foundation for defining what an agency seeks to accomplish, identifying the strategies it will use to achieve desired results, and then determining how well it succeeds in reaching results-oriented goals and achieving objectives. Strategic planning can help clarify priorities and unify an agency in pursuit of shared goals. As far back as 2005, we have reported that each of the military services and the Defense Logistics Agency were planning the future of their prepositioning programs without the benefit of an overall plan or joint doctrine to coordinate their efforts, which made it difficult to determine how the services’ different programs would fit together to meet the evolving defense strategy. DOD officials from the Joint Staff and the services agreed with our assessment and said that they shared our concerns. In June 2008, DOD issued an instruction directing the Under Secretary of Defense for Policy to develop and coordinate for approval by the Secretary of Defense guidance that identifies an overall war reserve materiel strategy, which includes prepositioned stocks, to achieve desired capabilities and responsiveness in support of the National Defense Strategy. We reported in May 2011 that at that time DOD still had limited department-wide guidance that would help ensure that its prepositioning programs accurately reflect national military objectives such as those included in the National Defense Strategy and the National Military Strategy. We recommended that DOD develop appropriately detailed authoritative strategic guidance for prepositioned stocks and that the guidance include planning and resource priorities linking the department’s current and future needs for prepositioned stocks to evolving national defense objectives. Our report stated that such strategic guidance would provide the services with information on the medium- and long-term department-wide priorities they need to effectively plan and apply their resources to meet future contingencies, thus linking DOD’s prepositioning programs with its overall national defense strategies. In response to our May 2011 report, DOD stated that it would develop strategic direction concerning prepositioned stocks. In the fall of 2011, DOD program officials stated that the department was in the process of conducting a department-wide review, which would result in enhanced joint oversight, increased program efficiencies, and expanded guidance to link prepositioning programs with national military objectives. The result of that review was DOD’s Comprehensive Materiel Response Strategy, issued in May 2012, which describes DOD’s strategy for integrating and synchronizing materiel response to support a full range of military activities globally in an increasingly constrained resource environment. Also, in January 2013, DOD issued a Comprehensive Materiel Response Plan, which provides guidance for directing, coordinating, and prioritizing DOD-wide development plans, initiatives, and activities for the period 2013-2020 in order to achieve the Comprehensive Materiel Response Strategy end state. However, neither the Comprehensive Materiel Response Strategy nor the Comprehensive Materiel Response Plan provides guidance for DOD’s prepositioning programs, and the plan specifically states that the services’ prepositioned programs are outside the scope of the plan. During our review for our September 2012 report, Joint Staff officials developing the strategy told us that prepositioning programs were excluded because the planners received new direction for this effort in spring 2012, re-focusing the strategy and plan on integrating and synchronizing materiel response to support the full range of military activities, which is much broader than prepositioned materiel and equipment. Accordingly, in September 2012, we reported that DOD still had not made progress in implementing overarching DOD-wide strategic guidance for its prepositioning programs. Because DOD had planned to develop department-wide strategic guidance for its prepositioning programs and these efforts had not materialized because of other departmental priorities, our September 2012 report recommended that DOD set a timeline for implementing our prior recommendation. In commenting on a draft of that report, DOD concurred with the recommendation but said the department will continue to focus on ensuring that combatant commanders’ equipment requirements identified in operation and contingency plans are satisfied by the services. In conducting our current review, we found that DOD had still not made progress in developing an overarching strategy for its prepositioning programs. Hence, the services’ individual prepositioning programs are still not linked to overarching strategic guidance, which could lead to inconsistencies and potential overlap and duplication among the services’ prepositioning strategies and between the service strategies and the new national defense strategy. Further, without a set timeline for the development and implementation of department-wide strategic guidance that aligns DOD’s prepositioning programs with national defense strategic guidance and new departmental priorities, DOD could face difficulties in effectively planning and implementing its prepositioning programs and risks the potential for duplicative or unaligned efforts among the services. DOD has also not improved its joint oversight of its prepositioning programs because a working group that was expected to provide joint oversight has not been functioning as intended and other joint activities do not specifically address prepositioned stocks. We have previously reported that an increased emphasis on joint program management and oversight of prepositioned stocks is needed to reduce potential unnecessary duplication and achieve cost savings and efficiencies. We also identified the need to strengthen joint oversight and synchronize prepositioning programs at a department-wide level in our first annual report to Congress on potential duplication, overlap, and fragmentation in the federal government. Without joint-service oversight, DOD may not be able to fully recognize potential efficiencies among prepositioned stocks across the department. DOD’s instruction on war reserve materiel directed establishment of the Global Prepositioned Materiel Capabilities Working Group, which is to comprise officials from the services, the Defense Logistics Agency, joint organizations, and entities within the Office of the Secretary of Defense. In particular, according to DOD officials involved with the group since its inception, the intent of the working group is to provide an overall view of DOD’s prepositioning programs and ensure that the services’ programs are synchronized. Based on its charter, the working group’s joint prepositioning activities are to include, among other things, providing oversight of DOD’s prepositioning programs through reviewing risk assessments, addressing joint issues concerning requirements and positioning of prepositioned stocks, and making recommendations that balance limited resources against operational risk for use during budget and program reviews. However, the working group has not carried out all of the responsibilities specified in the instruction or the objectives in its own charter related to prepositioned stocks. Rather, officials said that the main function of the working group has been to consolidate the services’ individual submissions on their prepositioning programs into DOD’s annual report for Congress. According to DOD officials, the working group has met only sporadically and has not yet addressed many of the duties specified in its charter. Further, officials from the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics and the Joint Staff told us that they are considering revising the DOD instruction on war reserve materiel policy to eliminate the working group. Without strategic guidance from the Secretary of Defense that emphasizes the importance of joint oversight of prepositioned stocks, the working group may in fact be abolished, or it may continue to operate as it has been, with little impact on enhancing jointness or efficiency across the services’ prepositioning programs. DOD has developed some joint activities related to the supply chain, but many of these efforts are either in very early stages or do not specifically address prepositioned stocks and focus instead on more broadly supporting the full range of military activities. For example, DOD’s Comprehensive Materiel Response Plan calls for increasing sharing, standardization, and synchronized planning across the services. However, this plan does not contain details on where to position or how to manage prepositioned stocks. An example of where joint oversight could highlight areas for potential efficiencies is in the services’ prepositioned medical stocks. Currently, each service determines its requirements for prepositioned stocks in support of a geographic combatant commander’s operation plan. For instance, each service has determined its requirements for the number of prepositioned field hospitals—the Army has 8; the Navy, in support of the Marine Corps, has 10; and the Air Force has 3. Also, the size of these hospitals varies across the services, with costs ranging from about $10 million for the smaller ones to about $33 million for the larger ones. According to Joint Staff medical logistics officials, DOD has not conducted a coordinated department-wide analysis of the services’ requirements and the preferred options for meeting those requirements and supporting each other. Further, they said coordinating this type of analysis is difficult because of the individual ways the services identify requirements, configure hospitals, and package medical equipment. The officials pointed out, for example, that while the services are providing essentially similar medical services in their field hospitals, they individually identify requirements and develop capabilities and design processes to address them. Prepositioned hospitals are the end results of such processes; therefore, the officials said opportunities exist to assess theater hospitalization as a joint-service capability and still recognize potentially minimal unique aspects of requirements that each service has. According to the Joint Staff medical logistics officials, DOD has recognized that there are challenges associated with the coordination of medical logistics among the services, including prepositioned stocks to support theater hospitalization. To address these challenges, the officials said that they are taking a number of actions. For example, DOD plans to establish a new agency—the Defense Health Agency—in October 2013. This agency will interface with the combatant commanders and focus on improved coordination between the services and shared services, including medical logistics. However, until these challenges are met, the military services’ fragmented approach to planning and prioritizing the need for prepositioned resources, such as medical equipment, absent specific strategic guidance, increases the potential for overlap and duplication at a time when the services are seeking ways to reduce budgets and achieve efficiencies in virtually all areas. Congress has expressed concerns that DOD has not implemented an overarching strategy and joint-service oversight framework for its prepositioning programs. In a proposed bill for the National Defense Authorization Act for Fiscal Year 2014, the Senate Armed Services Committee recommended a provision that would require the Secretary of Defense to develop an overarching strategic policy, along with an implementation plan, to integrate and synchronize at a department-wide level, the services’ prepositioning programs, among other things. In the committee report accompanying the bill, the committee said that developing such a strategy and implementation plan would help ensure that DOD’s prepositioning programs, both ground and afloat, align with national defense strategies and DOD priorities and emphasize joint oversight to maximize effectiveness and efficiencies in prepositioned materiel and equipment across DOD. The legislation is currently pending. The House also passed a bill for the National Defense Authorization Act for Fiscal Year 2014, which does not include a similar provision, thus it is unclear whether the final National Defense Authorization Act, when passed, will address these issues. DOD’s annual report on prepositioning programs—with three partially- addressed elements, data inconsistencies among the services, inaccuracies, and omissions—is illustrative of long-standing problems stemming from the lack of overarching DOD strategic guidance and oversight. The resulting product is, for the most part, a separate report by each of the services on its prepositioning efforts, rather than a coordinated joint-service picture of DOD’s prepositioning programs. Strategic guidance and enhanced joint departmental oversight could strengthen the coordination and quality assurance procedures that DOD uses to compile its annual prepositioning reports for Congress. Importantly, a more complete, consistent, and accurate report would aid Congress in its ability to oversee and make informed decisions about DOD’s prepositioning programs. Further, an increased emphasis on joint program management and oversight of prepositioned materiel and equipment would serve to unify DOD’s prepositioning efforts in support of defense priorities, identify and reduce any unnecessary overlap or duplication, and achieve cost savings and efficiencies. Because we have made recommendations for strategic guidance and oversight for several years without meaningful actions by DOD, and in response to continued congressional concern and proposed legislation related to this issue, we are elevating this issue as a matter for congressional consideration. To improve DOD’s annual prepositioning report and more fully inform the congressional defense committees on the status of prepositioned materiel and equipment, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Acquisition, Technology, and Logistics, in coordination with the Chairman of the Joint Chiefs of Staff, to 1. develop guidance that clearly articulates the type and format of information the services should provide for the report to ensure consistency across DOD’s prepositioning programs, and 2. identify and correct weaknesses in DOD’s quality assurance procedures to minimize inaccuracies and omissions in the report. Congress may wish to require the Secretary of Defense to develop overarching strategic guidance, along with an implementation plan, to integrate and synchronize the services’ prepositioning programs department-wide. The strategic guidance and implementation plan, which should be developed within a specified time frame, should ensure that DOD’s prepositioning programs align with national defense strategies and new departmental priorities and emphasize joint oversight to maximize efficiencies and reduce the potential for unnecessary overlap or duplication in prepositioned materiel and equipment across the department. We provided a draft of this report to DOD for comment. In its written comments, reproduced in appendix II, DOD concurred with our recommendations. Regarding our first recommendation that DOD develop guidance that clearly articulates the type and format of information the services should provide for the report to ensure consistency across DOD’s prepositioning programs, DOD said it will review previous annual reports and related reference material and develop a reporting template to solicit service information and standardize respondent data format. The agency said this standardized format will be implemented in the next report cycle. Regarding our second recommendation that DOD identify and correct weaknesses in its quality assurance procedures to minimize inaccuracies and omissions in the report, DOD said it will insert a review step in the process to validate components’ inputs for data accuracy and completeness. If implemented, these actions will help improve the consistency and quality of information contained in DOD’s annual report, which will better assist Congress in overseeing and making informed decisions about DOD’s prepositioning programs. 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; the Chairman of the Joint Chiefs of Staff; the Secretaries of the Army, the Navy, and the Air Force; and the Commandant of the Marine Corps. 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. GAO staff members who made key contributions to this report are listed in appendix III. To evaluate the extent to which the Department of Defense’s (DOD) annual report addressed the 12 reporting elements set out in 10 U.S.C. § 2229a, regarding prepositioned stocks, we analyzed DOD’s report on the status of prepositioned materiel and equipment for fiscal year 2012. We performed a content analysis in which we compared the prepositioned stocks information in DOD’s fiscal year 2012 report with the 12 reporting elements and assessed the extent to which DOD had addressed each required element. One GAO analyst conducted this analysis, coding the information and entering it into a spreadsheet, and a different GAO analyst checked the information for accuracy. Any initial disagreements in the coding were discussed and reconciled by the analysts. The analysts then tallied the responses to determine the extent to which the reporting elements were addressed. We assessed an element as addressed if DOD’s report explicitly addressed all parts of the element. We assessed an element as partially addressed if at least one—but not all—parts of the required element were explicitly addressed. Finally, we assessed an element as not addressed if it did not explicitly address any part of the required element. We also analyzed each of the tables in the fiscal year 2012 report to identify any inconsistencies in the reporting of data among the services, as well as any inaccuracies or omissions in the data. Additionally, we compared the data in the fiscal year 2012 report with data presented in the fiscal year 2011 report, where applicable, to identify discrepancies between the two reports. We did not independently assess the data in the fiscal year 2012 report, but we assessed the reliability of the systems used to generate the data and concluded that the data were sufficiently reliable to meet the objectives of this engagement. To assess reliability, we developed and administered a survey to appropriate service officials to collect information on data system management, data quality assurance processes, potential sources of errors, and mitigations of those errors. We also interviewed service officials to collect information on their experiences working with these data systems and the data validation process. Furthermore, we reviewed DOD policies, prepositioning guidance from the services, and the prior year’s (fiscal year 2011) annual report to Congress on prepositioned materiel and equipment to understand the variations of information reported by the services on the status of prepositioned stocks and the quality control processes used during the development of the fiscal year 2012 report. To obtain additional information for our review, we met with officials from the: Office of the Under Secretary of Defense for Acquisition, Technology, Office of the Deputy Assistant Secretary of Defense for Supply Chain Integration; Joint Chiefs of Staff, Operations, Logistics, and Force Structure, Resources, and Assessment Directorates; U.S. Army, Headquarters, Deputy Chiefs of Staff for Operations and Plans, Logistics, and Programs; U.S. Army Materiel Command; U.S. Army Medical Materiel Agency; U.S. Army, Office of the Surgeon General; U.S. Air Force, Headquarters, Logistics, Installations and Mission U.S. Air Force, Air Combat Command, Logistics Readiness and U.S. Air Force Medical Operations Agency; U.S. Navy, Chief of Naval Operations, Expeditionary Warfare Division; U.S. Naval Medical Logistics Command; U.S. Naval Facilities Engineering Command, Expeditionary Programs U.S. Marine Corps, Headquarters, Installations and Logistics; U.S. Marine Corps, Headquarters, Plans, Policies and Operations; U.S. Pacific Command. To determine the extent to which DOD has made progress in addressing our prior recommendations to develop department-wide strategic guidance and a coordinated joint-service approach for managing its prepositioned stocks, we reviewed prior GAO reports, DOD and service guidance, and DOD’s Comprehensive Materiel Response Strategy and associated plan. This strategy and plan focus on integrating and synchronizing DOD’s global materiel response to support the full range of military activities. We discussed the extent to which department-wide guidance specific to prepositioned stocks and joint oversight have been developed with officials from the Office of the Secretary of Defense, the Joint Chiefs of Staff, U.S. Pacific Command, and all four of the military services. To review DOD’s progress in developing a coordinated joint- service approach for prepositioning, we examined DOD guidance, including DOD Instruction 3110.06, War Reserve Materiel (WRM) Policy (2008) and the Global Prepositioned Materiel Capabilities Working Group’s charter, and identified activities the working group had performed. We conducted this performance audit from October 2012 through September 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Cary B. Russell, (202) 512-5431 or [email protected]. In addition to the contact named above, individuals who made key contributions to this report include: Alissa H. Czyz and Larry Junek, Assistant Directors; Karyn Angulo; Lionel C. Cooper; Susan Ditto; Gilbert H. Kim; Greg Pugnetti; Michael D. Silver; Maria Storts; and Michael Willems. Prepositioned Materiel and Equipment: DOD Would Benefit from Developing Strategic Guidance and Improving Joint Oversight. GAO-12-916R. Washington, D.C.: September 20, 2012. Follow-up on 2011 Report: Status of Actions Taken to Reduce Duplication, Overlap, and Fragmentation, Save Tax Dollars, and Enhance Revenue. GAO-12-453SP. Washington, D.C.: February 28, 2012. 2012 Annual Report: Opportunities to Reduce Duplication, Overlap and Fragmentation, Achieve Savings, and Enhance Revenue. GAO-12- 342SP. Washington, D.C.: February 28, 2012. Defense Logistics: Department of Defense Has Enhanced Prepositioned Stock Management but Should Provide More Detailed Status Reports. GAO-11-852R. Washington, D.C.; September 30, 2011. Warfighter Support: Improved Joint Oversight and Reporting on DOD’s Prepositioning Programs May Increase Efficiencies. GAO-11-647. Washington, D.C.: May 16, 2011. Opportunities to Reduce Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue. GAO-11-318SP. Washington, D.C.: March 1, 2011. Defense Logistics: Department of Defense’s Annual Report on the Status of Prepositioned Materiel and Equipment Can Be Further Enhanced to Better Inform Congress. GAO-10-172R. Washington, D.C.: November 4, 2009. Defense Logistics: Department of Defense’s Annual Report on the Status of Prepositioned Materiel and Equipment Can Be Enhanced to Better Inform Congress. GAO-09-147R. Washington, D.C.: December 15, 2008. Defense Logistics: Improved Oversight and Increased Coordination Needed to Ensure Viability of the Army’s Prepositioning Strategy. GAO-07-144. Washington, D.C.: February 15, 2007. Defense Logistics: Better Management and Oversight of Prepositioning Programs Needed to Reduce Risk and Improve Future Programs. GAO-05-427. Washington, D.C.: September 6, 2005. | DOD prepositions stocks such as combat vehicles and repair parts worth billions of dollars at strategic locations around the world. These assets are used to prepare forces quickly for conflicts when needed. Over the years, GAO has made recommendations for DOD to develop overarching strategic guidance and improve joint oversight of the military services' prepositioning programs. Section 2229a of Title10 requires DOD to report annually on the status of its prepositioned stocks and for DOD's report to include 12 specific elements--for example, the material condition of the equipment. The law also mandates that GAO review DOD's report and provide any additional information to Congress that would be informative on issues relating to the status of prepositioned stocks. This is GAO's sixth report, and it assessed the extent to which (1) DOD's fiscal year 2012 prepositioning report addressed the 12 statutory reporting elements and (2) DOD has made progress in addressing GAO's prior recommendations on department-wide strategic guidance and a coordinated joint-military service approach for managing prepositioning. To conduct this work, GAO analyzed DOD's prepositioning report, reviewed DOD's guidance, and interviewed officials. The Department of Defense (DOD) provided information on all 12 required reporting elements in its fiscal year 2012 prepositioning report; however, 3 of these elements were only partially addressed. For example, DOD provided a list of non-standard items slated for inclusion in its prepositioned stocks but did not include a specific plan for funding those items as required by the law. Federal internal control standards state that decision makers need complete and relevant information to manage risks and achieve efficiency and effectiveness goals. However, GAO found that DOD's report contained some inconsistencies in information across the services as well as several inaccuracies and omissions. For example, DOD's report included funding information for 6 or 7 fiscal years for most of the services but only 2 fiscal years for the Navy's stocks. Service information was also presented in different formats in the report, which makes it difficult to compare data. Because the Joint Staff did not provide specific guidance to the services to ensure consistency when requesting data, the services adopted separate approaches to reporting information to the Joint Staff for compilation in the report. In addition, although an agency should monitor the quality of information provided to Congress, GAO found several inaccuracies in the report, such as incorrect calculations and information that had been inadvertently omitted. While officials from the Joint Staff and each of the services stated that they have their own review processes, the errors found in the report indicate weaknesses in DOD's quality assurance procedures. Until DOD addresses these issues and provides complete, consistent, and accurate information on its prepositioned stocks, its report will be of limited use to Congress in making informed decisions about DOD's prepositioning programs. DOD has not made progress in addressing GAO's prior recommendations to develop department-wide strategic guidance and implement a coordinated joint-service approach for managing its prepositioning programs, nor has it set a timeline for doing so. As far back as 2005, GAO has reported that each of the military services was planning the future of its prepositioning programs without the benefit of an overall plan or joint doctrine to coordinate their efforts, which made it difficult to determine how the services' different programs would fit together to meet the evolving defense strategy. Recently, DOD issued a strategy for materiel response to support the full range of military activities and an implementation plan for directing, coordinating, and prioritizing DOD-wide development plans, initiatives, and activities for the period 2013-2020 to achieve the strategy. However, neither provides guidance for DOD's prepositioning programs, and the plan specifically excludes prepositioning. Hence, the services' individual prepositioning programs are still not linked to overarching strategic guidance. DOD has also not improved joint oversight of its prepositioning programs because a working group that was expected to provide such oversight has not been functioning as intended, and other joint activities do not specifically address prepositioned stocks. An increased emphasis on joint oversight would help unify DOD's prepositioning efforts in support of defense priorities, reduce potential unnecessary duplication, and achieve cost savings and efficiencies. Congress is currently considering legislation that would direct DOD to develop an overarching strategy for its prepositioning programs and establish joint oversight. GAO recommends that DOD develop guidance to ensure that it reports consistent information across the services and strengthens quality assurance procedures for its report. GAO also suggests that Congress require DOD to develop strategic guidance, including joint oversight, for its prepositioning programs. DOD concurred with the recommendations. |
To determine the extent to which the federal government’s response to the helium-3 shortage was affected by DOE’s management of helium-3, we reviewed the DOE Isotope Program’s strategic planning documents, helium-3 sales data, and information on NNSA’s inventory of helium-3. We also interviewed officials at DOE, DOE’s Savannah River Site, NNSA, and DHS, as well as representatives from Linde and GE Reuter-Stokes, the two principal companies that purchased helium-3 from the Isotope Program. Also, we used the federal standards for internal control to assess DOE’s management of helium-3. To determine the federal government’s priorities for allocating the limited supply of helium-3 to various users, we reviewed documents of the integrated project team. We also reviewed the helium-3 allocation decisions, criteria, and process of the interagency policy committee convened in 2009 by the National Security Staff, which report to the National Security Advisor, to oversee the integrated project team and make policy decisions to manage the helium-3 shortage. The policy committee is a multi-agency committee consisting of key agencies and departments that use helium-3 applications to support their missions, including the Department of Commerce’s National Institute of Standards and Technology (NIST), DOD’s Defense Threat Reduction Agency, the Department of State, DOE, and DHS. We also interviewed officials at NIST, the Department of Health and Human Services’ National Institutes of Health (NIH), DHS, DOD, DOE, DOE’s Oak Ridge and Pacific Northwest National Laboratories, and NNSA, as well as National Security Staff. To describe the steps that the federal government is taking, if any, to increase the helium-3 supply and develop alternatives to helium-3, we reviewed feasibility studies that presented options for alternative sources and recycling unused equipment and interviewed representatives from Ontario Power Generation, a Canadian power company. We reviewed research and documentation, including test results, on alternatives to helium-3 that are being developed by companies and interviewed representatives from these companies and officials at DHS, DOD, DOE, NIH, NIST, NNSA, and Oak Ridge National and Pacific Northwest National Laboratories. We conducted this performance audit from April 2010 to May 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. The unique physical properties of helium-3 have led to its use in a wide variety of national security, scientific, industrial, and medical applications. Helium-3 is widely used for detecting nuclear material and safeguarding nuclear weapons because, among other things, of its ability to efficiently absorb neutrons. In radiation detection equipment, helium-3 is used to detect neutrons that are emitted by nuclear material. In radiation detection portal monitors, long, thin metal tubes are filled with helium-3; neutrons passing through these tubes react with the helium-3, creating charged particles that are detected by the monitors. Also, as a nontoxic gas that is not absorbed by the human body, helium-3 is used in magnetic resonance imaging (MRI) to research pulmonary disorders, such as chronic obstructive pulmonary disease. Helium-3 is rare because it is currently extracted solely as a byproduct of the radioactive decay of tritium. During the Cold War, the United States produced tritium in nuclear reactors and stockpiled it for the nuclear weapons program. Helium-3 is also available from natural sources, such as subterranean natural gas deposits, but it has not been pursued commercially in the past because it is found in very low concentrations. NNSA and its predecessor agencies produced tritium at the Savannah River Site K-reactor in South Carolina and purified tritium by removing helium-3 at the Mound Plant, a weapons research laboratory in Ohio. Following the end of the Cold War, as the United States reduced its nuclear weapons stockpile and ceased producing tritium, its inventory of helium-3 decreased commensurately. In 1988, DOE shut down the K-reactor for safety reasons and, in 1995, closed the Mound Plant, thus eliminating the U.S. government’s large-scale ability to produce and purify tritium. NNSA has been able to meet the tritium needs of the nuclear weapons program by maintaining the existing stockpile and recycling tritium from dismantled nuclear warheads. To maintain the current tritium stockpile, NNSA extracts helium-3 from tritium on a daily basis and stores the helium-3 in pressurized cylinders at the Savannah River Site. To remove trace amounts of tritium and other impurities, NNSA ships these cylinders of helium-3 to Linde in New Jersey, which operates the only commercial facility in the United States licensed by the Nuclear Regulatory Commission to purify helium-3 of trace amounts of tritium. While NNSA’s helium-3 inventory at the Savannah River Site is constantly changing, as of early February 2011, it was almost 31,000 liters. NNSA estimates that about 8,000 to 10,000 liters of helium-3 will be made available per year from the current tritium stockpile. Like the United States, Russia extracts helium-3 from its tritium stockpile. According to National Security Staff documentation and representatives of Linde, Russia has curtailed its sales of helium-3, indicating that its supply is likely waning. Isotope production and distribution has been a long-standing mission of DOE. DOE’s Isotope Program provides isotopes to support the national need for a reliable supply of isotopes used in medicine, industry, and research. DOE transferred the Isotope Program to DOE’s Office of Science from DOE’s Office of Nuclear Energy starting in fiscal year 2009. In anticipation of this transfer, in August 2008, the Isotope Program organized a workshop to discuss the nation’s needs for isotopes, and identified those isotopes with supply challenges. As noted in the workshop summary report, the workshop assembled, for the first time, stakeholders from all the different areas of the diverse isotope community to discuss the nation’s current and future needs for isotopes and to consider options for improving the availability of needed isotopes. The workshop enabled the Isotope Program to discuss and develop program priorities, including those isotopes, such as helium-3, that were in short supply. This workshop identified 12 isotopes, including helium-3, that faced supply challenges and had less than 3 years before their supplies at that time were completely consumed. In August 2003, the Isotope Program signed a Memorandum of Understanding (MOU) with NNSA to make available an initial 103,570 liters of helium-3 for sale, followed by at least 10,000 liters of helium-3 per year from 2004 through 2008. At the time the MOU was signed, NNSA’s inventory of helium-3 was estimated at about 260,000 liters. Following this agreement, the Isotope Program held a series of public auctions to sell helium-3. A public auction process was used, according to program officials, to encourage competition. The Isotope Program and NNSA determined the quantity and minimum price of helium-3 for each auction; the price was set to recover the costs to extract helium-3 and the administrative costs of selling it. Linde and GE Reuter-Stokes, a company that manufactures helium-3 tubes for radiation detection portal monitors and other neutron detection applications, have been the two buyers of helium-3 who participated in the Isotope Program’s public auctions. From 2003 through 2009, the Isotope Program sold, or NNSA transferred, more than 209,000 liters of helium-3—an average of almost 30,000 liters of helium-3 per year, as shown in table 1. Given NNSA’s capacity to extract between 8,000 and 10,000 liters of helium-3 annually, this rate of sale exceeded the extraction rate and decreased the inventory. Following the terrorist attacks of September 11, 2001, the demand for helium-3 nearly tripled, because of the increased focus on radiation detection applications. Specifically, DHS’s Radiation Portal Monitor program, NNSA’s Second Line of Defense program, and DOD’s Guardian program all use helium-3 in radiation detection portal monitors deployed at domestic and foreign ports, border crossings, and military installations. DHS alone has deployed over 1,400 radiation detection portal monitors domestically. The largest demand for helium-3 has historically been for homeland security and scientific research, but demand for other applications, such as in MRIs for lung research, has also increased. The federal government’s awareness of and response to the helium-3 shortage was delayed because no DOE entity had stewardship responsibility for the overall management of helium-3. As a result of this lack of stewardship responsibility, officials from DOE’s Isotope Program, which sold helium-3, and NNSA, which extracted it from tritium, did not communicate about the helium-3 inventory or its extraction rate. Without stewardship responsibility, key risks to managing helium-3, such as the lack of understanding of the helium-3 inventory and the demand for helium-3, were not identified or mitigated by either entity. While the Isotope Program’s mission includes selling isotopes and providing related isotope services, senior program officials said that they interpret this mission to exclude helium-3 and other isotopes that the program sells but whose supply it does not control. Accordingly, Isotope Program officials noted that the program sold and distributed helium-3 solely as a courtesy to NNSA, not because it was a core part of the program’s mission or because it believed it had a stewardship responsibility to do so. NNSA officials also noted that helium-3 stewardship was not part of NNSA’s mission of managing the nation’s nuclear weapons. Without such stewardship responsibility, NNSA and Isotope Program officials did not communicate about the helium-3 inventory or its rate of extraction. The Isotope Program’s management of helium-3 sales was hampered by this lack of communication regarding the size of the helium-3 inventory and the rate at which helium-3 is extracted from tritium. Prior to selling helium-3 at public auction, officials from the Isotope Program and NNSA communicated with each other regarding how much helium-3 would be available to sell that year and the minimum price for which it would be sold at auction. However, Isotope Program and NNSA officials did not discuss the size of the helium-3 inventory, how much was being added to the inventory each year, or how quickly the inventory was being depleted. Additionally, NNSA officials did not inform Isotope Program officials when they transferred more than 34,000 liters of helium-3 in August 2008 to DOE’s Spallation Neutron Source, a physics research facility at the Oak Ridge National Laboratory that uses helium-3 in large-scale neutron detectors. This transfer—more than what the Isotope Program sold per year, on average from 2003 to 2009—greatly reduced the helium-3 inventory, but NNSA officials did not inform Isotope Program officials about it until after the transfer was completed. Despite the helium-3 inventory being greatly reduced, in September 2008 the Isotope Program and NNSA renewed their MOU to continue selling helium-3 for an additional 5 years without discussing the size of the helium-3 inventory or the rate at which sales and large transfers—such as the one to DOE’s Spallation Neutron Source—were reducing the inventory. Helium-3 inventory and production information was not shared between officials at the Isotope Program and NNSA because, according to NNSA officials, this information was generally treated as classified by NNSA out of concern that the inventory and annual extraction rate could be used to calculate the size of the U.S. tritium stockpile, which is classified. In describing the situation, Isotope Program officials stated that they did not have the requisite “need to know” to gain access to this information, and consequently, did not discuss it. In other words, Isotope Program officials did not believe that they needed complete information on the size of the helium-3 inventory or how much was being added to the inventory each year in order to carry out the program’s mission because helium-3 does not fall within its mission. One of the standards for internal control in the federal government—information and communications—states that information should be recorded and communicated to management and others within an entity in a form and within a time frame that enables them to carry out their responsibilities. The lack of communication between NNSA and Isotope Program officials was not consistent with this standard. Isotope Program and NNSA officials told us that this lack of communication contributed to the government’s delayed response to the helium-3 shortage. NNSA officials acknowledged the ambiguity about what information can be communicated about the helium-3 inventory and, in January 2010, issued a memorandum to clarify and broaden what information about helium-3 can be shared publicly. As a result, NNSA now reports that 8,000 to 10,000 liters of helium-3 will be made available per year. Senior Isotope Program officials said that they did not identify and mitigate key risks to managing helium-3 sales because, unlike most isotopes that the program sells, officials do not consider stewardship of helium-3 to be part of the program’s mission. Specifically, these Isotope Program officials did not consider their lack of understanding of the helium-3 inventory or the demand for helium-3 as risks to managing helium-3 sales. According to these officials, for those isotopes that are included in its mission—the isotopes that it produces—the Isotope Program developed strategic planning documents and generally updated these documents on an annual basis. We reviewed the Isotope Program’s strategic planning documents and found examples where the program assessed risks to isotopes that it produces and sells. The Isotope Program, however, did not perform strategic planning for helium-3, including assessing risks, because program officials do not consider stewardship of helium-3 to be part of the program’s mission. For those isotopes that the Isotope Program sells but whose supply it does not control, such as helium-3, Isotope Program officials told us that they see their role as a conduit that sells these isotopes to customers as a courtesy. There are 17 isotopes, including helium-3, that the program sells but, according to program officials, does not have stewardship responsibility for because the Isotope Program does not control their supply. For example, lithium-6, which is used in neutron detection applications and battery research, is sold by the Isotope Program, but its supply is controlled by NNSA. Although program officials do not consider helium-3 to be part of the program’s mission, it nonetheless collected information in order to forecast demand. To do this, the Isotope Program recorded the number of telephone inquiries from potential customers and the volume of helium-3 discussed. Because it does not view helium-3 as a part of its mission, program officials said that the Isotope Program did not take proactive steps to solicit information to better understand future demand. For example, according to representatives, the Isotope Program did not solicit information from Linde, the company that had purchased or purified nearly all the helium-3 in the United States, which gave Linde a more complete understanding of the historical and future demand for helium-3. In tracking telephone inquiries, the Isotope Program’s records show that it received nine telephone calls in 2008 from customers who were interested in acquiring 1,226 liters of helium-3. In contrast, according to Linde documentation, based on its actual use, the demand for helium-3 in 2008 was nearly 60,000 liters. Linde representatives also noted that the Isotope Program did not seek demand-related information from Linde until after the shortage was realized. Isotope Program officials told us that forecasting the demand for isotopes is very difficult because demand for isotopes can quickly change. Because of its effect on isotope inventories, changing demand is a risk to the program’s management of the sale of all isotopes. One of the federal standards for internal control—risk assessment—states that management should assess the risks faced entity-wide, and at the activity level, from both external and internal sources, and that once risks have been identified, management should decide what actions should be taken to mitigate them. Risk identification methods may include, among other things, forecasting and strategic planning, and consideration of findings from audits and other assessments. A DOE advisory committee has also noted the importance of understanding demand for isotopes. In August 2008, DOE tasked its Nuclear Science Advisory Committee with establishing a standing subcommittee to research the needs and challenges of the Isotope Program and make recommendations to address them. According to the subcommittee report, for the Isotope Program to be efficient and effective, it is essential that it accurately forecasts the demand for isotopes. The report noted that the “ability of the program to predict demand for certain isotopes needs vast improvement.” It went on to recommend that the program “maintain a continuous dialogue with all interested federal agencies and commercial isotope customers to forecast and match realistic isotope demand and achievable production capabilities.” Isotope Program officials told us that they are considering convening a workshop, possibly in the summer of 2011, with federal agency stakeholders to discuss supply and demand of all isotopes that are produced or sold by the Isotope Program. According to the Director of the Facilities and Project Management Division, which manages the Isotope Program, while the program does not consider this role a part of its mission, it is volunteering to convene this workshop to be helpful to the isotope user community. In July 2009, the National Security Staff, under the National Security Advisor, established an interagency policy committee consisting of officials from DOD, DOE, DHS, the Department of Commerce, and the Department of State to address the helium-3 shortage. In doing so, the policy committee established the following three priorities for allocating the limited supply of helium-3: Priority 1: Applications for which there are no alternatives to helium-3, which includes, for example, research that requires ultra-low temperatures that can be achieved only with helium-3. Priority 2: Programs for detecting nuclear material at foreign ports and borders, which includes, for example, NNSA’s Second Line of Defense program that deploys radiation detection portal monitors at key overseas ports and border crossings. Priority 3: Programs for which substantial costs have already been incurred, such as DOE’s Spallation Neutron Source research facility that conducts physics research. Furthermore, the committee eliminated further allocations of helium-3 for domestic radiation detection portal monitors beginning in fiscal year 2010 because, according to committee documents, it determined there are alternatives to using helium-3 to detect neutrons in these portal monitors. The policy committee also determined that it will not support allocating helium-3 for any new applications that would increase the demand for helium-3. Following this approach, the policy committee has allocated helium-3 to federal agency and commercial customers from 2009 through 2011, as shown in table 2. These allocations have brought the supply and demand of helium-3 into closer balance and mark a significant decrease from the amount the Isotope Program previously sold or transferred from 2003 through 2009—an average of about 30,000 liters per year. The policy committee developed a process for customers to request allocations of helium-3 using “champions,” which are agency officials who represent the federal agencies for which they work and its grantees; a champion is appointed by the Isotope Program for nonfederal customers, such as the oil and gas industry. The champion for a specific category of customer gathers all the helium-3 requests and determines whether the requests are consistent with the policy for allocating helium-3. If so, the champion submits the requests to the policy committee. The policy committee weighs the requests against the helium-3 priorities and the amount of helium-3 that is available to make allocation decisions. After allocation decisions are made, customers are notified and, if they received an allotment, they must submit a request for the helium-3 to Linde, which is contracted by the Isotope Program to purify and distribute the helium-3 allocations. When Linde receives a request for helium-3, according to Linde representatives, they verify the customer’s allocation with the appropriate champion. Once verification is received, Linde ships the allotted amount of helium-3 to the customer. This allocation and receipt process is the same for all customers—federal agencies, researchers, and private companies, as shown in figure 1. The helium-3 champions or the policy committee may reject a request for helium-3, as shown in figure 1. If rejected, customers may resubmit a request the following year. According to seven of the agency champions, customers are aware of the policy committee’s priorities and have usually reduced the amount of their request to the absolute minimum amount of helium-3 that is needed. As a result, the committee has approved most requests. When determining the annual allocations for helium-3, the policy committee also recommends to the Isotope Program a price at which helium-3 should be sold to different customers—including the federal, medical, and commercial entities. When the policy committee first began to allocate helium-3 in 2009, the Isotope Program, in consultation with the policy committee, established two different prices—one for medical applications and the other for all other applications. For use in the manufacture of drugs, medical devices, and other products, the Food and Drug Administration requires that helium-3 must be certified to meet specific requirements, called current good manufacturing practices (cGMP). In 2009, the price for cGMP helium-3 was $600 per liter; helium-3 for all other applications was priced at $450 per liter. Certifying helium-3 under cGMP requirements is more expensive, according to Linde representatives, because of the extra certification and purity testing that is required. This practice was continued for allocations in 2010. In 2011, however, the Isotope Program divided the price for helium-3 to be used for non-cGMP applications into two categories: one for federal agencies and their grantees and one for commercial and nonfederal agencies. Table 3 shows the different prices for helium-3, per liter, beginning with 2009. DOE and NNSA are taking actions to increase the supply of helium-3 by, among other things, pursuing other sources and recycling helium-3 from retired equipment. Specifically, NNSA officials said that NNSA is in discussions with Ontario Power Generation (OPG) to determine the feasibility of obtaining helium-3 from OPG’s stores of tritium. OPG has accumulated this tritium as a by-product of producing electricity using heavy-water nuclear reactors. According to OPG officials, it owns 16 heavy-water nuclear reactors that are currently operating that have produced enough tritium to initially yield approximately 100,000 liters of helium-3. According to NNSA officials, once this initial amount is recovered, OPG estimates that its stores of tritium may yield about 10,000 liters of helium-3 annually. Combined with NNSA’s current annual production of helium-3, obtaining helium-3 from OPG could boost the United States’ supply to about 18,000 to 20,000 liters per year. In addition, DHS and DOE have expressed interest in exploring the option of extracting helium-3 from natural helium, or helium-4. Helium-3 is found in small quantities in natural helium and could possibly be extracted from the nation’s helium reserve near Amarillo, Texas, that is managed by the Department of the Interior’s Bureau of Land Management. The Bureau of Land Management estimates that approximately 125,000 liters of helium-3 may be present in the helium reserve, which could be extracted over the next 10 years. DOE officials estimate that a similar reserve of natural helium in Wyoming could yield another 200,000 liters of helium-3 that could be extracted over the life of the reserve. DHS officials note, however, that a feasibility study is needed to determine whether it would be cost-effective to extract helium-3 from natural helium. Federal agencies and private sector companies have started to recycle helium-3 from unused equipment in order to boost the supply. For example, an analysis conducted by DOE shows that it can extract helium-3 from retired tritium storage beds at its tritium extraction facility at the Savannah River Site. DOE estimates that it could extract 8,000 to 10,000 liters from these storage beds every 8 to 10 years, beginning as early as 2012. Additionally, DOE surveyed its national laboratories and identified over 1,500 liters of helium-3 in unused equipment and storage cylinders that could be reused immediately. DHS has also identified retired equipment from which helium-3 can be extracted. Private companies have also started to recycle helium-3 from decommissioned radiation detection portal monitors. For example, according to a representative from a helium-3 tube manufacturing company, the company is buying retired radiation detection equipment to extract the helium-3. In addition to increasing the supply of helium-3, federal agencies and private companies are researching alternatives to helium-3 for several applications in order to decrease demand. For example, the government is conducting research to develop alternatives for neutron detection applications, including radiation detection portal monitors and nuclear physics research, which together use more helium-3 than any other application. DHS, DOE, DOD, and NIST, for example, are supporting approximately 30 different programs, some of which may result in technologies available for use in radiation detectors that, according to agency documents, could be ready by 2012. Similarly, DOE’s Spallation Neutron Source research facility is coordinating with similar facilities internationally—including those in Germany, Japan, Russia, and Sweden— to develop alternative technologies for large-scale physics research applications. The private sector is also researching alternatives to helium-3 for radiation detection portal monitors and other applications, including MRIs for the lungs. For example, equipment using the isotopes lithium-6 and boron-10 may be able to replace helium-3 in radiation detection portal monitors, according to representatives from companies that are developing them. Like helium-3, lithium-6 is produced by NNSA and sold by the Isotope Program. According to one program official, this official contacted NNSA to inquire about the inventory and production rate of lithium-6 because of the potential for increased demand if lithium-6-related technologies are chosen to replace helium-3 in radiation detection portal monitors. NNSA officials told the Isotope Program official, however, that such information is classified and cannot be shared, but assured the official that NNSA has enough lithium-6 to meet any future increase in demand. In March 2011, the Director of the Facilities and Project Management Division, which manages the Isotope Program, said that, although classified, program officials do have access to this information through NNSA’s Office of Nuclear Materials Integration. DOE officials said that they have evaluated the potential demand for lithium-6 and have taken steps to ensure there is an adequate supply. According to its director, the Office of Nuclear Materials Integration is responsible for, among other things, coordinating management of certain isotopes produced by NNSA, including tracking the inventory of these isotopes, and coordinating communication within DOE and NNSA. The director stated that it is the responsibility of the Isotope Program, however, to manage the activities under its control for these isotopes, such as selling them outside DOE and NNSA and conducting 5-year supply and demand forecasts. This raises concerns that without stewardship responsibility for the overall management of the supply and demand of lithium-6, or the other isotopes produced by NNSA, neither the Isotope Program nor any other DOE or NNSA entity may detect an imbalance, resulting in the shortage of another isotope. Facing a critical shortage of helium-3 since 2008, DOE and other federal agencies are collaborating to bring supply and demand into balance, while supporting essential applications for which there are no alternatives. This shortage occurred because the demand for helium-3 rose sharply in response to the increased deployment of radiation detection portal monitors, in addition to the increased use of helium-3 in research and other applications. The amount of helium-3 sold by the Isotope Program quickly outpaced the annual production, and this imbalance went undetected until the supply of helium-3 reached a critical shortage. The overall federal awareness of and response to the helium-3 shortage was delayed because no entity within DOE had stewardship responsibility for coordinating the production and sale of helium-3. Furthermore, there was a lack of communication between NNSA and Isotope Program officials over the size of the helium-3 inventory, how much was added to the inventory annually, and how quickly the Isotope Program’s sales were depleting the inventory. While the Isotope Program’s mission is to manage the production and sale of isotopes, including developing strategic plans and assessing risks for these isotopes, it has not taken a similar stewardship role in managing the 17 isotopes, including helium-3, whose supply it does not control. A key risk to managing the sale of all these isotopes is the lack of control over, and knowledge of, their supply. Under the federal standards for internal control, federal managers are to assess the risks faced entity-wide, and at the activity level, from external and internal sources and decide what actions to take to mitigate such risks. Because Isotope Program officials do not believe that they have a stewardship role for helium-3, they did not take steps to mitigate the risk of selling helium-3 without information on the size of the inventory or its rate of replenishment. Similarly, without a stewardship role, the program did not take sufficient steps to accurately forecast the increased demand for helium-3. Such forecasting is important in order to align demand with current inventory levels. In this regard, the subcommittee report of the Nuclear Science Advisory Committee stated that for the Isotope Program to be efficient and effective, it needs accurate forecasts for the demand for isotopes. A lack of communication and failure to identify risks and forecast demand ultimately delayed the Isotope Program’s awareness of, and the federal government’s response to, the helium-3 shortage. In conclusion, we believe that all isotopes without clear stewardship responsibilities may face the same risks that led to the helium-3 shortage. We are making four recommendations to the Secretary of Energy designed to avoid future shortages associated with managing all isotopes that the Isotope Program sells but whose supply it does not control, including helium-3. First, we recommend that the Secretary of Energy clarify whether the stewardship for all these isotopes belongs with the Isotope Program or elsewhere within the Department of Energy. Once the stewardship for these isotopes has been assigned, we further recommend that the Secretary of Energy direct the head of the responsible office(s) to take the following three actions: develop and implement a communication process that provides complete information to the assigned entity on the production and inventory of isotopes that are produced outside the Isotope Program; develop strategic plans that, among other things, systematically assess and document risks to managing the isotopes and supporting activities, such as not having control over the supply of these isotopes, and implement actions needed to mitigate them; and develop and implement a method for forecasting the demand of isotopes that is more accurate than the one that is currently used. In this regard, the actions taken should be consistent with the forecasting recommendation from the subcommittee report of the Nuclear Science Advisory Committee. We provided a draft of this report to the Secretaries of Energy and Homeland Security for their review and comment. DHS had no comments on the findings of the draft report or our recommendations. In a written response for DOE, the National Nuclear Security Administration’s Associate Administrator for Management and Budget stated that he understands our recommendations and can implement them but took exception to our characterization of the Isotope Program’s mission. In the report, we state that the Isotope Program’s mission is to produce and sell isotopes and related isotope services, maintain the infrastructure required to do so, and conduct research and development on new and improved isotope production and processing techniques, which was its mission from 2003 through 2008—the time during which the Isotope Program was selling helium-3 by auction and the helium-3 shortage occurred. In its response, NNSA explained that the Isotope Program has been working to clarify its responsibilities for isotopes since 2009. In this regard, the DOE fiscal year 2012 Congressional Budget request describes the Isotope Program’s mission as that of producing and distributing isotopes that are not commercially available and distributing other materials as a service to DOE. However, according to NNSA’s comments, the Isotope Program does not have the mission to be the steward of stockpiles of other materials and their byproducts, including helium-3. Neither DOE’s fiscal year 2012 Congressional Budget request, nor NNSA’s comments explain what entity does have stewardship responsibility for helium-3 and several other isotopes that are sold by the Isotope Program, but produced elsewhere. Regardless of how the Isotope Program defines its mission today, at the most crucial time when helium-3 should have been carefully managed in order to avoid the sudden awareness of the shortage, no one entity believed it had the responsibility to do so. As a result, the shortage of an isotope that is critical to national security, research, industrial, and medical applications went undetected until the supply reached a critical level. Our recommendations are intended to assist in avoiding such a problem with helium-3 and other isotopes in the future. DOE also provided technical comments that we incorporated as appropriate throughout the report. DOE’s comments on our draft report are included in appendix I. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, Secretaries of Energy and Homeland Security, Administrator of NNSA, National Security Staff, and other interested parties. The report will also be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact Gene Aloise at (202) 512-3841 or [email protected] or Timothy M. Persons at (202) 512-6412 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II. In addition to the contact named above, Ned H. Woodward, Assistant Director; Eric Bachhuber; R. Scott Fletcher; and Wyatt R. Hundrup made key contributions to this report. Kendall Childers, Nancy Crothers, Cindy Gilbert, Jonathan Kucskar, and Mehrzad Nadji also made important contributions. | Helium-3 gas is a key component of equipment used at ports and border crossings to detect radiation and prevent the smuggling of nuclear material into the United States, among other uses. The National Nuclear Security Administration (NNSA), a separate agency within the Department of Energy (DOE), extracts helium-3 and controls the inventory. Since 2003, NNSA has made helium-3 available for sale to DOE's Isotope Development and Production for Research and Applications Program (Isotope Program). After September 11, 2001, demand increased for radiation detection equipment, and in 2008, the federal government learned that it faced a severe domestic shortage of the gas. GAO was asked to review DOE's management of helium-3 to (1) determine the extent to which the federal government's response to the helium-3 shortage was affected by DOE's management of helium-3; (2) determine the federal government's priorities for allocating the limited supply of helium-3; and (3) describe the steps that the federal government is taking to increase the helium-3 supply and develop alternatives to helium-3. GAO reviewed DOE and NNSA documents and interviewed cognizant agency officials. The federal government's awareness of and response to the helium-3 shortage was delayed because no DOE entity had stewardship responsibility for the overall management of helium-3--a by-product of the radioactive decay of tritium, a key component of the U.S. nuclear weapons program. Although the Isotope Program's mission includes selling isotopes and providing related isotope services, senior program officials said that they interpret this mission to exclude helium-3 and 16 other isotopes that the program sells but whose supply it does not control. As a result of this weakness in DOE's management of helium-3, officials at the Isotope Program and NNSA did not communicate about the helium-3 inventory or its extraction rate. According to NNSA and Isotope Program officials, they communicated with each other about how much helium-3 to sell each year and at what price but not about the size of the helium-3 inventory or extraction rate because NNSA generally treated this information as classified, due to concerns that the helium-3 inventory could be used to calculate the size of the U.S. tritium stockpile. NNSA and Isotope Program officials told GAO that this lack of communication contributed to the federal government's delayed response to the helium-3 shortage. The standards for internal control in the federal government state that information should be communicated to management and others within a time frame that enables them to carry out their responsibilities. Further, without stewardship by a DOE entity, key risks to managing helium-3, such as the lack of complete information on the production and inventory of helium-3, were not identified or mitigated. The federal standards for internal control state that management should assess the risks faced from external and internal sources and decide what actions to take to mitigate them. Facing this critical shortage of helium-3, DOE and other federal agencies are collaborating to bring supply and demand into balance. Specifically, in July 2009, an interagency policy committee was formed, which halted allocations of helium-3 for domestic radiation detection equipment and established three priorities for allocating helium-3: (1) applications for which there are no alternatives to helium-3 have first priority (e.g., research that can be achieved only with helium-3); (2) programs for detecting nuclear material at foreign ports and borders have second priority; and (3) programs for which substantial costs have already been incurred have third priority (e.g., a DOE research facility that conducts physics research). To increase the supply of helium-3, the federal government is, among other things, pursuing other sources and developing alternatives. Specifically, NNSA is in discussions with Ontario Power Generation (OPG), a power company in Ontario, Canada, to obtain helium-3 from its stores of tritium. OPG has accumulated tritium as a by-product of producing electricity using a type of nuclear reactor not found in the United States. Also, federal agencies and private companies are researching alternative technologies to replace helium-3 in several applications to decrease demand. GAO recommends, among other things, that DOE clarify whether the stewardship for those isotopes produced outside the Isotope Program, such as helium-3, rests with the program or another DOE entity. DOE stated that it understands and can implement these recommendations. |
BOP consists of a headquarters and six regional offices—Mid-Atlantic, North Central, Northeast, South Central, Southeast, and Western—that directly oversee the operations of its 114 facilities within their respective geographic regions of the country. BOP operates facilities of different security levels—minimum, low, medium, and high, which respectively have increasing security features, inmate to staff ratios, and control of inmate movement, and administrative, which have special missions, such as the treatment of inmates with serious or chronic medical problems. Some BOP facilities are part of BOP’s 13 FCCs, which consist of two or more facilities colocated on property that is contiguous. BOP facilities are given a security designation based on the level of security and staff supervision the facility is able to provide. Figure 1 shows the locations of BOP facilities and regions and the facilities in our review. Facilities are managed by a warden and other officials, including an executive assistant and associate warden who generally provide overall direction and implement policies. Each facility consists of various departments, including the correctional services department, which represents the largest segment of each facility. Correctional workers are responsible for the correctional treatment, custody, and supervision of criminal offenders. The captain is the head of the correctional services department and generally reports to the warden or associate warden. Lieutenants are generally responsible for the day-to-day staffing of correctional services and report to the captain or deputy captain. Non- correctional services staff include, among others, those assigned to health services, unit management, food services, and facility operations. According to BOP written responses, all facility staff receive the same initial core 5 weeks of training and 1 week of annual refresher training. BOP’s Master Agreement with AFGE permits management to determine the internal security practices of the agency and take whatever actions may be necessary to carry out the agency mission during emergencies. According to BOP officials, the warden is permitted to use all facility staff (including non-correctional services staff, such as secretary, nurse, or dentist) for correctional services assignments during emergencies and at other designated times. One of BOP’s published core values is that all employees are “correctional workers first,” regardless of the specific position to which an individual is hired, and both correctional services staff and non-correctional services staff are responsible for the safety and security of the facility. BOP has no written policies for lateral transfers and provides no guidance to facilities on how to process requests for lateral transfers or criteria for granting such requests. Requests for lateral transfers are generally handled on a case-by-case basis, and the processes and criteria used for granting those requests varied across facilities in our review. Neither BOP nor most of the facilities reviewed maintained documentation or tracked data on lateral transfers and their outcomes and did not systematically review lateral transfers. We have previously reported that agencywide policies and procedures help ensure consistent treatment when agencies are geographically dispersed. Our review of the lateral transfer policies of four other Justice components showed that each had established written policies and procedures for lateral transfers. According to officials from BOP’s Human Resources Division, BOP has no written policies and procedures for processing staff requests for lateral transfers. The officials said that BOP staff request lateral transfers because of a variety of personal reasons, including personal hardship, such as a sick family member, or a relocated spouse. At most of the facilities included in our review, officials told us staff generally requested a lateral transfer from their current facility to another location by submitting a memorandum through their warden to the warden at the desired location. According to a written response from BOP, this approach is informal and is at the discretion of both wardens. BOP provides no guidance to facilities on how to process such requests or criteria for granting them. In addition, because no written policies and procedures exist, BOP has no way of ensuring that staff are aware of how to request a lateral transfer. An official at one facility in our review said because no written policies exist, if an employee wanted to find out about how to obtain a lateral transfer, the employee would have to ask someone. BOP officials told us that they did not think written policies on lateral transfers were necessary because of the infrequency of such requests. Officials from the facilities in our review reported using different processes and criteria for lateral transfers. Officials from two facilities said their Employee Services Department, which is responsible for human resources functions, forwarded a memorandum from the employee to the warden at the desired facility, while officials from other facilities said their Employee Services Department had no role in receiving or forwarding requests for lateral transfers. Officials we interviewed from two facilities said that their wardens routinely approved reassignment requests going out of the facility, while others said requests would be considered individually on a case-by-case basis. Further, in accepting requests for incoming lateral transfers, officials from some facilities said the decision was based on a combination of budgetary, staffing, and work performance factors, while one facility official said he preferred not to approve lateral transfers of senior correctional officers, specifically those at the General Schedule grade 8, because of its affect on morale. BOP was unable to identify the number of staff who were laterally transferred because it did not maintain data on the manner in which employees are permanently reassigned. According to a BOP Human Resources Division official we interviewed, BOP’s personnel database did not contain information by type of permanent reassignment, such as agency-initiated, application for announced vacancy, or lateral transfers. In fiscal year 2005, a total of 2,749 staff were permanently reassigned; in fiscal year 2006, 1,952; and in fiscal year 2007, 1,901. According to BOP officials, these numbers reflect the total number of staff successfully reassigned through all types of permanent reassignments; BOP could not isolate lateral transfers. In addition, these numbers did not include the number of staff who applied for or requested a reassignment and were denied. BOP did not require facilities to maintain any documentation of requests for lateral transfers, such as the original memorandum making a request or documents indicating whether requests were forwarded, approved, denied, or reasons for denial. Officials from most of the facilities in our review said their facilities retained the original employee request memorandum in some circumstances, but one official said the request memorandum was never retained. Without such documentation, BOP was not able to determine BOP-wide the number of staff who requested lateral transfers, the number of times an employee requested a transfer, the number of requests approved or denied, or the reasons for denial. According to BOP, its central office exercises no role in reviewing decisions concerning lateral transfers where the warden is the deciding official. BOP officials stated that lateral transfers have not been considered a high-risk area necessitating review. At the regional level, officials from five of the six regions told us that their offices had no role concerning requests for lateral transfers where the warden was the deciding official. At the sixth region, an official said that starting in the first quarter of 2008 all wardens in that region were required to obtain authorization from the regional director before approving lateral transfers. According to this official, the approval policy was implemented because of a concern that transfers from hard-to-fill positions would contribute to turnover. At the facility level, if the warden at the employee’s current facility decided not to forward the request or the warden at the desired facility denied the request, BOP had no formal process for reconsideration. We have previously reported that it is important to have agencywide policies and procedures to help ensure consistent treatment, especially if employees are geographically dispersed across regions. Further, according to the Equal Employment Opportunity Commission’s (EEOC) Management Directive 715, to ensure management and program accountability, agencies should maintain clearly defined, well- communicated personnel policies, and ensure that they are consistently applied. A Human Resources Specialist from the Office of Personnel Management’s (OPM) Strategic Human Resource Policy Division told us that policies, procedures, and monitoring of employee-initiated reassignments are not required by regulation. However, according to the official, as with any other personnel action, documentation could be helpful if a personnel action is later questioned. The official also said that documentation of consistent treatment would also provide support for an agency’s decision-making process when there are claims of favoritism and help an agency to avoid perceptions of inconsistent treatment. The absence of BOP-wide policies and procedures for lateral transfers diminishes BOP’s ability to ensure consistent treatment of staff across BOP’s 114 facilities in 6 regions. Our review of the policies and procedures of four other Justice law- enforcement components—the Federal Bureau of Investigation; the U.S. Marshals Service; the Bureau of Alcohol, Tobacco, Firearms, and Explosives; and the Drug Enforcement Administration—showed that each of these had established written policies and procedures applicable to some or all employees for requesting a transfer to another location. For example, the Marshals Service, whose policy is intended “to provide a standard, fair, and efficient means of considering employee requests for transfer,” uses a centralized automated system where deputy U.S. Marshals can register their interest in transfers to district positions at General Schedule grades 12 and below in one or more geographic locations. For medical hardship requests, the policy also provides for a review panel whose decisions can be appealed to a designated agency official to approve or reject a request for a transfer. BOP has policies and procedures on how facilities are to assign staff on a temporary basis, but it has not systematically assessed how such temporary assignments are being made. As part of a cost-reduction strategy involving temporary assignments that began in 2004, in 2005 BOP designated certain posts as “mission critical,” that is, assignments that were deemed essential for the safe and secure operations of its facilities and would be vacated only in rare circumstances. The mission critical post initiative was intended to reduce facilities’ reliance on overtime and non- correctional services staff, both of which had typically been used for temporary assignments. BOP provided facilities with general guidance on implementing the initiative but did not subsequently conduct an evaluation on the effectiveness of the initiative or determine whether it resulted in reduced reliance on overtime and use of non-correctional services staff for mission critical posts. Under the Standards for Internal Control in the Federal Government, federal agencies are to employ internal control activities, such as top-level review, to help ensure that management’s directives are carried out and to determine if the agencies are effectively and efficiently using resources. BOP generally does not review data on temporary assignments at any level. In addition, BOP’s computerized system cannot produce the summary data that would facilitate such a review. As a result, we had to conduct a manual review of temporary assignments. Our manual review showed that reliance on overtime and non-correctional services staff varied by facility and that some mission critical posts were left unassigned. BOP’s written sources of policies and procedures on temporary assignments are the negotiated Master Agreement with AFGE and BOP’s Correctional Services Procedures Manual. BOP’s Master Agreement with AFGE provides that management, in accordance with applicable laws, has the right to assign work and to determine the personnel by which operations shall be conducted and outlines the negotiated procedures for assigning work and other matters subject to negotiation. For example, according to the Agreement, employees shall be given at least 24-hours notice when it is necessary to make shift changes, except employees assigned to the sick and annual leave list or when the requirement for prior notice would cause vacating a post. Work assignments on the same shift may be changed without advance notice. In addition, when BOP determines that it is necessary to pay overtime for assignments normally filled by bargaining unit employees, the Agreement provides that qualified employees in the bargaining unit will receive first consideration for these overtime assignments and that these assignments will be distributed and rotated equitably among bargaining unit employees. Each facility may negotiate specific procedures regarding overtime assignment. The stated purpose of the Correctional Services Procedures Manual is to promote standard management practices for correctional services staff at all facilities, while recognizing the differences among facilities that vary in missions and security levels. The Manual requires facilities to use the computerized roster management system for the correctional services daily roster, reflecting all temporary assignments. According to interviews with BOP officials, all temporary assignments must be recorded in the computerized roster management system. As stated earlier, BOP uses temporary assignments, or day-to-day changes in correctional services assignments, for a variety of reasons including to fill in for staff regularly assigned to correctional services posts at BOP facilities who are absent because of illnesses or other reasons, such as training, or for special assignments. Special assignments are used to meet needs that arise in a facility and are not regularly assigned posts and may include escorted trips, airlifts, bus transports, and phone monitoring. Special assignments are used to address needs that could (1) arise unexpectedly, such as a medical emergency, or (2) be anticipated and may be planned for in advance, such as a scheduled educational activity or medical appointment. According to BOP officials, staffing decisions on temporary assignments are made at the discretion of each individual facility and are generally carried out by the lieutenants who are responsible for the day-to-day staffing of the correctional services departments. The options for staffing temporary assignments are not contained in BOP-wide written policy. However, according to officials at the facilities we interviewed, when there is a need for a temporary assignment, the assigning lieutenants have five options, as shown in figure 2. While most officials said that there were specific posts that should never be left unassigned—including the control room, towers, special housing unit, and mobile or perimeter patrol—officials from all of the facilities in our review said that some mission critical posts could go unassigned, depending on the type of post and the circumstances (e.g., in emergencies). For example, an official from one facility said that if there is snow on the ground and fewer inmates than normal are in the recreation yard, one or more recreation yard posts may go unassigned. In 2004, faced with significant budgetary constraints associated with increases in the inmate population, BOP began implementing a three- phase comprehensive strategy designed to streamline its operations and reduce costs. As part of its overall cost-reduction strategy, in 2005, BOP implemented the mission critical post initiative. The objectives of the mission critical post initiative were to (1) establish posts that were deemed essential for the safe and secure operations of its facilities and would be vacated only under rare circumstances, (2) reduce the reliance by the correctional services department on non-correctional services staff, and (3) substantially reduce overtime costs. According to BOP’s Director, these objectives were to be achieved by making other correctional services posts available for relief and special assignments. Before the mission critical post initiative, special assignments had most often been covered by use of overtime or non-correctional services staff. Under the mission critical post initiative, BOP identified standard correctional services posts for each security level. These included posts that were mandated by current policy as well as posts that were determined to be essential for the daily operations of the facilities, such as those in the control room, where staff can monitor all facility activity and control entrances and exits, and housing units, which include sleeping spaces and a common area. BOP gave facility wardens final authority in designating mission critical posts to accommodate specific facility missions and designs, such as the needs of an older building, and to consider other factors. Correctional services posts deemed not mission critical, such as front gate or chapel officers, were eliminated. BOP guidance stated that certain essential duties, such as telephone monitoring, still needed to be accomplished despite the absence of a dedicated post. BOP guidance also required the facility captain to ensure that all other reasonable options had been exhausted before authorizing overtime to fill mission critical posts. However, BOP did not specify what such options were. Further, BOP’s Correctional Services Procedures Manual, which provides guidance on assigning correctional services staff, was last updated in October 2003, before the implementation of the mission critical post initiative and, therefore, does not provide further guidance on when it is appropriate to (1) use non-correctional services staff or (2) leave a mission critical post unassigned rather than pay overtime. “In order to monitor this process over the next 6 months, each Captain will be required to submit a weekly recapitulation to their (sic) respective Regional Correctional Services Administrator identifying their (sic) daily activity regarding local roster management. At minimum, the weekly recapitulation must consist of the amount of overtime used, number of posts filled by shift, the number of staff on day off, annual leave, sick leave, holiday, and training. The weekly recapitulation must be sent to the respective Regional Correctional Services Administrator by the close of business on Monday of the following week. At the end of the six-month period, the roster recapitulation results by institution will be analyzed regarding the amount of overtime used in regards to each institution’s Custody staffing pattern and mission.” According to BOP officials, BOP never conducted the analysis described in the memorandum and has not conducted any evaluation of the mission critical post initiative. BOP officials could not explain why the evaluation was not conducted. Such an evaluation would have been consistent with both the Standards for Internal Control in the Federal Government, which provide that federal agencies are to employ internal control activities, such as top-level review, to help ensure that management’s directives are carried out and resources are effectively and efficiently used, and BOP’s Management Control and Program Review Manual, which lays out the basic components of its system of management controls, which include assessing program performance regularly. BOP’s management generally does not review temporary assignments. For example, BOP’s central office does not review temporary assignments, including the extent to which facilities leave mission critical posts unassigned or rely on overtime or non-correctional services staff to fill temporary assignments. Central office reviews, which are conducted by BOP’s Program Review Division, generally every 3 years, are limited to reviewing a sample of daily rosters to ensure that the rosters are signed and properly maintained and do not include a review of temporary assignments. At the regional level, reviews of temporary assignments are generally limited to overtime usage and do not include reviews on the extent to which mission critical posts were left unassigned and the reliance on non-correctional services staff. While facilities in all six regions are to submit overtime reports to their regional offices for review, according to BOP written responses, these reports are not provided in a consistent manner throughout the agency and are used differently by each region. At the facility level, reviews of temporary assignments are mostly limited to the day-to-day reviews of the daily rosters generally to verify accuracy. In addition, officials from one of the seven facilities reported tracking mission critical posts left unassigned on daily rosters, and the warden at that facility said that he randomly reviews daily rosters on a weekly basis. Without reviewing unassigned mission critical posts, facilities cannot determine whether leaving mission critical posts unassigned has an effect on facilities’ safety and security. Because of limitations with BOP’s computerized roster management system, the only way currently for BOP to assess how it is temporarily assigning staff would be for BOP officials to manually review daily rosters. The system does not produce summary data on temporary assignments and does not produce reliable historical data on non-correctional services positions. While the system contains data on temporary assignments for individual days, it currently does not produce summary data that would make it easier for BOP officials to assess BOP’s use of temporary assignments. For example, when a facility leaves a mission critical post unassigned, it is designated on the correctional services daily roster, but BOP’s computerized system does not produce summary data on the number of mission critical posts left unassigned. To obtain summary data, a facility would have to count the occurrences of unassigned posts from each daily roster for a given period. In addition, although the system can produce limited data on overtime and non-correctional services staff by individual days, it does not produce summary data over time on the use of overtime or non-correctional services staff or the purposes for which overtime was paid or non-correctional services staff were used. In March 2008, one region began manually reviewing individual daily rosters submitted by its facilities. Officials in that region said that two staff members currently spend about an hour a day reviewing the rosters and that one staff member is spending about an hour and a half reviewing the rosters on a weekly basis. Also according to BOP officials responsible for the design and implementation of the system, although it distinguishes between correctional services and non-correctional services staff, if an employee moves from a correctional services position to a non- correctional services position or vice versa, the employee’s department status would change for all rosters that are stored on the system before the move. As a result, any historical data on the use of non-correctional services staff is not reliable, and only hard copy versions of daily rosters maintained at a facility are an accurate record. Without summary data on the use of overtime and non-correctional services staff and the purposes for which overtime was paid or non-correctional services staff were used, BOP cannot assess whether the policy changes it made involving temporary assignments enabled BOP to achieve its goals of reducing its reliance on overtime and non-correctional services staff. Also without summary data on unassigned mission critical posts, BOP cannot assess the effect, if any, of such posts on the safety and security of its facilities. Further, without reliable data on the use of non-correctional services positions, BOP cannot accurately assess the extent to which it has reduced its reliance on non-correctional services staff. Our review of BOP’s management of temporary assignments included determining how BOP temporarily assigned staff, specifically the extent to which the facilities in our review left mission critical posts unassigned and relied on overtime and non-correctional services staff for temporary assignments. Because of the limitations with BOP’s computerized roster management system, we manually reviewed individual daily rosters. For each of the facilities in our review, we analyzed a stratified random sample of 60 correctional services daily rosters, 5 per month, for calendar year 2007. We counted for both mission critical posts and special assignments the occurrences of (1) unassigned posts, (2) non-correctional services staff paid regular time, (3) correctional services staff paid overtime, (4) non- correctional services staff paid overtime, and (5) compensatory time and statistically estimated the average number and percentage of mission critical posts and special assignments for each of these categories. We also counted the total number of special assignments. We did not review daily rosters completed before the implementation of the mission critical post initiative and therefore do not know the impact of the initiative. Appendix I provides detailed information on the methods we used for conducting our analysis. Appendix III provides the results of our analysis for each of the facilities in our review. Our analysis showed that facilities in our review left mission critical posts unassigned, with an estimated low of 3 percent of mission critical posts per day on average at two facilities and an estimated high of 12 percent per day on average at another facility. Facilities differed in the occurrences of overtime to fill mission critical posts, with estimated low of 1 percent per day on average and a estimated high of 6 percent per day on average and for special assignments an estimated low of 21 percent of special assignments per day on average and an estimated high of 63 percent per day on average. Facilities differed in the of use of non-correctional services staff to fill mission critical posts, with an estimated low of 1 percent of mission critical posts per day on average and an estimated high of 10 percent per day on average and for special assignments an estimated low of 2 percent of special assignments per day on average and an estimated high of 25 percent per day on average. It is unclear the extent to which leaving mission critical posts unassigned, paying overtime, and using non-correctional services staff may affect the safety and security of BOP’s operations. BOP does not have written policies and procedures for managing lateral transfers. Without such policies and procedures, BOP cannot ensure that staff at each of its 114 facilities in 6 regions across the United States have similar processes available to them or are being consistently treated when they request lateral transfers. While BOP does have processes in place for managing temporary assignments, it has not evaluated the effectiveness of its mission critical post initiative nor systematically assessed temporary assignments. Without such assessments, BOP is not employing internal control activities specified in federal standards and BOP policy and, therefore, cannot determine whether it is achieving the desired cost savings or determine the effect, if any, of unassigned mission critical posts on the safety and security of its facilities. We recommend that the Attorney General direct the Director of BOP to develop and implement specific policies and procedures for administering employee requests for lateral transfers, including the collection of data on such requests and their outcomes and the development of a system of oversight to ensure the consistent treatment of BOP staff and systematically assess temporary assignments to ensure that BOP is meeting the objectives of the mission critical post initiative and effectively and efficiently using resources. In a letter dated February 5, 2009 (see app. IV), the Director of BOP, on behalf of the Attorney General, agreed with our findings. Regarding our first recommendation, the Director disagreed with the recommended action that BOP develop and implement specific policies and procedures for administering employee requests for lateral transfers because BOP would have to devote time and personnel to developing policies and procedures and maintaining such a program. In addition, the Director stated that implementation of our recommendation would elevate this process to a central office function rather than retain it at the local level where staffing decisions are made. While developing, implementing, and overseeing policies and procedures that we recommend would require some resources, these actions would not necessarily require centralizing either decisions on requests for lateral transfers or the data collection on such requests and their outcomes. For example, decisions on transfer requests could primarily remain at the facility level; facilities would collect and retain data on all requests and their disposition and facilities would then report these data on lateral transfers to BOP. This would allow BOP to conduct appropriate oversight to ensure that requests for lateral transfers are handled consistently across facilities. The Director stated that instead of implementing our recommendation, BOP plans to “encourage a practice to have locations post a vacancy announcement on USAJobs before filling local vacancies.” Such a plan would fall short of the intent of our recommendation of having specific policies and procedures for facilities across BOP to administer employee requests for lateral transfers, including the collection of data on such requests and their outcomes and the development of a system of oversight to ensure consistent treatment of staff. We continue to believe that without such written policies and procedures covering lateral transfers, BOP cannot readily monitor how such transfers are being managed across BOP or ensure that staff are being consistently treated when requesting such transfers. Regarding our second recommendation, the Director stated that BOP will conduct a systematic assessment of the use of correctional services mission critical posts at its field locations from January 1 through December 31, 2009. Further, the assessment will include the issue of vacating posts. After the initial assessment, BOP’s Correctional Services Program Review Guidelines will be modified as appropriate based on BOP’s findings, and BOP plans to conduct regularly scheduled reviews of institutions to determine whether it is meeting its mission critical post initiative and effectively and efficiently using resources. We will send copies of this report to the Attorney General 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 have questions about this report, please contact me on (202) 512-9490 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. Staff who made major contributions are listed in appendix V. Our objectives were to identify whether BOP had policies and procedures and how it assessed the management of those policies and procedures for (1) permanent reassignments of BOP employees between correctional facilities and (2) temporary assignments of BOP employees within a correctional facility. For purposes of this report, permanent reassignments, referred to as lateral transfers by BOP, are employee- requested transfers to other BOP facilities that do not involve a promotion or demotion. Temporary assignments are day-to-day changes in correctional services assignments at BOP facilities made for a variety of reasons including (1) to fill in for staff regularly assigned to correctional services posts who are absent because of illnesses or other reasons, such as training, or (2) for special assignments (i.e., to meet needs that arise in a facility and are not regularly assigned posts). As part of our review, we selected seven facilities, which included five separately located facilities and two federal correctional complexes (FCC). We selected facilities based on the number of staff, as reported in BOP’s 2006 State of the Bureau, with at least one facility from within each of BOP’s six regions, and included low- and medium-security federal correctional institutions (FCI) and high-security United States Penitentiaries (USP). Because of their specialized missions, we excluded administrative facilities, such as Federal Detention Centers, Federal Medical Centers, and the Administrative-Maximum USP. To select the FCCs, we included an additional criterion, whether the FCC used separate rosters to assign staff at each of the facilities in the complex or one consolidated roster to assign staff throughout the complex. Based on information provided by BOP, we selected the FCC with the highest number of staff that uses a consolidated roster, FCC Terre Haute (consisting of two facilities, a high-security and a medium-security) in the North Central Region, and the FCC with the highest number of staff that uses separate rosters, FCC Coleman (consisting of four facilities—two high-security, one medium-security, and one low-security) in the Southeast Region. For the remaining regions, we selected the facility in each region with the highest number of staff. In the Mid-Atlantic region, we selected the two facilities with the highest number of staff, one at which to conduct a site visit. We selected low-security FCI Fort Dix in the Northeast Region, medium-security FCI Sheridan in the Western Region, and the following high-security USPs: Hazelton and Lee in the Mid-Atlantic Region and Pollock in the South Central Region. We conducted a site visit to USP Hazelton and interviewed officials at the other facilities by video conference. To identify whether BOP had policies and procedures on lateral transfers and how it assessed the management of such policies, we requested documentation on such policies and procedures. We also interviewed officials from BOP’s Human Resources and Program Review divisions, each of its regional offices, its Consolidated Employee Service Center in Grand Prairie, Tex., and the seven facilities in our review. We interviewed representatives of the American Federation of Government Employees Council of Prison Locals (AFGE) and reviewed AFGE’s Master Agreement with BOP. To obtain information about the use of written policies, procedures, and oversight of lateral transfers in the federal government, we interviewed an official from the Office of Personnel Management’s Strategic Human Resources Policy Division. We also requested and reviewed documentation on the extent to which four other Department of Justice law enforcement components—Bureau of Alcohol, Tobacco, Firearms and Explosives; Drug Enforcement Administration; Federal Bureau of Investigation; and United States Marshals Service—had written policies and procedures in place for such reassignments. To identify the number of BOP employees who were permanently reassigned for fiscal years 2004 through 2007, we requested and obtained National Finance Center (NFC) data from BOP on the number of permanent reassignments. These data included those successfully reassigned through all types of permanent reassignments, including lateral transfers, agency-initiated reassignments, application for an announced vacancy, BOP’s Management Selection System, and the Open Continuous Announcement System, but BOP could not separate the data by type of reassignment. We compared the NFC data with data on permanent reassignments generated by the Office of Personnel Management’s Central Personnel Data File. The discrepancies were small enough for us to determine that the NFC data were sufficiently reliable for the purposes of this report. To identify whether BOP had policies and procedures and how it assessed the management of its policies and procedures for temporary assignments of BOP employees within correctional facilities, we reviewed BOP program statements and other guidance related to temporary assignments. We interviewed the relevant officials at BOP’s central and regional offices, and at each of the selected facilities. We also interviewed representatives of AFGE and reviewed AFGE’s Master Agreement with BOP. To determine how the facilities in our review used temporary assignments, we analyzed correctional services daily rosters provided by BOP for each of the facilities included in our review. BOP facilities maintain daily rosters in two ways: (1) in its computerized roster management system, which can be accessed at a later date and (2) as hard copies stored at each facility. We analyzed hard-copy correctional services daily rosters from facilities in our review because BOP’s computerized roster management system does not produce historically accurate data on the department status of correctional services and non-correctional services staff that are sufficiently reliable for purposes of this report. According to BOP officials responsible for the design and implementation of BOP’s computerized system, although the system distinguishes between correctional services and non-correctional services staff, if an employee moves from a correctional services position to a non-correctional services position or vice versa, the employee’s department status would change for all rosters that are stored in the system before the move. To determine the reliability of the hard-copy daily rosters, we reviewed training and other technical documentation associated with the computerized roster management system used at BOP facilities and BOP’s policies and procedures for ensuring the accuracy of the data. We interviewed BOP’s Correctional Services Administrator; BOP officials responsible for designing, maintaining, and updating the computerized roster management system and for organizing system training at the facilities; and BOP officials from each of the seven facilities in our review knowledgeable about entering data and generating daily rosters. We determined that the data contained in the official hard-copy correctional services daily rosters were sufficiently reliable for the purposes of this report. BOP considers the hard-copy daily rosters the official record of staffing in correctional services, including the use of overtime and the use of non-correctional services staff. According to facility officials we interviewed, the evening watch lieutenant and captain review and sign each day’s hard-copy roster for accuracy, typically within the 24 to 48 hours following the end of the last shift of the day. That roster then becomes the final version. BOP requires the signed hard-copy daily rosters to be stored at the facility for 10 years. We did not evaluate the accuracy of information on the individual daily rosters. We excluded those hard-copy daily rosters that were printed more than 30 days after the date of the daily roster because we determined that the designations on non-correctional services staff were not sufficiently reliable for the purposes of this report. We also excluded from our analysis incomplete daily rosters (i.e., those that were sent to us with missing pages) and rosters that we did not receive. To analyze the correctional services daily rosters from each of the facilities in our review, we selected a stratified random sample of 60 hard- copy daily rosters, 5 per month, from the universe of 365 daily rosters per facility for calendar year 2007. We did not look at daily rosters completed before the implementation of the mission critical initiative and therefore do not know the impact of the initiative. For FCC Coleman, which uses separate daily rosters to assign staff at each of its four facilities, we reviewed the separate rosters from each facility for the 60 days. For FCC Terre Haute, which uses a consolidated roster to assign staff throughout the complex, we reviewed the consolidated daily roster for the 60 days. In total, we reviewed 600 daily rosters. With this stratified random sample, each roster in the universe had a chance of being selected. Each selected roster was subsequently weighted in the analysis to account statistically for all the members of the universe, including those who were not selected. For each day selected in the sample, on the daily roster we manually counted for both mission critical posts and special assignments occurrences of (1) unassigned posts, (2) non-correctional services staff paid regular time, (3) correctional services staff paid overtime, (4) non- correctional services staff paid overtime, and (5) compensatory time. In addition, we counted the total number of special assignments assigned per day at each facility in our review. Based on these results, we estimated the average daily number and percentage of mission critical posts and special assignments that were unassigned, filled with non-correctional services staff, or filled with overtime using either correctional services staff or non- correctional services staff. These results are limited to the facilities in our review for calendar year 2007 and are not intended to be applied to facilities across BOP. For the overtime results, we based the average daily count on the number of overtime occurrences rather than number of overtime hours. The total number of overtime occurrences per day was determined by adding the daily count of occurrences of correctional services staff paid overtime and non-correctional services staff paid overtime. Because of resource constraints, we did not count the total number of mission critical posts listed on each of the 600 daily rosters. This would have provided the actual total number of mission critical posts for each day. Instead, we calculated daily percentages based on the maximum number of posts possible per day in the facility, which ranged from 70 mission critical posts at low-security FCI Coleman to 232 mission critical posts at FCC Terre Haute. BOP facilities determine the number of days needed for each post, and posts are designated as consisting of between 1 to 7 day shifts per week. For example, a visiting-room post was identified as a 2-day shift per week at one facility in our review. We assumed for each day in our sample that each mission critical post would be listed on the daily roster—that is, the visiting room would be staffed on each day of our sample. Because it is likely that not every post would be included on the daily roster on each of the days in our sample and that the actual number of posts listed on the roster would be less than the maximum number of posts possible in a day at that facility, our methodology potentially underestimates the results. Because we followed a procedure based on random selection, each of our samples is only one of a large number of samples that we might have drawn. Since each possible sample could have provided different estimates, we express our confidence in the precision of our particular sample’s results as a 95 percent confidence interval. This is the interval that would contain the actual value for 95 percent of the samples we could have drawn from the universe. For mission critical posts, each estimate from these samples has a margin of error at the 95 percent confidence level, of plus or minus 2 percent or less for average daily percentage estimates or plus or minus 4 posts or less for average daily post estimates. For special assignments, each estimate from these samples has a margin of error, at the 95 percent confidence level, of plus or minus 6 percent or less for average daily percentage estimates or plus or minus 3 special assignments or less for average daily special assignments estimates. We conducted this performance audit from August 2007 to January 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. This appendix describes how BOP assigns staff to correctional services mission critical posts and makes temporary assignments to these posts and special assignments. BOP correctional services staff are assigned to or selected for two types of mission critical posts, rotating and non-rotating. Most posts in a facility are rotating posts and are assigned on a quarterly basis in accordance with the bidding procedures contained in the Master Agreement between BOP and AFGE. The outcome of the bid process represents the correctional services assignments for that specific quarter. These include such posts as the control room, where staff can monitor all facility activity and control entrances and exits, and housing units, which include inmate sleeping spaces and a common area. Staff may also bid on what are called “sick and annual” posts. Staff who hold sick and annual posts serve as a designated group of officers used for a variety of reasons, including filling in for staff on leave, in training, or for special assignments. Non-rotating posts are not open to quarterly bidding, and staff are assigned or selected on a permanent basis. These include such posts as captain’s secretary, captain, and special investigative agent. Assignments to mission critical post (rotating and non-rotating) are reflected on each facility’s quarterly roster that is prepared and stored in each facility’s computerized roster management system. The quarterly roster reflects all staff assigned to posts for the quarter and serves as the basis for all daily rosters for that quarter and is generated from each facility’s computerized system. Approximately 2 weeks before a particular date, the designated administrative lieutenant at each facility generates the daily roster from the computerized system. Subsequently, designated supervisory staff, typically other lieutenants, enter temporary assignments directly into the computerized system to reflect correctional services staff requests for leave and special assignments. In staffing temporary assignments, lieutenants are to consider the number of staff needed and the specialized experience, training, or certification required for some posts and special assignments and the qualifications of available staff. For example, in cases of medical escort special assignments, BOP policy requires a 3-to-1 staff- to-inmate ratio for maximum custody inmates, but only a 2-to-1 ratio for high- and medium-custody inmates. To escort an inmate to an outside medical facility, the staff assigned must have completed basic prisoner transport training and be recertified annually. Names of staff who are current on this certification and certifications required for other posts or special assignments are contained on lists available to the assigning lieutenant and are available under the staff member’s name in the computerized system. In addition, officials from some facilities and regional offices told us that staff assigned to some posts, while not requiring a formal certification, should have a certain level of knowledge or experience. For example, in the control room, officials told us that it is important to have someone with knowledge of the facility to fill in for someone regularly assigned. Finally, officials from two facilities said that certain non-rotating posts—those that are not assigned on a quarterly basis—such as special investigative agent, emergency planning officers, captain’s secretary, captain, and deputy captain could go temporarily unassigned, and officials from one of these facilities said staff assigned to some non-rotating posts are used for temporary assignments to mission critical posts and special assignments. Temporary assignments are made as necessary until the end of the last shift of the day (i.e., midnight). This appendix describes the results of our analysis of correctional services daily rosters of how each of the facilities in our review used temporary assignments to mission critical posts and special assignments for calendar year 2007. For a more detailed description of the methods we used to conduct our analysis, see appendix I. Our analysis showed that during calendar year 2007 facilities in our review left mission critical posts unassigned ranging from an estimated low of 3 percent per day on average at FCI Sheridan and FCI Coleman Medium to an estimated high of 12 percent per day on average at USP Coleman II. Figure 3 shows the 2007 estimated average daily percentage of unassigned mission critical posts for each of the facilities we reviewed. We did not analyze which specific posts went unassigned (e.g., rotating or non- rotating posts or posts by name). Facilities paid overtime to fill, on average, an estimated low of 1 percent per day of mission critical posts at USP Lee and a high of 6 percent per day of mission critical posts at FCI Coleman Low, FCI Coleman Medium, and USP Coleman II, as figure 4 shows. Facilities used non-correctional services staff to fill, on average, an estimated low of 1 percent per day of mission critical posts at FCI Sheridan, USP Hazelton, USP Lee, USP Pollock, and FCC Terre Haute and a high of 10 percent per day of mission critical posts at FCI Coleman Medium, as figure 5 shows. An official from one facility said he tries not to use non-correctional services staff for temporary assignments because they have their own assignments to complete and being reassigned to a post would disrupt that work. Officials from six of the facilities told us that they regularly use non- correctional services staff for temporary assignments during annual refresher training, a 1-week course that occurs several times a year at each facility and is required for all facility staff. The estimated average number of special assignments per day ranged from 10 at FCI Coleman low and medium to 47 at FCC Terre Haute (one high- security and one low-security), as table 1 shows. On average, the facilities in our review filled nearly all special assignments, with the exception of USP Lee, which left an estimated 8 of 22, or 37 percent, of special assignments unassigned per day. The facilities in our review paid overtime to fill, on average, an estimated low of 21 percent of special assignments per day at USP Lee and a high of 63 percent at FCC Terre Haute, as figure 6 below shows. The facilities in our review used non-correctional services staff to fill, on average, an estimated low of 2 percent of special assignments per day at FCI Sheridan and FCC Terre Haute and a high of 25 percent per day at FCI Ft. Dix, as figure 7 shows. In addition to the individual named above, Kiki Theodoropoulos, Assistant Director; James Ashley; Dewi Djunaidy; Karin Fangman; Tamara F. Stenzel; and Gregory H. Wilmoth made key contributions to this report. | The Department of Justice's Federal Bureau of Prisons (BOP) is responsible for the custody and care of more than 202,000 federal offenders with approximately 35,000 employees, almost half of whom are correctional officers, dispersed across BOP's 114 correctional facilities in 6 regions. In response to a request, GAO identified whether BOP had policies and procedures and how it assessed the management of those policies and procedures for (1) employee-requested lateral transfers of BOP employees between correctional facilities and (2) day-to-day changes in correctional services or temporary assignments of BOP employees within a correctional facility. GAO reviewed available documentation on BOP's policies and procedures on lateral transfers and temporary assignments. GAO also interviewed officials from BOP's central and regional offices and seven facilities selected on the basis of the number of staff; at least one facility was selected from within each of BOP's six regions. BOP does not have written policies and procedures on lateral transfers of staff. Each correctional facility evaluates requests for lateral transfers on a case-by-case basis. Typically, when an employee requests a lateral transfer to another facility, the warden at the employee's current facility determines whether to forward the request to the desired facility's warden. The processes for requesting a lateral transfer and the criteria for forwarding, granting, or denying such requests varied across the facilities GAO reviewed, and generally no documentation on decisions reached or actions taken was maintained. Further, BOP does not systematically review decisions concerning these requests at any level. As a result, BOP cannot determine the number of requests for lateral transfers, the outcome of these requests, or whether requests were handled consistently within or among facilities. GAO has previously reported that agencywide policies and procedures help ensure consistent treatment of staff when agencies have geographically dispersed locations. Other Department of Justice law-enforcement components have written policies, procedures, and a review process concerning requests for lateral transfers. Unlike lateral transfers, BOP has written policies and procedures on how facilities are to temporarily assign staff to fill in for absences or to meet other needs that arise in a facility. However, BOP has not systematically assessed how facilities are managing temporary assignments. As part of a costreduction strategy affecting temporary assignments, in 2005, BOP designated mission critical posts, that is, assignments that were deemed essential for the safe and secure operations of its facilities and that would be vacated only in rare circumstances. The mission critical post initiative was intended to reduce facilities' reliance on overtime and non-correctional services staff, who had typically been used for temporary assignments. A memorandum from the Assistant Director of Correctional Programs described how each facility was to gather information for 6 months on overtime and staffing under the mission critical post initiative and how BOP would evaluate the effectiveness of the initiative. However, BOP conducted no such evaluation. BOP officials also generally do not review temporary assignments at any level, including the effect of leaving mission critical posts unassigned. According to the Standards for Internal Control in the Federal Government, federal agencies are to employ internal control activities, such as top-level review, to help ensure that management's directives are carried out and to determine if agencies are effectively and efficiently using resources. Without assessing its mission critical post initiative and data on temporary assignments, BOP does not know whether it is efficiently and effectively using staff for temporary assignments or achieving the desired cost savings. Also, without reviewing the effect of leaving mission critical posts unassigned, BOP cannot assess the effect, if any, of unassigned posts on the safety and security of its facilities. |
The Army Reserve is a partner with the active Army and the Army National Guard in fulfilling the country's military and contingency needs. The Army Reserve provides nearly half of the Army’s combat support capabilities. The Army Reserve has approximately 2,000 units that drill at 1,500 Army Reserve Centers located in communities spread throughout the United States and territories. As of May 2004, the Army Reserve reported that it had about 328,000 members in the Ready Reserve. During peacetime, Army Reserve units report to the United States Army Reserve Command (USARC), located in Atlanta, Georgia, and the Chief of the Army Reserve, located in Washington, D.C. In addition, the Army Reserve has established Regional Readiness Commands to provide resource, logistics, and personnel management support for Army Reserve units within their region. When not mobilized to active duty, Army Reserve units are required to maintain readiness at a sufficiently high level to facilitate prompt active duty mobilization. While in a reserve status, Army Reserve soldiers are required to attend one drill weekend each month and obtain a minimum amount of training (usually about 2 weeks) each year. During national emergencies, the President has the authority to mobilize the Army Reserve to active duty status. While mobilized, Army Reserve units are accountable to the combatant commander of the theater in which they are assigned to operate, and ultimately, to the President. On September 14, 2001, the President declared a national emergency as a result of the terrorist attacks on the World Trade Center and the Pentagon and the continuing and immediate threat of further attacks on the United States. Concurrent with this declaration, the President authorized the Secretary of Defense to mobilize reserve troops to active duty pursuant to 10 U.S.C. Section 12302. The Secretary of Defense delegated to the Secretary of the Army the authority to order Army Reserve soldiers to active duty. Since September 2001, the Army has mobilized unprecedented numbers of Army Reserve soldiers (as well as other reserve and national guard forces) to active duty on lengthy tours. DOD reported that as of April 2004, about 96,000 Army Reserve soldiers have been mobilized to active duty at some point since September 2001 to carry out critical missions. In contrast to the Army National Guard forces that may be assigned traditional combat roles, Army Reserve forces are generally assigned combat support missions. The Army National Guard and Army Reserve both include military police and intelligence units. However, while the Army National Guard has special forces and other units that have combat mission assignments, Army Reserve units are generally limited to combat support mission assignments, such as supply, medical, and transportation operations. Army Reserve soldiers’ mobilizations during the period of our audit were also affected by two other Army actions. First, the Army issued a “stop loss” order affecting Army Reserve soldiers in November 2002. The stop loss order was authorized by statute and allows the Army to retain soldiers in the service beyond their date of separation or retirement for an open- ended period. Second, in November 2003, the Army extended the orders for all mobilized Army Reserve soldiers expected to return from active duty on December 1, 2003, for an additional year. There have been three major contingency operations involving mobilized Army Reserve soldiers since September 2001: Operation Noble Eagle, Operation Enduring Freedom, and Operation Iraqi Freedom. In general, missions to provide domestic defense were funded through Operation Noble Eagle, missions to fight terrorism outside the United States were initially funded under Operation Enduring Freedom. More recently, missions related to the combat in Iraq and subsequent policing operations in that region were funded under Operation Iraqi Freedom. For example, Army Reserve soldiers participated in combat support missions in Afghanistan that were carried out as part of Operation Enduring Freedom, whereas Army Reserve soldiers participating in homeland security missions, such as assisting in intelligence data analysis, were considered part of Operation Noble Eagle. According to Army Reserve data, approximately 45,700 Army Reserve soldiers were activated as of April 2004. At that time, Army Reserve soldiers accounted for about 27 percent of all mobilized DOD reserve components. Many of these Army Reserve soldiers were mobilized as small units, including about 2,800 units with 10 or fewer soldiers and about 1,000 one-soldier units. The Army assigns a separate unit identification number to each of these small groups or detachments of Army Reserve soldiers (these units are known as derivative units). According to Army Reserve data as of April 2004, the Army Reserve had soldiers assigned to almost 6,000 different unit numbers. While on active duty, all Army Reserve soldiers earn various statutorily authorized types of pays and allowances. The types and amounts of pays and allowances that Army Reserve soldiers are eligible to receive vary depending upon rank and length of service, dependency status, skills and certifications acquired, duty location, and the difficulty of the assignment. While Army Reserve soldiers mobilized to active duty may be entitled to receive over 50 types of pays and allowances, we focused on 14 types of pays and allowances applicable to the Army Reserve units we selected for case studies. As shown in table 1, we categorized these 14 pay and allowance types into two groups: (1) pays, including basic pay, medical and dental and foreign language proficiency skill-based pays, and location- based hostile fire and hardship duty pays, and (2) allowances, including allowances for housing, subsistence, family separation, and cost of living for the continental United States. Several of these types of pays and allowances have multiple subcategories of entitlement. For example, there are eight different types of basic allowances for housing that soldiers may be entitled to receive based on individual circumstances and documentation (including documents establishing dependency status or court documents). In addition, Army Reserve soldiers may be eligible for significant tax advantages associated with their mobilization to active duty. Mobilized Army Reserve soldiers assigned to or working in a designated combat zone are entitled to exclude from taxable income certain types of military pays that would otherwise be taxable. In addition to the complexities of determining and documenting the specific circumstances surrounding each individual soldier’s initial active duty pay, allowance, and tax benefit entitlements, these types of pays and benefits are further complicated because entitlements vary depending on soldiers’ locations as they move through their active duty tours. That is, maintaining effective accountability and paying mobilized Army Reserve soldiers as they move from location to location during their active duty tours require extensive close coordination among a variety of operational, personnel, finance, and pay organizations throughout DOD. Key components requiring closely coordinated efforts in this worldwide team are the mobilized soldier; unit commanders and unit administrators for all mobilized Army United States Army Reserve Pay Center located at Fort McCoy; Army Reserve Pay Management Division at Fort McPherson; 12 Army Reserve Regional Readiness Commands; U.S. Army Finance Command; personnel and finance offices at Army mobilization stations; Army area servicing finance offices assigned to support deployed units; personnel and finance offices at Army demobilization stations; Defense Finance and Accounting Service (DFAS) at Indianapolis, DFAS at Denver, Colorado; and DFAS at Cleveland, Ohio. As shown in figure 1, three key phases are associated with the pays and allowances applicable to mobilized Army Reserve soldiers: (1) mobilization: starting applicable active duty pays and allowances, (2) deployment: starting and stopping applicable location-based active duty pays while continuing other nonlocation-based active duty pay and allowance entitlements, and (3) demobilization: stopping active duty pays and allowances. During the initial mobilization, units receive an alert order and begin a mobilization preparation program, Soldier Readiness Processing (SRP). Among other things, the SRP is intended to ensure that each soldier’s financial records are in order. The initial SRP is to be conducted by the unit’s administrator at the unit’s home station assisted by personnel from the cognizant Army Reserve Regional Readiness Command or designee. This initial SRP is to include a verification of the accuracy of records supporting applicable active duty pays and allowances. The unit commander, supported by the unit administrator, is responsible for ensuring that all personnel data, such as birth certificates for dependents or foreign language certifications, are current for all soldiers under their command. During this phase, the unit administrator is required to gather all supporting documents and send the documentation to the Reserve Pay Center at Fort McCoy. Pay technicians at the Reserve Pay Center are responsible for entering transactions to start initiating basic pay and allowances for mobilized Army Reserve soldiers based on the active duty tour information that appears on a hard copy of each soldier’s mobilization order. If transactions are entered correctly and on time, activated Army Reserve soldiers will automatically start to receive basic pay and basic allowances for housing and subsistence based on the entered active duty mobilization start date. After soldiers complete their initial SRP, they travel as a unit to an assigned active duty Army mobilization station. At the mobilization station, mobilized Army Reserve soldiers are required to undergo a second SRP. As part of this second SRP, finance personnel at the mobilization station are responsible for confirming or correcting the results of the first SRP, including obtaining the documentation necessary to support any changes needed to the automated pay records. Pay technicians at the various Army mobilization stations are required to promptly initiate appropriate active duty pay and allowance transactions that were not initiated during the first SRP. Transactions to initiate and terminate pays for all mobilized Army Reserve soldiers entitled to receive special medical and dental pay entitlements are entered and processed centrally at DFAS-Indianapolis. While Army Reserve soldiers are deployed on active duty, there are several active Army and DFAS components involved in paying them. The Army area servicing finance office, which may be within the United States or in a foreign country, is responsible for initiating pays earned while the soldier is located in certain specified locations, such as location-based pays for hostile fire and hardship duty. Pay technicians at these area servicing finance offices are responsible for starting these types of pays for each soldier based on documentation, such as annotated battle rosters or flight manifests, showing when soldiers arrived at these designated locations. Thereafter, hostile fire pay is automatically generated each pay period until an established end-of-tour date is reached or a pay technician manually stops the pay. In contrast, other location-based pays, such as hardship duty pay, require manual entry of pay transactions each month by the assigned Army area servicing finance office. While the designated Army area servicing finance offices have primary responsibility for administering pay for deployed Army Reserve soldiers, particularly starting and stopping location-based active duty pays (such as hardship duty pay), finance personnel at the cognizant mobilization station or at the Reserve Pay Center can also enter certain pay-altering transactions that occur during deployments, such as those related to a soldier’s early separation from active duty. In addition, the Reserve Pay Center has responsibility for entering all monthly nonlocation-based, nonautomated pay and allowance transactions, such as foreign language proficiency pay. Upon completion of an active duty tour, Army Reserve soldiers normally return to the same active Army locations from which they were mobilized for demobilization processing before returning to their home stations. The personnel section at the demobilization station is required to provide each soldier and the military pay technicians at the demobilization station with a copy of the Release from Active Duty order and a DD Form 214, Certificate of Release or Discharge from Active Duty. The demobilization station military pay technicians are required to use the date of release from active duty shown on these documents as a basis for stopping all Army Reserve soldiers’ active duty pay and allowances. The Reserve Pay Center is responsible for discontinuing monthly input of all nonlocation-based, nonautomated pays and allowances. If the active Army demobilization station did not take action to stop active duty payments for demobilized Army Reserve soldiers, or if a soldier did not return to the demobilization station for active duty out-processing, the responsibility for stopping active duty pays and allowances falls to the soldier’s unit or the Reserve Pay Center. Paying Army Reserve soldiers is complicated by the number of nonintegrated, automated order-writing, tactical, personnel, and pay systems involved in authorizing, entering, and processing active duty pays and allowances to mobilized Army Reserve soldiers during the mobilization, deployment, and demobilization phases of their active duty tours. These automated systems are the Defense Joint Military Pay System – Reserve Component (DJMS- RC)—a DFAS-operated system used to pay reserve soldiers; the Defense Military Pay Office (DMO)—data input system used to enter pay transactions for processing; the Army Reserve’s Regional Level Application System (RLAS), including its personnel order-writing functions; the Total Army Personnel Database–Reserves (TAPDB-R); the Army’s Tactical Personnel System; and the Army’s Transition Processing (TRANSPROC) System. Many of these systems were originally designed for other purposes, but have been adapted to help support payments to mobilized Army Reserve soldiers. For example, DJMS-RC, a large, complex automated payroll system application now used to pay Army and Air National Guard and Army and Air Force Reserve soldiers, was originally designed to be used to pay Reserve and Guard soldiers for monthly drills, short periods (30 days or fewer) of active duty or training. DFAS has acknowledged that its current military pay systems (including DJMS-RC) are aging, unresponsive, fragile, and a major impediment to efficient and high-quality customer service. DFAS has primary responsibility for developing guidance and managing system operations for DJMS-RC. DFAS-Denver is responsible for designing, developing, and maintaining customer requirements for all of DOD’s military pay services. Its Technical Support Office is responsible for designing and maintaining the DJMS-RC core pay software. DFAS- Indianapolis is the central site for oversight of all Army military pay. As such, DFAS-Indianapolis is responsible for maintaining an estimated 1 million Army soldier pay records, including those for Army Reserve soldiers. DFAS-Indianapolis serves as a “gatekeeper” for DJMS-RC in that it monitors the daily status of data uploaded to the system to ensure that all received transactions are processed. After manual entry of the mobilization dates from hard copies of mobilization orders into DJMS-RC, DJMS-RC is designed to automatically generate most active duty pay and allowance payments based on the mobilization date, twice a month, until the stop date is entered into the system. Without additional manual intervention, DJMS-RC will automatically stop generating these active duty payments to Army Reserve soldiers as of the stop date recorded in DJMS-RC. This automated edit control feature is intended to prevent erroneous payments to soldiers beyond their authorized end of active duty date. Because pay and personnel systems are not integrated, human intervention and additional manual data entry are required when a pay or allowance error is detected or an event occurs that requires a change in the soldier’s pay-related personnel and pay records. For example, a change in dependent status, such as marriage or divorce; a promotion; jump pay disqualification; or being demobilized before the active duty tour end date shown on a soldier’s original mobilization order would necessitate manual input to appropriately change or eliminate some of the pays and allowances a soldier would be entitled to receive. All Army Reserve soldier pays and allowances are to be documented in the Master Military Pay Account—the central repository for soldier pay records in DJMS-RC. All pay-related transactions that are entered into DJMS-RC, primarily through the DMO input application, update the Master Military Pay Account. DMO is the DJMS-RC pay input subsystem used by the Reserve Pay Center, active Army finance offices, and military pay offices—including offices located at overseas locations throughout the world—to enter transactions to initiate and stop active duty pays to mobilized Army Reserve soldiers. DMO is used to manually enter transactions to (1) initiate any Army Reserve soldier pay and allowances that were not started at initial mobilization, as well as applicable location- based pays, such as hostile fire and hardship duty pays, (2) stop all location-based pays when soldiers depart designated locations, and (3) stop all active duty pays and allowances at demobilization. In addition to DJMS-RC and DMO, the Army Reserve relies on four other nonintegrated automated systems as a basis for authorizing active duty pay, allowance, and related benefit entitlements to mobilized Army Reserve soldiers: RLAS is operated at the Army Reserve’s regional support locations and contains multiple modules to support regional human resource, resource management, and training operations for Army Reserve soldiers. The personnel module within RLAS is used to process Army Reserve personnel actions, including those that have an impact on pay, such as promotions and discharges. Within the personnel module, there is an order-writing sub-module used for writing and generating mobilization orders for individual Army Reserve soldiers. Army Reserve soldier data in the personnel module of RLAS is used by the RLAS order- writing sub-module to help create the individual orders for mobilized soldiers. TAPDB-R is the central repository for Army Reserve-wide personnel data. Selected pay-related personnel data, such as solders’ initial enrollment in the Army Reserve, contained in Army Reserve soldiers’ pay records in DJMS-RC, are received through an automated interface with TAPDB-R. The Tactical Personnel System is a stand-alone Army-wide personnel system operated by Army personnel at overseas airports where Army soldiers first enter or leave an overseas deployment location. Hard copies of Tactical Personnel System-generated manifests showing names and dates of soldiers’ arrivals and departures are one source of authorization for starting or stopping Army Reserve soldiers’ location- based hostile fire pay, hardship duty pay, and combat zone tax exclusion tax benefits. Arriving and departing soldiers can enter data, such as name, rank, and Social Security number, into the Tactical Personnel System from their common access cards using a barcode scanner function. TRANSPROC is an Army-wide system used to track and support Army soldier processing at mobilization and demobilization stations. TRANSPROC is used to generate a DD Form 214, Certificate of Release or Discharge from Active Duty, for Army Reserve soldiers completing their active duty mobilization tours. We identified significant pay problems at all eight of the Army Reserve case study units we audited. Specifically, we identified 256 Army Reserve soldiers who were overpaid their active duty pay and allowance entitlements by about $247,000, 245 soldiers who received late pay and allowance payments of about $77,000, and 294 soldiers who were underpaid their pay and allowance entitlements by about $51,000. As discussed in the following sections, we found that these pay problems were associated with a series of processes, human capital issues, and automated system deficiencies. The Army Reserve units we audited for our case studies had various functions, including a Quartermaster (supply), dental services, transportation, military police, and military intelligence unit. These units were assigned a variety of combat support missions associated with the global war on terrorism while mobilized on active duty in and around Iraq, Afghanistan, Qatar, and Kuwait and in support of intelligence operations here in the United States. The units we audited, their locations, and information about their mobilizations are shown in table 2. Overall, 332 of the 348 soldiers (95 percent) in our eight case study units that were mobilized, deployed, and demobilized at some time during the 18- month period from August 2002 through January 2004 had at least one pay problem associated with their mobilization to active duty. Many of the soldiers had multiple pay problems associated with their active duty mobilizations. Problems lingered unresolved for considerable lengths of time. For example, for some soldiers, problems lingered through the entire period of their active duty mobilization and for several months after their active duty tours ended. Table 3 summarizes the number of Army Reserve soldiers at each of our case study locations that had at least one problem associated with their pays and allowances during each of the three phases of their active duty mobilization. We counted soldiers’ pay problems as a problem only in the phase in which the problem first occurred, even if the problems persisted into subsequent phases. In addition, many soldiers had more than one problem associated with their entitled pays and allowances. Further, our case study audits reflect only the problems we identified. However, because our audits were only intended to provide more detailed perspective on the types and causes of any pay problems experienced by mobilized Army Reserve soldiers, rather than an exact calculation of what soldiers should have received, we likely did not identify all of the active duty pay and allowance problems related to our case study units. In addition to pay and allowance problems, while we did not attempt to fully quantify the tax withholding and tax filing effects, we also identified problems with timeliness and accuracy of combat zone tax exclusion benefits for soldiers with the seven case study units we audited that were deployed overseas in Kuwait, Afghanistan, Qatar, or Iraq. Specifically, while soldiers in these units were eligible to receive their pays and allowances tax free when they first arrived in-theater, almost all failed to receive this benefit until at least a month after arrival. Over- and underpayment of active duty pays and allowances for soldiers deployed in designated combat zones adversely impacted the accuracy and timeliness of soldiers’ combat zone tax exclusion benefits. Establishing the exact amount owed and collecting overpayments of active duty pays and allowances erroneously provided to soldiers placed an additional administrative burden on both the individual soldiers and DOD. Soldiers were sometimes required to spend considerable time and were frustrated in their efforts to determine the exact sums owed or to establish a repayment plan. For example, it took one soldier over a year and about 20 phone calls, e-mails, and faxes to identify and resolve the active duty overpayments and related tax benefits he received. In other instances, we identified soldiers who received extensive improper active duty payments, sometimes for over a year, but who may not have contacted anyone within DOD to stop these erroneous overpayments. These soldiers received significant overpayments, but did not acknowledge their receipt or set aside sufficient funds to repay these erroneous overpayments. In these instances, the soldiers may be subject to criminal prosecution. For example, we identified a soldier who did not mobilize with his unit, yet received over $36,000 in active duty pay and allowances for over a year. When questioned, the soldier stated he was not aware that he had received $36,000 in erroneous pay and could not immediately pay back all the erroneous active duty overpayments he received. We referred this, and other similar cases, to the Army’s Criminal Investigation Division for further investigation into whether criminal prosecution of these soldiers may be warranted for attempting to fraudulently convert government funds to personal use. Further, these overpayment debts placed an additional labor-intensive burden on the Army and DFAS. Determining the exact amounts soldiers owed as a result of overpayments, particularly when the combat zone tax exclusion benefits were involved, required labor-intensive efforts to gather necessary supporting documentation (in some instances from multiple locations) and compare these data with pay and tax withholdings, sometimes spanning more than 1 year, to manually compute amounts owed as a result of erroneous overpayments. In addition, DFAS was required to track and monitor collections from soldiers against these debts. Collection of these debts may become more difficult the longer they remain outstanding. For example, Army auditors reported in 2003 that, to the extent that soldiers leave the Army with outstanding debts, collection rates are only about 40 percent. Examples of pay and allowance problems found through our audits of soldiers’ pay experiences at the eight case study units included the following: Forty-seven soldiers deployed overseas with the 824th Quartermaster Company from North Carolina improperly received several months of hardship duty pay, totaling about $30,000, for several months after they left Kuwait. Nine soldiers of the 824th Quartermaster Company improperly received family separation allowance payments totaling an estimated $6,250 while serving at Fort Bragg, their unit’s home station. Forty-nine soldiers with the 824th Quartermaster Company did not receive the hardship duty pay they were entitled to receive when they arrived at their designated duty locations overseas until about 3 months after their arrival. Subsequently, they continued to erroneously receive hardship duty pay for 5 consecutive months after departure from their overseas duty locations. Ten soldiers with the 443rd Military Police Company had problems with their overseas housing allowance associated with their deployment in Iraq, including five soldiers who were underpaid about $2,700 and seven who did not receive their last allowance until more than 2 months after their active duty tour ended. A soldier with the 443rd Military Police Company who demobilized from an active duty deployment in August 2002, subsequently received erroneous active duty payments of about $52,000 through May 2004. These erroneous payments were not detected and stopped by DOD. The soldier contacted us to ask for our assistance in resolving this matter. A soldier from the 965th Dental Company who received an emergency evacuation from Kuwait as a result of an adverse reaction to anthrax and antibiotic inoculations he received in preparing for his overseas deployment, continued to receive about $2,900 in improper hostile fire and hardship duty payments after his return from Kuwait. A soldier with the 3423rd Military Intelligence Detachment did not receive an estimated $3,000 in family separation allowance payments associated with his active duty mobilization. Further, seven of our eight units were deployed overseas during their mobilization. Almost all the soldiers in these seven units had problems with the timeliness of their combat zone tax exclusion benefits. All the soldiers at our seven case study units who were deployed overseas experienced problems with the late receipt of their combat zone tax benefits because DJMS-RC could not simply stop withholding federal taxes, but instead had to first withhold the taxes and then in the following month’s pay processing, reimburse the soldier the taxes previously withheld. As a result, soldiers generally did not benefit from the tax exemption for at least one month after their tax withholdings should have ceased. In addition to this systemic issue, we identified other problems associated with these benefits with respect to the soldiers at our case study units: Twenty of the 20 soldiers with the 948th Forward Surgical Team waited over 2 months after they arrived in Afghanistan to benefit from the combat zone tax exclusion. It took nearly a year to identify and resolve a $1,100 overpayment associated with one soldier’s combat zone tax exclusion benefit. Several soldiers with Maryland’s 443rd Military Police Company never received the correct amount of reimbursement for taxes withheld, which sometimes resulted in underwithholding taxes, and other times resulted in overwithholding taxes. These pay mistakes were the source of many complaints, took considerable time and effort to address, and were likely to have had an adverse effect on soldier morale. In addition, soldiers at one of our case study units told us that a delay in receiving their active duty pays and allowances created financial hardship for them and their families. Specifically, several of the unit’s soldiers told us they could not pay their bills when they were initially deployed overseas and were forced to borrow money from friends and relatives in order to meet their financial obligations. We provided data on the pay problems we identified to Army Reserve officials. For the most part, they concurred with our analysis and reported that they have taken action to address any identified over- and underpayments and withholdings we identified. Appendixes II through IX provide a more detailed description of the pay experiences of the soldiers at each of the Army Reserve case study units we audited. The pay problems we found were caused, at least in part, by design weaknesses in the extensive, complex set of processes and procedures relied on to provide active duty pays, allowances, and related tax benefits to mobilized Army Reserve soldiers. We identified issues with the procedures in place for both determining eligibility and processing related transactions of active duty pay to mobilized Army Reserve soldiers. These process weaknesses involve not only the finance and military pay component of the Army, Army Reserve, and DFAS, but the Army’s operational and personnel functions as well. Specifically, we found deficiencies in processes for (1) tracking and maintaining accountability over soldiers as they moved from location to location to carry out their mobilization orders, (2) carrying out SRPs—primarily at the mobilization stations, (3) distributing and reconciling key pay and personnel reports during mobilizations, and (4) determining eligibility for the family separation allowance associated with active duty mobilizations. Mobilization policies and procedures did not provide the Army with effective accountability and visibility over soldiers’ locations to provide reasonable assurance of accurate and timely payments for Army Reserve soldiers’ active duty mobilizations. Accountability breakdowns can occur as soldiers pass through four main transitions during the course of a typical mobilization cycle, including transitions from (1) their home station to their designated mobilization station, (2) the mobilization station to their assigned deployment location, (3) the deployment location to their demobilization station, and (4) the demobilization station back to their home station. Soldiers’ active duty pays, allowances, and related tax benefits are directly tied to being able to account for soldiers’ locations during these transitions. For example, timely data on the dates soldiers arrive at and leave designated locations are essential for accurate and timely hardship duty pays, allowances, and related combat zone tax exclusion benefits. To effectively account for soldiers’ movements during these transitions, unit commanders, unit administrators, as well as individuals assigned to personnel and finance offices across the Army Reserves, Army mobilization stations, and in-theater Army locations must work closely and communicate extensively to have the necessary data to pay Army Reserve soldiers accurately and on time throughout their active duty tours. However, we identified several critical flaws in the soldier accountability procedures in place during the period of our audit. Specifically, we identified flawed procedures for accountability over soldiers’ actual locations and associated pay entitlements in that (1) soldiers received mobilization orders, but did not report for active duty and (2) dates of soldiers’ arrival at, and departure from, designated hardship duty deployment locations were not reported. Such breakdowns in accountability procedures resulted in erroneously starting, or delays in starting, active duty pays, allowances, and related tax benefits, and erroneously continuing these pays, allowances and benefits when soldiers were no longer entitled to receive them. Effective procedures were not in place to monitor and validate the propriety of active duty payments to mobilized reservists. We found that preventive controls for initiating and stopping active duty payments for Army Reserve soldiers were ineffective. In addition, the accountability controls in place at Army stations responsible for unit mobilization and demobilization processing were not effective in detecting any Army Reserve soldiers assigned to units passing through those locations who were not entitled to receive active duty pays and allowances. As a result of these control design flaws, we found several soldiers who received up to a year of active duty payments based on issued mobilization orders, even though the soldiers never reported for active duty. Army officials have acknowledged that active duty payments are increasingly vulnerable to such overpayments as a result of the Army Reserve’s November 2003 action to extend Army Reserve soldiers on active duty at that time for another year. When a unit is called to active duty, soldiers in the mobilized unit receive individual mobilization orders. Processing procedures provide that these orders be used as a basis for initiating active duty pays and allowances to begin on the first day of active duty designated in the individual active duty mobilization orders. The Reserve Pay Center, located at Fort McCoy, is generally responsible for initiating active duty pays and allowances based on the data shown on a hard copy of the individual orders. However, the Reserve Pay Center did not receive the data necessary to identify, on a unit- by-unit basis, which soldiers reported to the active Army mobilization stations so that this information could be compared with a list of soldiers for that unit for whom the Reserve Pay Center started active duty pays and allowances. In addition, Army mobilization station finance personnel did not receive a list of soldiers in a unit who were receiving active duty pay to compare with the names of unit soldiers who actually reported to the mobilization station. At one of our case study units, the 965th Dental Company, we found that this process flaw resulted in tens of thousands of dollars in overpayments. Individual Case Illustration: Flawed Soldier Location Accountability Procedures Result in $36,000 Erroneous Active Duty Payments A soldier assigned to the 965th Dental Company received a mobilization order, but based on a discussion with his commander about a medical condition, was told he would be transferred to a unit that was not mobilizing. However, the unit commander did not provide a list of the unit’s mobilizing soldiers to the Reserve Pay Center and did not provide any information on this soldier indicating that he would not be reporting to the unit’s mobilization station. Consequently, neither the Reserve Pay Center nor the mobilization station personnel had any means of detecting that a soldier had not mobilized with his unit and therefore was improperly receiving active duty payments. As a result, the soldier’s pay was started on February 11, 2003, and continued through February 29, 2004, resulting in more than $36,000 in overpayments. This improper active duty pay was stopped only after we identified the error and notified Army officials. In another instance, the Army’s inability to determine that one soldier’s actual location did not match his “paper” mobilization resulted in an estimated $52,000 in erroneous payments. Individual Case Illustration: Soldier Accountability Flaws Lead to Estimated $52,000 in Erroneous Active Duty Payments A soldier contacted GAO in March 2004 to inquire as to why he had been receiving active duty pay for almost a year even though, according to the soldier, he was not mobilized to active duty during that time. Subsequent inquiry determined that, at least on paper, the soldier was transferred from Maryland’s 443rd Military Police Company to Pennsylvania’s 307th Military Police Company in February 2003, and was mobilized to active duty with that unit on March 3, 2003. Applicable active duty pays and allowances for the soldier were initiated based on these March 3, 2003, orders. After the 307th Military Police Company demobilized in February 2004, the soldier’s mobilization order was revoked. Nonetheless, available pay documentation indicated the soldier continued receiving erroneous active duty pay and allowances for basic pay, and allowances for subsistence, housing, and family separation totaling an estimated $52,000 through May of 2004. In addition, Army Reserve officials told us about similar cases at other units not included in our case studies in which soldiers did not report for active duty, but nonetheless received erroneous active duty pay for lengthy periods. They told us they identified soldiers who received large improper active duty payments, some of whom had received erroneous active duty payments for over a year before they were identified and stopped, as the following examples illustrate: A soldier from an Army Reserve chemical unit in South Carolina received an individual mobilization order in February 2003, but did not mobilize with the unit. Nonetheless, her active duty pays and allowances (a total of over $45,000) continued until they were stopped in April 2004. A soldier from a Louisiana Army Reserve unit received an individual mobilization order in January 2003. However, the unit commander determined the soldier should not be mobilized with the unit because he had not yet completed required training. Nonetheless, the soldier received active duty pays and allowances totaling over $25,000 until they were stopped in March 2004. A soldier attached to a Puerto Rico Quartermaster Reserve unit was mobilized in February 2003, but did not report for active duty. The soldier continued to receive improper active duty pays and allowances totaling about $36,000 until the payments were stopped in April 2004. A soldier assigned to an Illinois Reserve Military Police Company received an individual mobilization order in December 2002. However, she did not report to the mobilization station with her unit and her mobilization order was revoked in January 2003. Nonetheless, the soldier continued to receive active duty pay and allowances totaling about $24,000 until the payments were stopped in April 2004. Army Reserve officials told us that these improper payments were not identified through any systemic preventive accountability control process associated with an active duty mobilization or demobilization, but rather as a result of after the fact detective controls in place at the unit or the Army Reserve pay center. For example, one soldier reported for a weekend drill and the unit pay administrator attempted to enter a transaction to pay him for weekend drill duties. However, the unit pay administrator discovered the soldier’s receipt of erroneous active duty payments when the weekend drill pay transaction was rejected by DJMS-RC. Army Reserve officials told us they have referred these improper payments to the Army’s Criminal Investigations Division to determine if criminal prosecution of the soldiers involved may be warranted. Flaws in soldier accountability procedures associated with overseas deployment locations resulted in late, under-, and overpayments of active duty pays, allowances, and tax benefits associated with almost all the soldiers in our case study units. Soldiers were generally paid late or underpaid location-based incentives upon their initial arrival into designated hardship duty and hostile fire locations. Subsequently, they were often overpaid these same location-based entitlements because these payments continued, sometimes for long periods of time, after soldiers left designated overseas locations. These failures occurred because Army procedures in place during our audit were ineffective in accounting for when soldiers entered into and departed from designated hardship duty and hostile fire locations. In addition, as discussed in a subsequent section of this report, automated systems deficiencies also contributed to, and in some cases exacerbated, location-based active duty pay problems. According to DFAS procedures, Army local area servicing finance locations are to obtain documentation showing soldier and associated arrival and departure date information to start and stop location-based pays, allowances, and associated tax benefits. We were told that flight manifest lists generated through the Army’s Tactical Personnel System were the primary source documents used as a basis for entering manual transactions to start and stop location-based pays during most of our audit period. One of our case study units, the 443rd Military Police Company, relied on an extraordinary, labor-intensive workaround to ensure that necessary documentation supporting any changes in the location of the unit’s soldiers, as well as other pay-support documentation, was received by the unit’s area servicing finance office while the soldiers were deployed in Iraq. Individual Case Illustration: Biweekly Flights to Transmit Unit Pay Documents While deployed to guard Iraqi prisoners at Camp Cropper in Iraq, the unit commander of the 443rd Military Police Company assigned a sergeant to help address myriad pay complaints. The sergeant was deployed to Iraq as a cook, but was assigned to assist in pay administration for the unit because he was knowledgeable in DJMS-RC procedures and pay-support documentation requirements and was acquainted with one of the soldiers assigned to the unit’s servicing finance office in Camp Arifjan, Kuwait. Every 2 weeks, for about 5 months, the sergeant gathered relevant pay- support documentation from the unit’s soldiers, took a 1 hour and 15 minute flight to the Kuwait airport, and then drove an hour to the Army finance office at Camp Arifjan. The day following the sergeant’s biweekly journey to Camp Arifjan, the sergeant worked with the Army finance officials at Camp Arifjan to enter transactions into DMO, often for 8-12 hours, to get unit soldiers’ pay entitlements started or corrected, particularly hardship duty pay requiring manual input every month. However, despite diligent efforts by Army local area servicing finance officials to develop and maintain accurate lists of soldiers at the designated deployment locations, our analysis of payments to soldiers at our case study units indicated that this information was often not timely or accurate. Finance officials at the Army area servicing finance offices either did not obtain manifests (documentation showing soldier arrival and departure dates) at all, received the documentation late (often months after the unit’s actual arrival or departure dates), or obtained manifests listing soldiers that should not have been included for pay purposes. For example, an Army Reserve soldier assigned to support Air Force operations did not process through, or have any access to, an Army location that could provide a manifest showing his arrival date in-country to local Army area servicing finance office officials so that they could start his location-based pays. In this case, the soldier did not receive his location-based pays until he returned to his demobilization station and insisted that personnel at that location take the actions necessary to start this payment. Also, we were told that soldiers departing from designated locations on emergency or rest and recreation leave, who are still entitled to continue to receive designated location-based pays while on such leave, were sometimes erroneously included on departure manifests used as source documents to stop active duty location-based pays. These flawed procedures, which were relied on to account for Army Reserve soldiers’ actual locations and their related pay entitlements while deployed, resulted in pay problems in all seven of our case study units that deployed soldiers overseas, as the following examples illustrate: All 49 soldiers that deployed overseas with our 824th Quartermaster Company case study unit were underpaid their hardship duty pay when they first arrived in the country. Subsequently, almost all soldiers in the unit were overpaid their hardship duty pay---most for up to 5 months-- after they left the designated location, and some continued to receive these payments even after they were released from active duty. In total, we identified about $30,000 in improper hardship duty payments received by this unit’s soldiers. Seventy-six soldiers with the 965th Dental Company received improper hardship duty payments totaling almost $47,000 after they had left their hardship duty location. Ten soldiers with the 431st Chemical Detachment received improper hardship duty payments for 7 months after their return to their home station. None of the 24 soldiers deployed with the 629th Transportation Detachment received hardship duty pay for the months they arrived and departed the hardship duty areas. In addition, they did not receive hostile fire pay for almost 3 months after their arrival at their assigned overseas deployment locations. The debts created by overpayment of these location-based payments placed an additional administrative burden on both the soldiers and the department to calculate, monitor, and collect the corrected amounts. Some of the pay problems we found were associated with flawed procedural requirements for the pay support review, which is part of the SRP process carried out at Army mobilization stations. Procedures followed by Army mobilization station finance officials during the SRP were inconsistent with respect to what constitutes a “thorough review” of soldiers’ pay support documentation to determine if it is current and complete and has been entered into the DJMS-RC pay system. Procedures followed for our 824th Quartermaster Company case study unit at the Fort Bragg mobilization station provided that the pay support portion of the SRP at that location consisted of finance representatives briefing the entire unit on required pay support. Finance personnel did not meet individually with each soldier to compare his or her pay support documentation with on-line soldier pay data in DJMS-RC. As a result, missing or outdated documentation required to support active duty pays and allowances at the time of the 824th Quartermaster Company’s SRP contributed to some of the late payments we identified. For example, one soldier with this unit who was certified as ready for mobilization as a result of the SRP, did not receive entitled family separation allowance payments because documentation necessary to start this allowance was not submitted as part of the SRP process. Six months later, after the soldier demobilized at Fort Bragg, the paperwork necessary to receive this allowance was obtained and submitted for payment. This soldier received about 6 months of back family separation allowance in September 2003 totaling $1,400. We also found indications that the pay support documentation review carried out at the Army’s Fort Lee mobilization station was less than thorough. Personnel at the Fort Lee mobilization station did not carry out a detailed review of Master Military Pay Account records, which would have shown that soldiers with the unit would stop receiving their entitled housing allowances and family separation allowances because there were incorrect end dates for these payments entered into DJMS-RC. As a result, several soldiers from the 443rd Military Police Company had their basic allowance for housing switched to a rate less than the soldiers were entitled to receive and had their family separation allowance stopped for a period during their deployment because the Fort Lee mobilization station finance personnel did not take action necessary to extend the end-of- eligibility dates for these two entitlements. In contrast, pay support documentation review procedures in place as part of the SRP at the Army’s mobilization stations at Fort McCoy and Fort Eustis provided that, in addition to a unitwide finance briefing, finance officials at those sites were to conduct one-on-one pay support documentation reviews with each soldier. Members of the 948th Forward Surgical Team, who mobilized through Fort McCoy, and the 629th Transportation Detachment, who processed through Fort Eustis, had their pay records reviewed and compared to DJMS-RC on-line records by finance officials during the finance portion of their SRP. We found very few problems with either the 948th or 629th units’ active duty pay entitlements, excluding in-theater entitlements, after these units passed through the one- on-one soldier pay documentation review as part of the SRP at Fort McCoy and Fort Eustis. Design flaws in the procedures in place to obtain and reconcile key pay and personnel reports impaired the Army’s ability to detect improper active duty payments. As discussed previously, we identified several cases and the Army has also identified a number of instances in which such improper payments continued for over a year without detection. The reserve pay review and validation procedures for Army Reserve soldiers were initially designed to service reservists as they perform weekend drills, annual training, and short-term active duty mobilizations of 30 days or fewer. Correspondingly, pay and personnel reconciliation processes in place during our audit were focused primarily on requirements for unit commanders to reconcile data for reserve soldiers while they are in an inactive (drilling reservist) status. However, as illustrated by the pay problems discussed in this report, there is an equal or even greater need to clearly establish required procedures for the review and reconciliation of pay and related personnel data for Army Reserve soldiers mobilized on extended active duty tours. Specifically, with respect to the monthly review and reconciliation of two key reports, the Pay/Personnel Mismatch Report and the Unit Commander’s Pay Management Report, current procedures contained in USARC Pamphlet 37-1 provide that unit commanders are required to review the Unit Commander’s Pay Management Report for soldiers in their units on weekend drill activities and for active duty mobilization planning activities. However, these procedures do not clearly require unit commanders to review this key report for Army Reserve soldiers in subsequent phases of their active duty mobilization tours. Appendix I of USARC Pamphlet 37-1 provides that unit pay data in the Unit Commander’s Pay Management Report should be reconciled with unit training and attendance reports, but does not require reconciling pay data with related data on mobilized soldiers. As a result, the unit commander at one of our case study units, the 965th Dental Company, stated that he did not believe that a review and reconciliation was needed. Instead, he stated he relied on the unit’s soldiers to identify any pay problems. In light of the extensive manual entry, and nonintegrated systems currently relied on for mobilized Army Reserve soldiers’ pay, the timely and complete reconciliation of comparable pay and personnel data in these key reports can serve as an important detective control to identify any pay errors shortly after they have occurred. In addition, Army guidance does not specify how deployed units are to receive these reports. Distribution of these reports is particularly problematic for units deployed in remote locations overseas. As a matter of practice, we found that for units in an inactive status, the unit’s Regional Readiness Command usually provides these reports. However, we also found no procedural guidance in place to distribute the same reports to unit commanders and administrators while their units are on active duty. Unit commanders for several of our case study units stated they did not receive these key reports while their units were deployed. Had those reports been available and reconciled, they could have been used to identify and correct improper active duty payments, such as the large, erroneous active duty overpayments discussed previously. The existing procedures for applying eligibility requirements for activated Army Reserve soldiers’ family separation allowance payments were not clear. These flawed procedural requirements for paying the family separation allowance led to varying interpretations and pay errors for Army Reserve soldiers at the implementing Army home stations and mobilization stations. DOD Financial Management Regulation (FMR) Volume 7A policy clearly provides that soldiers are entitled to receive a family separation allowance if their family does not reside near the duty station, which is generally defined as within 50 miles. However, DOD procedures and the form needed to implement this FMR policy were not clear. Implementing guidance and DD Form 1561 (a document that must be completed to receive the family separation allowance) do not provide for a determination that a soldier’s family does not live near the soldier’s duty station. Specifically, DD Form 1561 does not specifically require soldiers to certify that the soldier is entitled to receive family separation allowance benefits because (1) they live over 50 miles away from the unit’s home station and do not commute daily or (2) the soldier’s commander has certified that the soldier’s required commute to the duty station is not reasonable. We noted that in several of our case study units, soldiers began receiving the family separation allowance while stationed in Army installations less than 50 miles away from their residence and without any documentation showing the unit commander’s determination that the soldier’s commute, even though within 50 miles, was nonetheless, unreasonable. For example, soldiers from the 824th Quartermaster Company received family separation allowance payments while stationed at their Fort Bragg home station, even though they lived within 50 miles of the base and no documentation was available showing that the unit commander authorized an exception. In contrast, 14 soldiers with Maryland’s 443rd Military Police Company who lived over 50 miles away from their home station, including several soldiers from Puerto Rico, did not receive a family separation allowance as of the date of their arrival at their home station. Human capital weaknesses also contributed to the pay problems mobilized Army Reserve soldiers experienced in our eight case study units. Our Standards for Internal Control in the Federal Government states that effective human capital practices are critical to establishing and maintaining a strong internal control environment, including actions to ensure that an organization has the appropriate number of employees to carry out assigned responsibilities. Even in an operational environment supported by a well-designed set of policies and procedures and a world- class integrated set of automated pay and personnel systems, an effective human capital strategy— directed at ensuring that sufficient numbers of people, with the appropriate knowledge and skills, are assigned to carry out the existing extensive, complex operational requirements—is essential. Such a human capital strategy supporting accurate and timely active duty payments to mobilized Army Reserve soldiers must encompass potentially hundreds of DOD components that are now involved in carrying out the extensive coordination, manual intervention, and reconciliations required to pay mobilized Army Reserve soldiers. Well-trained pay-support personnel throughout various DOD components are particularly critical given the extensive, cumbersome, and labor- intensive process requirements that have evolved to provide active duty payments to mobilized Army Reserve soldiers. We encountered many sincere and well-meaning Army, Army Reserve, and DFAS personnel involved in authorizing and processing active duty payments to these soldiers. The fact that mobilized Army Reserve soldiers received any of their entitled active duty pays, allowances, and tax benefits accurately and on-time is largely due to the dedication and tireless efforts of many of these pay-support personnel to do the right thing for these mobilized Army Reserve soldiers. However, in conjunction with our case studies, we observed human capital weaknesses related to (1) inadequate resources provided to support unit-level pay management, (2) inadequate pay management training across the spectrum of pay-support personnel, and (3) customer service breakdowns. Vacancies and turnovers in key unit administrator positions, and the deployment of unit administrators to fill other military requirements, impaired a unit’s ability to carry out critical pay administration tasks that could have prevented or led to early detection of pay problems associated with our case study units. In addition to pay administration responsibilities, unit administrator duties include personnel and supply operations. We were told that vacancies in unit administrator positions were difficult to fill and often remained vacant for many months because Army policy requires the individual filling the unit administrator position to have a dual status, which means the individual must perform duties both in the capacity of an Army Reserve military occupation specialty as well as unit administrator. For example, at the 948th Forward Surgical Team, the unit administrator position was vacant prior to and during the unit’s mobilization. We were informed that the 948th Forward Surgical Team had difficulty filling the vacancy because of its dual status. Specifically, the unit officials stated that this position was difficult to fill because the individual must have a medical background to meet the dual status requirement. That is, the person filling the position must be able to meet the unit’s mission requirements as well as have knowledge and experience performing the personnel, payroll, and supply tasks of a unit administrator. In the absence of a unit administrator, the unit commander assigned a sergeant with limited knowledge of pay entitlements and DJMS-RC processing requirements to help carry out some of the unit administrator’s pay management duties. The sergeant told us that during a 2-week period during late April 2003, she spent about 100 hours attempting to resolve the unit’s pay problems, while concurrently carrying out her duties as a health specialist. Providing adequate resources to support the execution of critical pay management responsibilities was particularly problematic for Army Reserve soldiers that were cross-leveled (transferred) to other units and mobilized to active duty with those units. For three of the four case study units we audited where small groups of Army Reserve soldiers were transferred and mobilized to active duty with another unit, we found that these soldiers experienced pay problems that could be attributed, at least in part, to inadequate resources to carry out critical unit-level pay management responsibilities. For example, because he did not have any unit-level support to assist in processing his active duty payments, a soldier who was mobilized as a single-soldier unit did not receive any location- based active duty pays until he returned from Qatar. In addition to concerns about the level of resources provided to support critical unit administrator positions, we identified instances in which the lack of adequate unit administrator and finance office personnel training on pay management duties and responsibilities contributed to the soldiers’ pay problems we identified. In addition, we found that unit commanders did not always support these important pay management duties. Our Standards for Internal Control in the Federal Government provides that management should establish and maintain a positive and supportive attitude toward internal controls and conscientious management. Several of the individuals serving as unit administrators in our case study units informed us that they had received limited or no formal training covering unit administrator responsibilities and that the training they did receive did not prepare them for mobilization issues associated with supporting and processing active duty pays and allowances. Unit administrators have responsibility for a variety of pay-related actions, including working with the unit soldiers to obtain critical pay support documentation, maintaining copies of pay support records, providing pay- transaction support documentation to the Reserve Pay Center, and reviewing pay reports for errors. Without adequate training, unit administrators may not be aware of these critical pay management responsibilities. Few unit administrators at our case study units had completed all of the required training on active duty pay and allowance eligibility and processing requirements. While unit administrators are required to attend two courses (each lasting 2 weeks), few of the unit administrators for our case study units took the required training at or near the time they assumed these important pay management and other key unit administrator duties. For example, the unit administrator at one of our case study units, the 824th Quartermaster Company, stated she had not attended any formal training courses, but instead received on-the-job training. Our audit showed that she did not always effectively carry out her pay management report review responsibilities. For example, while our audit of unit pay reports showed she reviewed the documents, we saw no indication she used this tool to identify and stop an overpayment of $18,000 to one soldier in her unit. As a result, the erroneous pay was allowed to continue for another 5 months. At other units, we identified instances in which available documentation indicated that unit administrators did not take timely action to submit pay- support transactions. For example, several soldiers with the 965th Dental Company did not receive promotion pay increases and other entitlements for over 2 months because the unit administrator failed to process necessary pay-support documentation, available at the time of the unit’s initial SRP, until the unit was already deployed on active duty. At the 443rd Military Police Company, we found the unit’s finance sergeant assigned pay management responsibilities did not gather and submit current documentation needed to support active duty pays and allowances, including current documents showing soldiers’ marital status and number of dependents. As a result, soldiers from the 443rd Military Police Company experienced over-, under-, and late payments associated with their housing and cost of living allowances. In addition to inadequate unit administrator training, inadequate training of military pay technicians at Army finance offices at mobilization stations, area servicing finance offices (for deployed soldiers), and demobilization stations adversely affected the accuracy and timeliness of payments to mobilized Army Reserve soldiers. Few of the military finance personnel responsible for processing pays and allowances at the mobilization and demobilization stations and at the area servicing finance offices for deployed units had formal training on DJMS-RC pay procedures. Instead, several of the military pay technicians and supervisors we talked to at the Army mobilization and demobilization stations told us they relied primarily on on-the-job training to become knowledgeable in the pay eligibility and pay transaction processing requirements for mobilized Army Reserve soldiers. For example, military pay personnel at the Defense Military Pay Office at Fort Eustis informed us that they did not receive any formal training on active duty pay entitlements or DJMS-RC pay processing before assuming their assigned responsibilities for mobilization and demobilization pay processing. Instead, they stated they became knowledgeable in mobilization and demobilization pay processing procedures by processing hundreds of soldiers within 2 to 3 weeks of being assigned these responsibilities. They also said they contacted full-time civilians in the finance office, as well as Reserve Pay Center and DFAS officials, by telephone for assistance. Also, few of the Army finance personnel at overseas area servicing finance offices were adequately trained in active duty pay entitlements and processing procedures for mobilized Army Reserve soldiers. Specifically, these key personnel with responsibility for location-based active duty payments to mobilized Army Reserve soldiers deployed in Kuwait and Iraq and surrounding areas did not receive formal training on pay eligibility and DJMS-RC processing requirements before assuming their duties. USARC Pamphlet 37-1 provides that an Army in-theater servicing finance office has primary responsibility for supporting active duty payments to mobilized Army Reserve soldiers when a reserve unit is deployed overseas. Camp Arifjan was the Army location assigned responsibility for processing active duty payments to mobilized Army Reserve soldiers deployed in Kuwait and Iraq during 2003. Officials from the 336th Command, the Army command with oversight responsibility for Camp Arifjan, confirmed that while finance personnel at Camp Arifjan received training in the pay eligibility and pay processing procedures for active duty Army soldiers, they were not adequately trained in pay eligibility issues of Army Reserve soldiers. We were told of instances in which Army finance personnel were unable to help reserve soldiers resolve their pay problems. For example, the 948th Forward Surgical Team contacted an Army finance unit located in Kandahar, Afghanistan, to request its assistance in resolving the unit’s pay problems. However, the finance personnel at that location were unable to help resolve the 948th Forward Surgical Team’s pay problems because they said they had not had training in this area and were not familiar with DJMS- RC processing requirements and procedures. All 20 soldiers with the 948th Forward Surgical Team experienced pay problems associated with their location-based payments related to their deployment in Afghanistan, including hardship duty pay. These payments require manual entry every month by the unit’s area servicing finance office. Further, we saw little evidence that the unit commanders of our case study units received any training for their role in supporting their unit administrators in these important pay management responsibilities. For example, at one of our case study units, the 965th Dental Company, the unit commander informed us that he did not support the review of pay management reports because soldiers had the capability to review their pay online and would use this capability to identify and report any pay problems. However, as discussed previously, we identified a number of instances in which soldiers did not identify or report that they received thousands of dollars in improper active duty payments. Our audit work at eight case study units identified significant soldier concerns with both the level and quality of customer service they received related to their active duty pays, allowances, and tax benefits. The soldiers’ concerns centered around three distinct areas: (1) the accessibility of customer service, (2) the ability of customer service locations to help soldiers, and (3) the treatment of soldiers requesting assistance. Servicing soldiers and their families with pay inquiries and problems is particularly critical in light of the error-prone processes and limited automated system processing capabilities. Ultimately, pay accuracy is left largely to the individual soldier. Although there are several sources that soldiers can turn to for pay issue resolution, soldiers at our case study units experienced problems in accessing these sources. Sources that soldiers can contact include their home unit, the military pay section of the cognizant RRC, the mobilization/demobilization station, the designated active Army area servicing finance office in-theater, the online myPay system, and the 1-888- PAY-ARMY (729-2769) toll-free number. However, mission requirements and the distance between deployment locations and field finance offices often impaired the soldiers’ ability to utilize the in-theater customer service centers. Also, soldiers did not always have Internet and telephone access to use the myPay system or to contact customer service sources such as 1- 888-PAY-ARMY, the home unit, or the cognizant RRC. The lack of Internet access for deployed soldiers was particularly problematic because it limited soldiers’ access to pay, allowance, and tax benefit data reflected in their leave and earnings statements. Lacking leave and earnings statements, soldiers had no means to determine the propriety of their active duty payments. For example, soldiers with the 948th Forward Surgical Team told us that their inability to access the leave and earnings statements adversely affected their overall morale. Even when mobilized reservists were able to contact customer service sources, their pay issues often continued because the office they were instructed to contact was unable to address their inquiry or correct their problem. In some cases, customer service sources failed to help soldiers because they lacked an understanding of what was needed to fix the problems. When representatives of the 948th Forward Surgical Team contacted their parent company for help in correcting pay problems, personnel with the parent company informed them that they could not fix the unit’s pay problems because they (incorrectly) believed that the unit was paid through the Army’s active duty Army system. Soldiers at other units were redirected from one source to another. Soldiers were not aware of which sources could address which types of problems, and more significantly, the customer service sources themselves often did not know who should correct a specific problem. An Army Reserve major’s experience illustrates the time and frustration that was sometimes involved with soldiers’ attempts to obtain customer service for correcting errors in active duty pays, allowances, and related tax benefits. Individual Case Illustration: Extensive, Time-consuming Action Required to Resolve Pay Issue A soldier from Maryland was mobilized in March 2003 from the Army’s Individual Ready Reserve to active duty to serve as a liaison between the Army and Air Force to help coordinate ground and air combat operations in Iraq. After completing his 2-month active duty tour and returning to an inactive reserve status in May 2003, he contacted Army officials to inform them that he was continuing to receive active duty payments and volunteered to immediately repay these erroneous overpayments. In July 2003, he wrote a check for $6,150.75 after receiving documentation showing his debt computation. However, he continued to receive Leave and Earnings Statements indicating that he had an outstanding debt. He contacted his Army demobilization finance office to determine how to get the erroneous outstanding debt removed from his pay records. After being referred by officials at that location to various DFAS locations (including once being told, “There is nothing more I can do for you.”), he contacted us for assistance. After DFAS recomputed the soldier’s debt as a result of our inquiry, the soldier was informed that he owed an additional $1,140.54, because the original debt computation did not fully consider the erroneous combat zone tax exclusion benefits he received. Overall, he spent nearly a year after his 2-month active duty tour ended, and about 20 phone calls, faxes, and letters in contacting at least seven different DOD representatives at five different customer service centers to correct active duty pay and allowance overpayments and associated combat zone tax exclusion benefit problems. Finally, soldiers expressed concern about the treatment they sometimes received while attempting to obtain customer service. Soldiers felt that certain customer service representatives did not treat soldiers requesting assistance with respect. For example, one soldier who attempted to make corrections to his DD Form 214, Certificate of Discharge or Release from Active Duty, informed us that mobilization station personnel told him that the citations and dates of service he was trying to add “didn’t matter” and that he could fix them later. Additionally, some soldiers told us that while they raised concerns about the quality of customer service they received with respect to their pay inquiries and concerns, they were sometimes ignored. For example, soldiers with Connecticut’s 3423rd Military Intelligence Detachment told us that while they contacted the local Inspector General when they believed that finance personnel at their deployment location had both actively tried to impair the payment of their active duty entitlements and had tried to intimidate and discourage the unit’s soldiers from seeking help elsewhere, they were not aware of any action taken as a result of their concerns. As a result, soldiers with the unit told us they believed they had no recourse but to accept the poor treatment they believed they received. Weaknesses in automated systems contributed significantly to the underpayments, overpayments, and late payments we identified. These weaknesses consisted of (1) nonintegrated systems with limited system interfaces and (2) limited processing capabilities within the pay system. The Army and DFAS rely on the same automated pay system to authorize and process active duty payments for Army Reserve soldiers as they use for Army National Guard soldiers. In addition, similar to the Army National Guard, the Army Reserve’s personnel and order-writing systems are not integrated with the pay system. Consequently, many of the systems problems experienced by mobilized Army Reserve soldiers were similar to those that we identified in our report on pay issues associated with mobilized Army National Guard soldiers. Because of the automated systems weaknesses, both Army Reserve and active Army personnel must put forth significant manual effort to accurately process pays and allowances for mobilized Army Reserve soldiers. Moreover, to compensate for the lack of automated controls over the pay process, both DFAS and the Army place substantial reliance on the review of pay reports to identify pay errors after the fact. Part of this reliance includes the expectation that soldiers review their own leave and earnings statements, even though these statements do not always provide clear explanations of all payments made. Finally, because of DJMS-RC’s limitations, the system cannot simply stop withholding taxes for soldiers in designated combat zone locations. Instead, for these soldiers, the system withholds taxes and then reimburses the soldiers the amount that should not have been withheld at least a month after the soldiers were first entitled to receive this benefit. The key pay and personnel systems involved in authorizing, entering, processing, and paying mobilized Army Reserve soldiers are not integrated and have only limited interfaces. Figure 2 provides an overview of the key systems involved in authorizing, entering, processing, and making active duty payments to mobilized Army Reserve soldiers. Lacking either an integrated or effectively interfaced set of personnel and pay systems, DOD must rely on error-prone, manual data entry from the same source documents into multiple systems. In an effectively integrated system, changes to personnel records automatically update related payroll records from a single source of data input. While not as efficient as an integrated system, an automatic personnel-to-payroll system interface can also reduce errors caused by repetitive manual data entry into more than one system. Because of the lack of effective integration or interfaces among key personnel and pay systems, pay-affecting data recorded in the personnel system are not automatically updated in the pay system. Therefore, pay- affecting personnel changes recorded in the personnel system must be re- entered into the pay system from hard copies of documents, such as soldiers’ mobilization orders. We found numerous instances in which pay- affecting personnel information was not entered promptly into the pay system, resulting in numerous pay errors. Individual Case Illustration: Overpayment due to Lack of Integrated Personnel and Pay Systems A soldier assigned to an Illinois Military Police Company received a mobilization order in December 2002 to report to Fort Dix, New Jersey. Data from her individual mobilization order were entered into DJMS-RC and she began receiving active duty pays and allowances based on the active duty mobilization date shown in her mobilization order. However, her mobilization order was revoked in early January 2003 after she was found to be ineligible for mobilization. But, because of the lack of integration or an effective interface between personnel and pay systems, this order was not automatically processed in DJMS-RC to stop the soldier’s active duty pay. Consequently, the soldier was overpaid from December 2002 through May 2004. Overpayments to the soldier totaled over $24,000. We found several instances in which soldiers that were promoted while on active duty did not receive their pay raises when they should have because the promotion information was not promptly recorded in DJMS-RC. For example, one Army Reserve soldier’s promotion was effective on July 1, 2003. However, the soldier’s promotion was not processed in the pay system until October 2003, which delayed an increase in both his basic pay and basic allowance for housing. The soldier finally received his promotion pay, including back pay, in late October 2003, resulting in late payments totaling over $2,700. Lacking an effective interface between pay and personnel systems, DOD and the Army must rely on after-the-fact detective controls, such as pay and personnel system data reconciliations, to identify and correct pay errors occurring as a result of mismatches between personnel (TAPDB-R) and pay system (DJMS-RC) data. In this regard, the Army Reserve has an automated reconciliation tool—the Participation Management and Reporting Subsystem (PMARS)—to help identify data inconsistencies between pay and personnel systems. Specifically, the Army Reserve uses PMARS to identify mismatches of soldiers accounted for in one system and not in the other, and to compare the systems’ information on individual soldiers, such as their ranks and dates of service. However, this tool is not effective in identifying soldiers that are being paid for active duty while in inactive status because TAPDB-R currently does not capture and maintain this information. Although TAPDB-R maintains a “deployability” code, this code does not necessarily indicate whether or not a soldier is on active duty. If TAPDB-R included a code that specifically identified soldiers on active duty, then the PMARS comparison of TAPDB-R data with DJMS-RC data could help identify those soldiers improperly receiving active duty pay. DJMS-RC was not designed to pay Army Reserve soldiers for active duty tours longer than 30 days. According to DOD officials, requiring DJMS-RC to process various types of pays and allowances for active duty tours that exceed 30 days has stretched the system’s automated processing capabilities to the limit. Because of the system’s limitations, the Army and DFAS were required to make repetitive manual inputs for certain active duty pays, such as hardship duty pay. We found many instances in which these manual inputs resulted in payment errors. Moreover, because of the way in which hardship duty pay was processed, mobilized Army Reserve soldiers could not always determine whether they received all of their entitled pays and allowances. In addition, under current processing limitations, DJMS-RC does not process a required tax exclusion promptly for soldiers in a combat zone, which has resulted in late payments of this benefit for all entitled Army Reserve soldiers. During our audit period, we found numerous errors in hardship duty pay as a result of a DJMS-RC processing limitation that required the use of a miscellaneous payment code for processing this type of pay. Because of the use of this miscellaneous code instead of a code specifically for hardship duty pay, this pay could not be automatically generated on a monthly basis once a soldier’s eligibility was established. Therefore, hardship duty pay had to be manually input every month for eligible soldiers. As previously discussed, reliance on manual processing is more prone to payment errors than automated processing. We found that nearly all soldiers in our case studies who were eligible for hardship duty pay experienced problems with this pay, including late payments, underpayments, and overpayments. For example, the 965th Dental Company’s soldiers at Seagoville, Texas, experienced both underpayments and overpayments. Specifically, all 85 soldiers deployed to Kuwait were underpaid a total of approximately $8,000 for hardship duty pay they were entitled to receive during their deployment overseas. Subsequently, 76 of the unit’s soldiers were overpaid a total of almost $47,000 because they continued to receive hardship duty payments for more than 6 months after they had left the designated hardship duty location. Both underpayments and overpayments, as well as late payments, of hardship duty pay occurred largely because of the reliance on manual processing of this pay every month. The errors often occurred because local area servicing finance office personnel did not receive accurate or timely documentation such as flight manifests or data from the Tactical Personnel System indicating when soldiers arrived or left the designated hardship duty location. As a result, finance personnel did not start these payments on time, and did not stop these payments as of the end of the soldiers’ active duty tour date recorded in DJMS-RC. The DJMS-RC system processing limitation that led to using the systems’ miscellaneous code to process hardship duty pay, also contributed to overpayments of this active duty pay. That is, finance personnel mistakenly continued to manually enter transactions to process hardship duty pay to soldiers beyond soldiers’ end of active tour dates because DFAS had no way of implementing a system edit that could identify and stop erroneous hardship duty pay while permitting other types of transactions processed using this code to continue. Similarly, no edit was in place to prevent duplicate payments of hardship duty pay. As a result, hardship duty pay could be entered more than once for a soldier in a given month without detection. From our case studies, we identified three soldiers who each received two hardship duty payments for one month. None of these duplicate payments was identified or collected until we submitted inquiries about these soldiers’ payments to the Reserve Pay Center. In addition, we were told that soldiers had difficulty determining that they received duplicate hardship duty payments because this type of payment was not clearly identified on their leave and earnings statement. Use of the miscellaneous payment code also made it difficult for soldiers to understand, and determine the propriety of, some of the payments reflected on their leave and earnings statements. Hardship duty pay and other payments that are processed using the miscellaneous payment code are reported on leave and earnings statements as “other credits.” Furthermore, the leave and earnings statements did not provide any additional information about what the “other credits” were for unless pay clerks entered additional explanations in the “remarks” section of the statement, which they rarely did. As a result, soldiers often had no means to determine if these types of payments were accurate. Unit commanders told us that they relied on soldiers to identify any pay problems based on their review of their leave and earnings statements. However, because leave and earnings statements do not always provide adequate information or are not available to soldiers while they are deployed, reliance on the soldiers to identify pay errors is not an effective control. In addition to soldiers’ pay problems that occurred primarily because of the extensive use of manual processes, soldiers also experienced systematic problems with automated payments related to their combat zone tax exclusion, which resulted in late payments of this benefit for all soldiers in the seven case study units that deployed overseas. Soldiers are entitled to the combat zone tax exclusion for any month in which the soldier performs active service in a designated combat zone area. For any applicable month, this benefit applies to the entire month, rather than being prorated based on the number of days the soldier was in the combat zone. However, because DJMS-RC was designed as a pay system for inactive Army Reserve soldiers, it does not have the processing capability to suspend withholding of federal and state income taxes applicable to pay that is ordinarily taxable. Instead, as a workaround procedure to compensate for this limitation, the system first improperly withholds taxes applicable to payments made while soldiers are in a combat zone, then later reimburses soldiers for these withheld amounts in the following month. For example, when an Army Reserve soldier is assigned to a location where he is entitled to receive tax-free active duty pays, DJMS-RC (improperly) withholds taxes from at least the soldier’s first one or two active duty payments. Subsequently, during the first pay cycle of the following month, DJMS-RC reimburses the soldier for the amount of taxes improperly withheld during the previous month. As a result of this workaround process, all Army Reserve soldiers who served in a combat zone received their combat zone tax exclusion benefit at least one month late. DJMS-RC processing limitations cause further delays in soldiers’ receipt of entitled combat zone tax benefits when soldiers arrived in a combat zone after the midmonth cutoff, which is approximately on the 7th day of each month. In these cases, entitlement to the tax exclusion is not recognized until the following month, which then delays the soldier’s receipt of his combat zone tax benefit until the next month—the third month the soldier is deployed in the combat zone. For example, members of the 824th Quartermaster Company that deployed to Afghanistan arrived in country on July 14, 2003, but did not receive their first combat zone tax exclusion reimbursements until early October, almost 3 months after they became eligible for the exclusion. DOD and the Army have reported a number of relatively recent positive actions with respect to processes, human capital practices, and automated systems that, if implemented as reported, should improve the accuracy and timeliness of active duty pays, allowances, and related tax benefits provided to mobilized Army Reserve soldiers. The accuracy and timeliness of payments to mobilized Army Reserve soldiers rely on many of the same processes and automated systems used for payments to mobilized Army National Guard soldiers. Consequently, actions to improve the accuracy and timeliness of Army Reserve soldier payments are closely tied to actions taken in response to several of the recommendations in our November 2003 Army National Guard pay report. Because many of DOD’s actions in this area were implemented in the fall of 2003 or later, they were not in place soon enough to have had a positive impact on mobilized Army Reserve soldiers’ payments as of the January 2004 cutoff for the soldier pay data we audited. However, if implemented as reported to us, many of DOD’s actions in response to our November 2003 report recommendations should help reduce the incidence of the types of pay problems we identified for Army National Guard soldiers as well as those identified in the Army Reserve case study units discussed in this report. With respect to the process deficiencies and related recommendations, DOD reported implementing additional procedural guidance intended to help minimize the pay problems attributable to nonstandard or unclear procedures. For example, in June 2004, the Army issued a comprehensive “Finance Mobilization and Demobilization Standing Operating Procedure.” This guidance clarified pay management responsibilities and transaction processing requirements to be followed for all Army Reserve and Army National Guard soldiers mobilized to active duty. One of the purposes of this guidance is to eliminate any questions regarding which DOD entity is responsible for resolving a soldier’s pay issues or questions. Further, as of January 2004, DOD reported establishing a new procedure under which DFAS assumed responsibility (from the Army finance offices located in various overseas locations) for all monthly manual entry of mobilized Army Reserve and Army National Guard soldiers’ location-based hardship duty pay. DOD also reported completing several actions related to our previous recommendations to improve the human capital practices related to payments to mobilized Army soldiers. For example, the Army reported that it had taken action to provide additional training for Army finance personnel at overseas finance locations, mobilization and demobilization stations, and for those Army finance personnel scheduled for deployment. This training is directed at better ensuring that these personnel are adequately trained on existing and new pay eligibility and pay processing requirements for mobilized Army National Guard and Army Reserve soldiers. DOD also reported establishing a new policy in January 2004 directed at more clearly affixing responsibility for addressing soldiers’ pay problems or inquiries. Under this new policy, the Army National Guard established a pay ombudsman to serve as the single focal point for ensuring coordinated, prompt customer service on all Army National Guard soldiers’ pay problems. Thus far, DOD’s reported actions have not yet addressed, and consequently we are reiterating, our previous human capital recommendations with respect to (1) requiring unit commanders to receive training on the importance of adhering to requirements to carry out monthly pay management responsibilities, and (2) modifying existing training policies and procedures to require active Army pay and finance personnel who are responsible for entering pay transactions for mobilized reserve component soldiers to receive appropriate training upon assuming such duties. With respect to automated systems, the Army and DFAS have acknowledged serious deficiencies in the current automated systems used to pay mobilized Army Reserve soldiers, and report that they have implemented a number of significant improvements, particularly to reduce an estimated 67,000 manual monthly entries for hardship duty pay. For example, in response to our recommendations in the Army National Guard report, DOD reported taking actions to (1) automate manual monthly hardship duty pay in April 2004, (2) eliminate the use of the miscellaneous code for processing hardship duty pay and instead process these payments using a unique transaction code to facilitate implementing a system edit to identify and stop erroneous payments, (3) compare active duty release dates in the Army’s system used to generate Release From Active Duty orders with soldiers’ end of active duty tour dates shown in DJMS-RC to identify and stop any erroneous active duty pays, and (4) increase the reliability and timeliness of documentation used to support soldiers’ arrival at and departure from designated overseas locations. However, DOD has not yet fully addressed, and consequently we are reiterating two of our previous recommendations directed at interim automated system improvements and one of our longer-term system improvement recommendations. Specifically, we are reiterating previous interim recommendations related to evaluating the feasibility of (1) using the personnel-to-pay interface as a means to proactively alert pay personnel of actions needed to start active duty pays and allowances and (2) establishing an edit check and requiring approval before processing any payments above a specified dollar amount. DOD has a major system enhancement effort under way in this area—the Defense Integrated Military Human Resources System (DIMHRS). As an interim measure, DOD is now pursuing Forward Compatible Payroll (FCP). FCP is intended to replace payroll systems now used to pay Army military personnel and help eliminate several of the labor-intensive, error-prone workarounds necessitated by current DJMS-RC processing limitations. As of May 2004, FCP was expected to be operational for all Army Reserve soldiers by March 2005. We are also reiterating our previous longer term recommendation with respect to taking action to ensure that DIMHRS and related efforts include a complete reengineering of not only the related automated systems, but the supporting processes and human capital practices used to pay mobilized Army Reserve soldiers as well. Such fundamental reengineering is necessary because, as discussed in the preceding sections, many of the pay problems we found were associated with procedural and human capital practice issues, as well as nonintegrated automated systems that extend beyond existing pay system processing limitations. The increased operating tempo for Army Reserve and Army National Guard active duty mobilizations has stressed the current processes, human capital, and automated systems relied on to pay these soldiers. The significant number of problems we identified associated with active duty pays, allowances, and related tax benefits provided to mobilized Army Reserve soldiers at eight case study locations raises serious concerns about whether current operations can be relied on to provide accurate and timely payments. These pay problems caused considerable frustration, adversely affected soldiers’ morale, and placed an additional, unnecessary burden on both the soldiers and their families. Further, if not effectively addressed, these pay problems may ultimately have an adverse impact on Army Reserve reenlistment and retention. Strengthening existing processes, human capital practices, and automated systems is critical to preventing, or at minimum, promptly detecting and correcting, the errors we identified. In this regard, DOD and the Army have reported a number of relatively recent positive actions intended to improve the accuracy and timeliness of active duty pays, allowances, and related tax benefits provided to mobilized Army Reserve soldiers. DOD’s completed and planned near-term actions, if implemented as reported, should reduce the number of pay problems. However, mobilized Army Reserve soldiers cannot be reasonably assured of accurate and timely active duty pays, allowances, and related tax benefits until DOD completes a reengineering of all the processes, human capital practices, and automated systems supporting this critical area. Fully and effectively addressing Army Reserve soldiers’ pay problems will require priority attention and sustained, concerted, coordinated efforts by DFAS, the Army, and the Army Reserve to build on actions taken and planned. For these reasons, we are reaffirming two of our previous human capital-related recommendations and three of our previous automated systems-related recommendations from our November 2003 report on payments to mobilized Army National Guard soldiers. However, we are also offering 15 additional recommendations identified as a result of our audit of mobilized Army Reserve soldiers’ pay experiences. We recommend that the Secretary of the Army, in conjunction with the Under Secretary of Defense (Comptroller), take the following 15 actions to address the issues we found with respect to the existing processes, personnel (human capital), and automated systems relied on to pay activated Army Reserve soldiers. Establish procedures for unit commanders and unit administrators, or other designated officials (for soldiers transferred between units), to reconcile the names of Army Reserve soldiers receiving active duty pay with the names of Army Reserve soldiers reporting for duty at mobilization stations. Establish procedures for unit commanders and unit administrators, or other designated officials, to provide the names and arrival dates for all soldiers entering and exiting in-theater locations to a designated area servicing finance office to facilitate accurate and timely payment of in- theater location-based active duty pays, allowances, and related tax benefits. Establish procedures to provide demobilization stations with a list of soldiers returning from overseas that are scheduled to arrive at the demobilization station for outprocessing. Establish procedures to reconcile the names of Army Reserve soldiers who recently demobilized with the names of Army Reserve soldiers still receiving mobilization pay and take appropriate action to resolve any identified pay issues. Clarify policy concerning “thorough” review of soldiers’ pay records upon initial mobilization to specify that finance personnel at Army mobilization stations must conduct a one-on-one review of online pay records for each mobilized soldier. Establish procedures to ensure unit commanders and unit administrators, or other designated officials, have online access to pay management reports, such as the Unit Commander’s Pay Management Report, particularly for mobilized units. Clarify DJMS-RC procedures to specifically require unit commanders, unit administrators, or other designated officials to review and reconcile key pay and personnel data every month, including personnel records, with the monthly Unit Commander’s Pay Management Report, for all mobilized Army Reserve soldiers. Clarify and simplify procedures and forms implementing the family separation allowance entitlement policy, particularly with respect to the 30-day waiting period and commuting distance criteria. Take appropriate action to address the issues of inadequate resources provided to carry out key unit administrator pay management responsibilities identified at our case study units, particularly with respect to (1) vacancies in unit administrator positions resulting from the requirement for dual status unit administrators and (2) lack of pay management support for Army Reserve soldiers transferred between units. Determine whether issues of inadequate resources identified at our case study units apply to other mobilized Army Reserve units and soldiers, and if so, take appropriate action to address any deficiencies identified. Evaluate the feasibility of establishing an ombudsman to serve as the single focal point and have overall coordination responsibility and visibility to ensure that all Army Reserve soldiers’ problems and inquiries with respect to applicable active duty pays, allowances, and related combat zone tax exclusion benefits are promptly and fully resolved. Interim Improvements to Current Automated Systems Evaluate the feasibility of modifying the deployability code or adding a duty status code in TAPDB-R that can be compared with the pay status code field in DJMS-RC to assist in identifying pay errors resulting from discrepancies between the soldiers’ duty status and pay status. Evaluate the feasibility of modifying DJMS-RC to suspend withholding taxes from soldiers when they serve in designated tax- exempt combat zones. Evaluate the feasibility of establishing a system edit to prevent DJMS- RC from generating payments for active duty service to soldiers after their date of demobilization from active duty. Address the deficiencies noted in this report as part of the functional requirements for the FCP and DIMHRS system development efforts currently under way. In its written comments, DOD concurred with our recommendations and stated its actions to address the identified deficiencies. Specifically, DOD’s response outlined some actions already taken, others that are under way, and further planned actions with respect to our recommendations. If effectively implemented, these actions should substantially resolve the deficiencies pointed out in our report. DOD’s comments are reprinted in appendix X. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its date. At that time, we will send copies of the report to interested congressional committees. We will also send copies of this report to the Secretary of Defense; the Under Secretary of Defense (Comptroller); the Secretary of the Army; the Director of the Defense Finance and Accounting Service; and the U.S. Army Reserve Command. We will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions regarding this report, please contact me at (202) 512- 9095 or [email protected] or Geoffrey Frank, Assistant Director, at (202) 512- 9518 or [email protected]. To obtain an understanding and assess the processes, personnel (human capital), and systems used to provide assurance that mobilized Army Reserve soldiers were paid accurately and on time, we reviewed applicable laws, policies, procedures, and program guidance; observed pay processing operations; and interviewed cognizant agency officials. The key laws, policies, and procedures, we obtained and reviewed included 10 U.S.C. Section 12302; DOD Directive Number 1235.10, “Activation, Mobilization & Demobilization of the Ready Reserve;” DOD FMR, Volume 7A, “Military Pay Policy and Procedures Active Duty and Reserve Pay;” USARC Regulation 37-1, “Financial Administration: USAR Financial Management and USAR Support;” USARC Pamphlet 37-1, “Defense Joint Military Pay System – Reserve Component (DJMS-RC) Procedures Manual;” Army Regulation 600-8-101, “Personnel Processing (In-, Out-, Soldier Readiness, Mobilization, and Deployment Processing);” the Army’s Consolidated Personnel Policy Guidance for Operations Noble Eagle and Enduring Freedom, September 2002; and 500-3-3, Reserve Component Unit Commander’s Handbook; 500-3-4, Installation Commander’s Handbook; and 500-3-5, Demobilization Plan. We also reviewed various Under Secretary of Defense memorandums, a memorandum of agreement between Army and DFAS, and DFAS, Army, Army Forces Command, and Army Reserve Command guidance applicable to pay for mobilized reserve component soldiers. We also used the internal control standards provided in the Standards for Internal Control in the Federal Government. We applied the policies and procedures prescribed in these documents to the observed and documented procedures and practices followed by the various DOD components involved in providing active duty pay to Army Reserve soldiers. We also interviewed officials from USARC, RRCs, Army Reserve Regional Readiness Commands, Army Central Command, Army and DOD military pay and personnel offices, Army Finance Command, DFAS, and unit commanders and unit administrators to obtain an understanding of their experiences in applying these policies and procedures. From these interviews, we also obtained information on examples of recent mobilized Army Reserve pay problems they encountered in the course of their work. In addition, as part of our audit, we performed a review of selected edit and validation checks in DJMS-RC. Specifically, we obtained documentation and performed walk-throughs associated with DJMS-RC edits performed on pay status/active duty change transactions, such as those to ensure that tour start and stop dates matched MMPA dates and that the soldier cannot be paid basic pay and allowances beyond the stop date that was entered into DJMS-RC. We also obtained documentation on and performed walk- throughs of the recently implemented personnel-to-pay system interface process, the order writing-to-pay system interface process, and on the process for entering mobilization information into the pay system. We did not independently test DOD’s reported edit and validation checks in DJMS- RC, but we held interviews with officials from U.S. Army Reserve Headquarters, Army Finance Command, and DFAS-Indianapolis to supplement our documentation and walk-throughs. Because our preliminary assessment determined that current operations used to pay mobilized Army Reserve soldiers relied extensively on error- prone manual entry of transactions into multiple, nonintegrated systems, we did not statistically test current processes and controls. Instead, we used a case study approach to provide a more detailed perspective of the nature of any deficiencies in the three key areas of processes, people (human capital), and automated systems relied on to pay mobilized Army Reserve soldiers. Specifically, we gathered available data and analyzed the pay experiences of Army Reserve soldiers mobilized to and demobilized from active duty in support of Operations Noble Eagle, Enduring Freedom, and Iraqi Freedom during the period from August 2002 through January 2004. We audited the pay experiences of soldiers in the following eight Army Reserve units as case studies of the effectiveness of the processes, human capital practices, and automated systems in place over active duty pays, allowances, and related tax benefits: 824th Quartermaster Company, Fort Bragg, N.C. 965th Dental Company, Seagoville, Tex. 948th Forward Surgical Team, Southfield, Mich. 443rd Military Police Company, Owings Mills, Md. FORSCOM Support Unit, Finksburg, Md. 629th Transportation Detachment, Fort Eustis, Va. 3423rd Military Intelligence Detachment, New Haven, Conn. 431st Chemical Detachment, Johnstown, Pa. From the population of Army Reserve units mobilized and demobilized between August 2002 and January 2004, we selected units from various specialties that represented the wide variety of missions performed by the Army Reserve during wartime. These case studies are presented to provide a more detailed view of the types and causes of any pay problems experienced by these units as well as the financial impact of pay problems on individual soldiers and their families. We used mobilization data supplied by the Army Reserve Headquarters Operations Center to assist us in selecting the eight units we used as our case studies. We did not independently verify the reliability of the Operations Center database. We used the data to select RRCs that had a large number of activated Reserve units that had mobilized, deployed, and returned from their tour of active duty in support of Operations Noble Eagle, Enduring Freedom, and Iraqi Freedom. From the list of units assigned to these Readiness Commands, we selected our eight case studies that had a variety of deployment locations and missions, including both overseas and continental U.S. deployments. In addition to our case studies, during our visits to Army mobilization locations, we interviewed small numbers of soldiers currently in the process of returning from active duty to obtain their perspectives on their experiences with active duty pays, allowances, and related tax benefits. We also obtained testimonial data from soldiers at several of our case study units. We asked numerous soldiers at these units to discuss pay-related experiences during their deployment. The information we obtained during these interviews is presented to provide further insight into the pay experiences of Army Reserve soldiers who were mobilized under current military operations, but is not intended to be representative of the views of all soldiers in their units nor of those of Army Reserve soldiers overall. We used DJMS-RC pay transaction extracts for the period from August 2002 through January 2004 to identify pay problems associated with our case study units. However, we did not perform an exact calculation of the net pay soldiers should have received in comparison with what DJMS-RC records show they received. Rather, we used available documentation and follow-up inquiries with cognizant personnel at the Army Reserve Command, Regional Readiness Commands, and the Reserve Pay Center at Fort McCoy, Wisconsin, to determine if (1) soldiers’ entitled active duty pay and allowances were received within 30 days of their initial mobilization date, (2) soldiers were paid within 30 days of the date they became eligible for active duty pay, allowances, and entitlements associated with their deployment locations, and (3) soldiers stopped receiving active duty pay and allowances as of the date of their demobilization from active duty. For the pay problems we identified, we counted them as problems only in the phase (mobilization, deployment, and demobilization) in which they first occurred even if the problems persisted into other phases. For purposes of characterizing pay and allowance problems for this report, we defined overpayments and underpayments as those that were in excess of (overpayment) or less than (underpayment) the entitled payment. We considered as late payments any active duty pay or allowance paid to the soldier over 30 days after the date on which the soldier was entitled to receive such payments. As such, these payments were those that, although late, addressed a previously unpaid entitlement. We used available data through February 2004, as well as dollar amounts reported by Reserve Pay Center officials, to determine collections against identified overpayments through February 2004. In addition, while we did not attempt to calculate the exact impact of any soldier’s over-, under-, and late payments on their combat zone tax exclusion benefits, we did examine readily available data to determine the extent to which our case study unit soldiers’ received their entitled combat zone tax exclusion benefits. Our audit results only reflect problems we identified. Soldiers in our case study units may have experienced additional pay problems that we did not identify. Further, our work was not designed to identify, and we did not identify, any fraudulent pay and allowances to any mobilized Army Reserve soldiers. However, to the extent we identified any problems with our case study unit soldiers’ active duty pays, allowances, tax benefits, and related collections, we provided documentation showing the results of our analysis to appropriate Army Reserve officials for a complete review of all soldier pay records to determine whether, and take appropriate action if, additional amounts are owed to the Army Reserve soldiers or to the government. We briefed officials of the DOD Comptroller, Army Finance Command, Army Reserve Command, Army Reserve Regional Readiness Commands, Army Forces Command, and DFAS-Indianapolis on the details of our audit, including our findings and their implications. On July 9, 2004, we requested comments on a draft of this report. We received comments on August 11, 2004, from the Under Secretary of Defense (Comptroller) and have summarized those comments in the section of this report entitled “Agency Comments and Our Evaluation.” DOD’s comments are reprinted in appendix X. We conducted our audit from November 2003 through June 2004 in accordance with U.S. generally accepted government auditing standards. Beginning on February 2, 2003, the 824th Quartermaster Company was called to active duty for up to a year in support of Operation Enduring Freedom. A total of 68 soldiers from the 824th Quartermaster Company mobilized at Fort Bragg, North Carolina, and went through in-processing at Fort Bragg’s mobilization station in the first few weeks of February. Over the next several months, members of the unit performed their mission of rigging parachutes for individual soldiers and large equipment drops at Fort Bragg, in Afghanistan, and in and around Kuwait. On April 6, 2003, 44 members of the 824th Quartermaster Company deployed to Kuwait to assist in parachute preparations. After completing their mission, the soldiers returned to Fort Bragg 2 months later on June 19. Another 5 soldiers from the unit deployed to Afghanistan on July 14 and performed similar parachute rigging duties, returning to Fort Bragg on September 1, 2003. The other 19 soldiers in the unit remained at Fort Bragg for the entire duration of their tour of duty where they assisted in parachute rigging at the base. Beginning on July 15, 2003, soldiers in the 824th Quartermaster Company began to demobilize and return to their civilian jobs, and by the end of September 2003, all but one soldier had been released from active duty. The soldier that remained on active duty was receiving medical treatment for injuries related to his military service. A time line of actions associated with the unit’s active duty mobilization is shown in figure 3. As summarized in table 4, at every stage of the unit’s tour of active duty, soldiers experienced a variety of pay problems. Fifty-eight of the 68 soldiers in the 824th Quartermaster Company experienced at least one pay problem associated with their activation to, during, or deactivation from active duty in support of Operation Enduring Freedom. Specifically, (1) we found that 11 soldiers experienced underpayments, overpayments, or late payments during their initial mobilization; (2) 50 soldiers experienced underpayments, overpayments, or late payments during their tour of active duty at Fort Bragg, in Afghanistan, and in and around Kuwait, including in- theater incentives such as hostile fire pay; and (3) 13 soldiers experienced underpayments, overpayments, and/or late payments associated with their demobilization, with most of the problems relating to the continuation of active duty pay after demobilization. The dollar amounts associated with overpayments, underpayments, and late payments we identified were approximately $60,000, $10,000, and $3,000, respectively. Of the overpayments we identified, about $2,000 was subsequently collected from the unit’s soldiers. Almost $18,000 of the overpayments we identified was associated with one soldier, who continued to receive active duty pay for more than 5 months after his discharge from the Army. As summarized in table 5, we found that 11 soldiers from the 824th Quartermaster Company experienced underpayments, overpayments, or late payments related to basic pay and associated entitlements when called to active duty. For example, we identified several soldiers who received their $250 per month family separation allowance even though they performed their military duty at Fort Bragg, their home station, and were not separated from their families as provided by the DOD FMR Volume 7A. The soldiers were not informed by pay technicians at the unit or their mobilization station that they were not entitled to the family separation allowance if their home of record was within a reasonable commuting distance, generally 50 miles, even though the soldiers were staying at Fort Bragg. Prior to being mobilized, the soldiers in the 824th Quartermaster Company attended a SRP at their unit’s home station. The purpose of this review was to ensure that all soldiers had all required administrative paperwork, financial documents, and were physically fit for the ensuing mobilization. Members of the 81st Regional Readiness Command and unit members of the 824th Quartermaster Company, who conducted the finance portion of the SRP, were required to verify the soldiers’ supporting financial documentation, and, if necessary, submit transactions with the necessary supporting documentation to the Reserve Pay Center at Fort McCoy to update the soldiers’ Master Military Pay Accounts to reflect their mobilized status. After performing the SRP at the unit’s home station, the 824th Quartermaster Company reported to Fort Bragg, its active Army mobilization station. Fort Bragg personnel conducted a second SRP that was intended, in part, to verify each soldier’s pay account with supporting finance documents. However, instead of conducting the required review of each soldier’s pay record, Fort Bragg’s finance personnel performed only a perfunctory review of the soldiers’ supporting documents. According to finance personnel at Fort Bragg’s mobilization station, the physical layout of the in-processing station did not allow them to sit with each soldier “one on one” to compare their pay account as shown in DJMS-RC with the soldier’s pay supporting documentation in real time. The perfunctory review and oversights during the SRPs at the home station and mobilization station allowed several soldiers to receive FSA when they were not entitled to receive it. A review by personnel at the SRP should have identified that the soldiers were not separated from their families as required, and therefore they would not have signed off as approvers of the entitlement forms. A lack of adequately trained staff with enough time to review the unit’s pay forms may have caused this pay error. Missing or noncurrent documentation required to support active duty pays and allowances at the time of the SRP contributed to some of the late pays and allowance payments we identified. For example, one soldier did not receive family separation allowance payments because documentation necessary to start this allowance was not submitted as part of the SRP process, although the soldier was certified as ready for mobilization as a result of the SRP. It was 6 months later, when the soldiers were demobilizing at Fort Bragg, that the paperwork necessary to receive this allowance was submitted to the Fort Bragg finance office. This soldier received about 6 months of back pay in September 2003. As summarized in table 6, we identified a number of problems associated with the unit’s active duty pays and allowances. During the soldiers’ deployment to Afghanistan and Kuwait, they encountered pay problems related to payments for soldiers located in designated hardship duty locations and hostile fire zones. Most soldiers did not receive the full amount of hardship duty pay payments while deployed. In addition, they continued to receive their hardship duty pay well after they had returned to Fort Bragg and demobilized. All 49 soldiers deployed overseas were incorrectly paid for either hardship duty or hostile fire pay. Army area servicing finance officials, who had responsibility for initiating these entitlements, did not initiate the unit’s hardship duty pay payments until several months after the unit had arrived. The delay resulted in the deployed soldiers being underpaid for most of their time in the hardship duty location. Local active Army finance officials also did not terminate payments of hardship duty pay until 5 months after the soldiers had left the hardship duty pay location, in most cases. This erroneous continuation of hardship duty payments may have been the result of pay clerks continuing to manually process these payments each month using a roster of soldiers in the country that did not properly reflect the unit’s departure from the overseas deployment location. In addition, the DJMS-RC system processing procedures in place at the time required that hardship duty pay be processed using a miscellaneous payment code that could be used for a variety of payments. The use of this miscellaneous code for hardship duty pay precluded the system from identifying the payments as active duty pay and therefore allowed these payments to continue after the soldiers were demobilized. The use of the miscellaneous payment code also led to soldier confusion because the Leave and Earning Statement did not identify the nature of the entitlement. In addition, soldiers who deployed to Afghanistan told us that in some cases, they had trouble finding in-theater finance officers willing to help them with their pay problems. The soldiers stated that when they arrived in Afghanistan, the finance office on duty at the time was preparing to return to the United States because its tour in the country was ending. Several weeks passed before the transition of finance offices was complete, and in that time the Reserve soldiers did not have any local support that would assist them with finance problems. This gap in a functioning supporting finance office for the deployed soldiers could only have added to their frustration and confusion over in-theater pays. In addition to the problems soldiers experienced related to their pay and entitlements, they also experienced systematic problems related to their combat zone tax exclusion benefits. All 49 of the soldiers from the 824th Quartermaster Company who deployed overseas were eligible for this tax benefit and all of them experienced some type of problem with their combat zone tax exclusion. Specifically, we found that all 49 soldiers received their combat zone tax exclusion late, totaling about $20,000. Five soldiers did not receive all of the combat zone tax exclusion benefits they were due during their deployment. Moreover, the soldiers who deployed to Afghanistan did not have the combat zone tax exclusion applied to their pay until nearly 3 months after they arrived in the country, and never received their combat zone tax exclusion benefit for September 2003. The error for the month of September caused over $1,300 of extra taxes to be collected from these soldiers while in a combat zone. Soldiers of the 824th Quartermaster Company began to demobilize in July 2003. As summarized in table 7, during their demobilization and after their release from active duty, soldiers continued to experience pay problems. These problems were primarily overpayments associated with soldiers receiving pay after their active duty demobilization dates. The largest pay problem related to the 824th Quartermaster Company’s demobilization involved a soldier who was put into a medical hold company. The soldier initially mobilized with the unit in February, and was in-processed by personnel at Fort Bragg. During the in-processing, it was determined that the soldier had a medical condition that did not allow him to mobilize with the unit and perform his duty. He was then transferred to a medical holding company under the command of the Fort Bragg Garrison Support Unit. In this unit, the soldier underwent treatment for his condition and concluded that treatment in August 2003. On August 13, 2003, the soldier was discharged entirely from the Army and his pay should have stopped on that date. According to DFAS guidance, several locations can initiate transactions to stop a soldier’s pay. The primary location is the demobilization station where the soldier receives his or her DD Form 214, Certificate of Discharge or Release from Active Duty. As a secondary catch, the Reserve Pay Center at Fort McCoy can also stop the soldier’s pay on his or her release date. Although the soldier did out-process through Fort Bragg and received his DD Form 214, personnel at the demobilization station at Fort Bragg did not amend the soldier’s pay record to cut off pay on August 13. The unit also did not take any action to stop the soldier’s pay because the soldier should have been off of its pay records and in the pay records of the medical hold company. This had not been done and the result was that the medical hold company could not view the soldier’s pay records but knew he was discharged. Meanwhile, the unit could view the pay records but, under current procedures, did not receive a copy of the DD Form 214 showing the soldier had been discharged. Ultimately, the soldier’s pay and allowances were stopped only as a result of actions we took. Specifically, in August 2003, the soldier contacted his old unit, the 824th Quartermaster Company, and faxed them a copy of his DD Form 214. At this point the unit had all necessary documentation to identify the overpayment to the soldier after his discharge date of August 13, but did not review the pay records and identify the problem. The soldier continued to get paid until the end of January 2004 when we identified the error, which resulted in an overpayment of almost $18,000. Finally, after we brought the error to the unit’s attention, the unit requested that the Reserve Pay Center at Fort McCoy stop the soldier’s pay and initiate collection. On February 9, 2003, the 965th Dental Company was called to active duty in support of Operation Enduring Freedom for an initial 1-year tour. The unit mobilized at its home station, Seagoville, Texas, on February 11, 2003, and reported for active duty at Fort Hood, Texas, on February 14, 2003. On March 23, 2003, the 965th Dental Company deployed to Camp Arifjan, Kuwait, to provide dental services to Army soldiers involved in military operations in Iraq and surrounding areas. Upon completion of its mission, the company redeployed from Kuwait to Fort Hood in two separate groups; the first group returned on May 22, 2003, and the second on June 10, 2003. Within a few days of returning to Fort Hood, soldiers were sent home and following end-of-tour leave were discharged from active duty. By the end of July 2003, all but three soldiers had been released from active duty. Two soldiers remained on active duty because they were still receiving medical treatment for injuries sustained during their deployment and one was still deployed overseas at the time of our review. A time line of actions associated with the unit’s active duty mobilization is shown in figure 4. As summarized in table 8, soldiers of the 965th Dental Company experienced various pay problems at every stage of the unit’s tour of active duty. Overall, 89 of 93 mobilized soldiers experienced some type of pay problem associated with their activation to, during, or deactivation from, active duty in support of Operation Enduring Freedom. Specifically, 25 soldiers experienced underpayments, overpayments, or late payments associated with their initial mobilization; 86 experienced underpayments, overpayments, or late payments during their deployment to areas in and around Kuwait, including in-theater incentives such as hostile fire pay and hardship duty pay; and 7 soldiers experienced underpayments or overpayments associated with their demobilization, including problems related to the continuation of active duty pay after demobilization. One soldier received $36,000 of active duty pay even though he never mobilized with the unit. Another soldier incorrectly received hostile fire pay, hardship duty pay, the family separation allowance, and the combat zone tax exclusion benefit following his return home to recuperate from injuries sustained overseas. The dollar amounts associated with overpayments, underpayments, and late payments we identified were approximately $100,000, $16,000, and $27,000, respectively. Of the overpayments we identified, about $400 was subsequently collected from the soldiers prior to the time we started our audit. As summarized in table 9, we found that 25 soldiers from the 965th Dental Company experienced underpayments, overpayments, or late payments related to basic pay and associated entitlements during mobilization processing. The unit administrator conducted a premobilization SRP review during October 2002 at the unit’s home station. However, according to the unit administrator, about 30 to 40 soldiers did not attend the SRP session because the soldiers would have had to travel from distant locations, such as Albuquerque, New Mexico, where they typically attended Army Reserve inactive duty training, or for other reasons. Thus, when these soldiers arrived at the unit’s home station prior to reporting to Fort Hood, the unit administrator quickly performed the SRP process for them at that time. However, instead of submitting necessary changes to soldiers’ pay accounts to the Reserve Pay Center, the unit administrator waited until the unit arrived at the Fort Hood mobilization station to submit them. According to documentation obtained from the Reserve Pay Center, some soldiers’ documentation was not submitted until March 22, 2003, a month after the unit was mobilized. As a result, promotion pay increases and other entitlements were paid over 2 months late. For 3 soldiers, correct entitlements were not received until the soldiers returned from their overseas tour. Delays in submitting required forms and documentation were the primary causes for late pay and entitlements. Also, three soldiers were overpaid pay and benefits because their active duty pay was started too early. These minor overpayments were collected from the soldiers’ pay during demobilization out-processing. One soldier received double the amount of basic allowance for housing, for an estimated overpayment of $6,600. In addition, the process of paying soldiers their family separation allowance was not consistently applied for the soldiers of the 965th Dental Company. For example, a soldier from Gulfport, Mississippi, was paid family separation allowance during his commute to the mobilization station; however, a soldier from Claremore, Oklahoma, was not. The lack of accountability for deploying soldiers resulted in one unit soldier being paid active duty pay even though the soldier never mobilized with the unit. This soldier received orders to mobilize with the unit, but because the soldier had a disability that prevented his serving on active duty, the unit commander excused the soldier from mobilization. However, although unit personnel transferred the soldier to another unit that was not mobilizing, no one canceled the soldier’s original mobilization order in the Army Reserve personnel system, or notified the Reserve Pay Center to stop the soldier’s active duty pay. In addition, unit personnel did not notify the Fort Hood mobilization station that this soldier had received a mobilization order so the mobilization station could confirm that the order had been revoked and stop pay for this soldier. Further, the soldier receiving the unauthorized pay did not report the overpayments to the unit to which he had been transferred. Thus, the soldier received approximately $36,000 of active duty pay for which he was not entitled. These overpayments continued for more than 12 months and were not identified until we discovered them during our visit to the unit in January 2004. During our visit to the home station, we informed the unit commander about the soldier’s overpayment and he stated that this soldier should not be held responsible for repaying the overpayment because he believed the soldier did nothing wrong or illegal. He also stated that he did not review the Unit Commander’s Pay Management Report because the soldiers were able to review their pay online. It is likely that the improper payments to this soldier would have been identified if either the unit commander or unit administrator had monitored the unit’s pay reports. As summarized in table 10, we identified extensive problems associated with active duty pays and allowances applicable to the unit’s overseas deployment to Kuwait. In total, 86 soldiers experienced some type of pay problem during the deployed phase, including one soldier who did not deploy overseas, but received in-theatre incentives. During the unit’s deployment to Kuwait, soldiers encountered pay problems related to hardship duty pay, hostile fire pay, and the combat zone tax exclusion, all of which are benefits eligible to soldiers when serving in designated hardship duty locations and hostile fire zones. All 85 of the soldiers deployed overseas were incorrectly paid for either hardship duty pay or hostile fire pay, most of which were overpayments. In total, 85 soldiers did not receive the full amount of their hardship duty pay entitlement while deployed to Kuwait. These soldiers were underpaid a total of about $8,000. In addition, 76 soldiers continued to receive hardship duty pay payments following their return from Kuwait. Sixty-six of these soldiers continued receiving the payments for 6 or more months following their return home. Overpayments made to all 76 soldiers amounted to approximately $46,500. This amount does not include the overpayments made to soldiers involving a type of hardship duty pay that is no longer paid to soldiers serving in Kuwait. In addition, we estimated that the combat zone tax exclusion benefit was applied to 76 soldiers late or incorrectly. We estimated that approximately 75 soldiers received their combat zone tax relief benefits 2 to 3 months late, which was after their deployment ended, totally $24,000. In addition, one soldier did not receive all of the combat zone tax exclusion benefits she was due during her deployment, resulting in an estimated $200 underpayment, while 2 other soldiers were overpaid for a combined overpayment of about $300. Soldiers of the 965th Dental Company returned to Fort Hood in two different groups; the first group returned on May 22, 2003, and the second group returned on June 10, 2003. As summarized in table 11, 7 of 93 soldiers had problems associated with properly stopping their active duty pays and allowances during their demobilization. Of the soldiers who experienced pay problems associated with this phase, most had underpayments. One of the soldiers we reviewed had his active duty pay stopped before his actual demobilization date and another soldier’s special medical pay was stopped a month early. Each soldier was underpaid an estimated $1,200. Another soldier’s active duty pay continued past his demobilization date for an overpayment of approximately $1,400. In addition, one soldier returned home early from deployment in May 2003 due to a medical emergency. However, his pay and entitlements were not adjusted correctly. As a result, during his convalescence, much of which was at his home, the soldier continued to receive hardship duty pay, hostile fire pay, the family separation allowance, and the combat zone tax exclusion through April 2004 when we brought the overpayments to the unit’s attention. On January 20, 2003, the 948th Medical Detachment Forward Surgical (948th Forward Surgical Team) was mobilized to active duty in support of Operation Enduring Freedom for a 1-year tour. A total of 20 soldiers from the 948th Forward Surgical Team, including four surgeons, mobilized at its home station in Southfield, Michigan, and went through in-processing at the mobilization station at Fort McCoy, Wisconsin. On February 28, 2003, the unit deployed to Afghanistan through Baghram Air Base, Afghanistan. Most of the 20 soldiers remained in Kandahar for about 5 months. While there, the unit provided emergency medical attention to wounded soldiers and civilians in and around Kandahar and prepared them for evacuation to a combat support hospital. Two surgeons from the team returned in June 2003 and a third soldier returned in July 2003 as a result of a medical condition and was released from active duty on September 27, 2003. Sixteen of the remaining 17 soldiers returned to Fort McCoy on August 5, 2003, for demobilization and were released from active duty by August 29, 2003. The 948th Forward Surgical Team’s commander remained in Afghanistan until August 8, 2003, when he returned to Fort McCoy for demobilization and was released from active duty on September 4, 2003. A time line of the unit’s movements associated with its mobilization under Operation Enduring Freedom is shown in figure 5. All 20 soldiers in the 948th Forward Surgical Team experienced one or more pay problems associated with their 2003 mobilization to active duty. As summarized in table 12, soldiers in the 948th Forward Surgical Team experienced pay problems during all phases of their active duty mobilization, with the majority of the problems encountered in the last two phases. Specifically, we identified pay problems associated with (1) basic active duty pay, special medical pays, or allowances for 5 soldiers during the mobilization phase; (2) basic active duty pay, special medical pays, allowances, combat zone tax exclusion, or an in-theater incentive pay associated with the deployment phase for 20 soldiers; and (3) basic active duty pay, special medical pays, or allowances associated with 18 soldiers’ demobilization from active duty. In total, the pay problems we identified resulted in estimated overpayments of about $20,700, underpayments of about $2,000, and late payments of about $5,600. In addition, we identified about $15,300 and about $130 of combat zone tax exclusions that were delayed or not refunded, respectively. Available records showed that about $2,300 of the $20,700 in identified overpayments were subsequently collected from the soldiers. We were informed of several instances in which the unit’s pay problems created financial hardships for the unit’s soldiers and their families. Specifically, several of the unit’s soldiers could not pay their bills while they were deployed and were forced to borrow money from friends and relatives in order to meet their financial obligations. As summarized in table 13, we found that five soldiers from the 948th Forward Surgical Team experienced underpayments, overpayments, or late payments related to their active duty pay and allowances associated with their initial mobilization. Five soldiers experienced a variety of pay problems associated with their mobilization to active duty. For example, one physician was underpaid the special medical pay he was entitled to receive while on active duty. In January 2003, the physician began receiving special medical payments at a rate lower than he was entitled to receive. In March 2003, DFAS identified and corrected this error by paying the physician the correct special medical pay. However, DFAS did not retroactively pay the physician the correct medical pay covering the first 39 days he was on active duty. Another soldier experienced a problem related to his basic pay. The soldier had previously received a reduction in rank for not completing training requirements. On February 12, 2003, the commanding officer signed an order revoking the reduction in rank—after the unit was mobilized to active duty, but before it was deployed to Afghanistan. The Reserve Pay Center received the revocation order on March 7, 2003, but did not process this personnel action until April 4, 2003, resulting in late payments totaling an estimated $520. In late February 2003, the 948th Forward Surgical Team left Fort McCoy and traveled to Afghanistan. While in Kandahar, the soldiers experienced further pay problems related to hardship duty pay, hostile fire pay, and to a lesser extent, active duty basic pay, basic allowance for housing, family separation allowance, and special medical pays. They also experienced problems with respect to their benefits associated with the combat zone tax exclusion. Table 14 summarizes the pay, allowance, and tax benefit problems that the 948th Forward Surgical Team encountered during its deployment. We found that 19 of the 20 soldiers did not receive their initial hostile fire pay of $150 for February until an average of 47 days after arriving in Afghanistan. We also found that one soldier never received her initial hostile fire pay for February and March totaling $300. She also never received a retroactive hostile fire payment of $75 for February 2003. All 20 soldiers experienced problems with their hardship duty pay. Nineteen of the 20 soldiers did not receive their hardship duty pay for February 2003 until April 2003. For 13 of the 19 soldiers, their February 2003 hardship duty payment was not only late but contained an overpayment because the payments covered a period when the soldiers were still at Fort McCoy. Additionally, 19 soldiers continued to receive hardship duty payments not only after they left the location for which they were authorized to receive this pay, but for periods ranging from 1 to 5 months following demobilization. All 20 soldiers waited 67 days before receiving their February combat zone tax exclusion benefit payment, which averaged $377. We also found that one soldier was not refunded the total amount of taxes withheld while in combat zone tax exclusion status. Eighteen of 20 soldiers in the 948th Forward Surgical Team experienced pay problems associated with their demobilization from active duty. Seventeen of the unit’s soldiers returned to Fort McCoy in August 2003 to begin their demobilization process. The other 3 left Afghanistan and returned to Fort McCoy in June and July 2003. As summarized in table 15, soldiers were overpaid their active duty basic pay, certain allowances, and special medical pays after their release from active duty, while others never received (and were therefore underpaid) all of the family separation allowance or special medical pays they were entitled to receive. We determined that 16 soldiers received 1 or more days worth of active duty basic pay, special medical pays, or allowances after being released from active duty. These pay problems occurred because the demobilization station was late in entering transactions to stop pays and allowances as of the date the soldiers were released from active duty. The 443rd Military Police Company, headquartered in Owings Mills, Maryland, has been called to active duty twice since September 11, 2001. However, only the second mobilization fell within the time period of our case study analysis. The first mobilization (October 6, 2001, to September 2002) activated 112 soldiers to perform “secure and defend” functions at Fort Sam Houston in support of Operation Noble Eagle. On February 24, 2003, 121 soldiers of the 443rd Military Police Company were mobilized with the unit, including 76 who had returned from the deployment to Fort Sam Houston 5 months prior to this mobilization and 25 soldiers who were cross-leveled in from other units. These cross-leveled soldiers included 12 soldiers from Puerto Rico, 7 soldiers from Pennsylvania, 3 soldiers from Maryland, and 1 soldier each from New Jersey, Virginia, and West Virginia. In support of Operation Enduring Freedom, soldiers from the 443rd Military Police Company reported to the home station in Owings Mills for a SRP designed to help prepare them for mobilization. They later reported to Fort Lee, Virginia on February 27, 2003, for additional mobilization and in- processing procedures. After approximately 2.5 months at Fort Lee, 112 soldiers arrived in Iraq on May 15. Of the 9 remaining soldiers, 1 soldier arrived in Iraq earlier, on May 14, 1 soldier arrived on September 16, and 7 were on medical hold at Fort Lee for the entire mobilization. While in- theater, the 443rd Military Police Company operated a prison, Camp Cropper, located near the Baghdad airport. On December 6, 2003, 112 of the 114 soldiers who deployed to Iraq left the Middle East and returned to Fort Lee. One of the 2 other soldiers left early—on August 17—and the other left later—on December 14. The soldiers of the 443rd Military Police Company began demobilizing and returning to their civilian jobs on December 15. By January 15, 2004, all but 6 of the 121 soldiers had demobilized; the 6 soldiers remained on active duty to receive medical treatment at Fort Lee. A time line of actions associated with the unit’s active duty mobilization is shown in figure 6. As summarized in table 16, soldiers experienced a range of pay problems at every stage of the 443rd Military Police Company’s tour of active duty. Overall, 119 of 121 soldiers who mobilized experienced some type of pay problem associated with their activation to, during, or deactivation from federal service in support of Operation Enduring Freedom. Specifically, we found that (1) 70 soldiers experienced underpayments, overpayments, or late payments during their initial mobilization; (2) 114 soldiers experienced underpayments, overpayments, or late payments during their tour of active duty at Camp Cropper, Iraq; and (3) 17 soldiers experienced underpayments, overpayments, or late payments during their demobilization. The dollar amounts associated with overpayments, underpayments, and late payments we identified were approximately $25,000, $15,000 and $20,000, respectively. In addition, soldiers received late payment of their combat zone tax exclusion benefit totaling about $33,000. Of the overpayments we identified, about $4,000 were subsequently collected from the unit’s soldiers. As summarized in table 17, we found that 67 soldiers from the 443rd Military Police Company experienced overpayments, underpayments, or late payments related to basic pay and the associated entitlements when called to active duty. Before arriving at the mobilization station, the 99th Regional Readiness Command performed a SRP for the 443rd Military Police Company at their home station. This review was designed to prepare soldiers for mobilization by confirming that their financial documents and personnel paperwork were in order, as well as verifying that the soldiers were medically fit to mobilize. The finance portion of the SRP consisted of a briefing that covered the different entitlements soldiers could expect to receive and a review of how to read the soldiers’ Master Military Pay Accounts. Soldiers who found errors in their individual accounts were supposed to notify the Regional Readiness Command’s finance personnel at the SRP, who would then process the corrections upon returning to their headquarters and send the necessary documentation to Fort McCoy’s Reserve Pay Center. Upon reporting to Fort Lee, the 443rd Military Police Company’s active Army mobilization station, the unit underwent a second SRP, as required by Army regulations. However, despite going through two SRPs, the soldiers still experienced various pay problems related to their mobilization. For example, not all of the eligible soldiers in the 443rd Military Police Company received the proper amount of family separation allowance. Many of the unit’s soldiers began receiving family separation allowance earlier than they should have, resulting in small overpayments that totaled approximately $550 for the unit. In addition, 15 soldiers received late family separation allowance payments during mobilization. In addition, the soldiers of the 443rd Military Police Company also had difficulties in starting their basic allowance for housing entitlements and active duty basic pay. Ten soldiers experienced overpayments and 6 soldiers experienced underpayments of their basic allowance for housing. The 12 soldiers cross-leveled into the 443rd Military Police Company from Puerto Rico were not entitled to the basic allowance for housing type I during their mobilization because they were classified as overseas soldiers. Instead, these soldiers received basic allowance for housing type II, a cost of living allowance and an overseas housing allowance. One soldier received an overpayment of the cost of living allowance and 2 soldiers received underpayments of their overseas housing allowance entitlements, all of which occurred because these payments were based on incorrect rates. Four members of the unit experienced problems starting their active duty basic pay. Two soldiers received a delay in their promotions, resulting in nearly $500 in late payments. The two other soldiers had received demotions that were not promptly entered into DJMS-RC. The first soldier’s demotion had been effective at the start of the mobilization, but the soldier continued to receive payments at the incorrect, higher rate until July 2003. The resulting overpayments of active duty basic pay, totaling over $2,500, were not identified by the Reserve Pay Center until we raised questions about them. The second soldier, however, incurred almost $6,400 in collections when his demotion was processed 16 months after it became effective, and despite the fact that his higher rank was restored shortly thereafter. His demotion occurred because he had been unable to attend training to maintain his rank before being mobilized for Operation Noble Eagle in October 2001. During this mobilization, in February 2002, Army personnel at the 99th Regional Readiness Command generated a grade reduction order, but the transaction was not entered into DJMS-RC until June 2003, 4 months after the soldier’s mobilization for Operation Enduring Freedom and after his deployment to Iraq. Although his previous grade was restored in July 2003, the restoration was not retroactive, so the soldier still had to pay back almost $6,400. One problem that occurred during the mobilization process did not have an immediate effect on the soldiers of the 443rd Military Police Company, but rather later, during their deployment. In October 2003, 20 soldiers had their basic allowance for housing switched from the regular entitlement to the partial basic allowance for housing. In addition, another 16 soldiers had their family separation allowance entitlements stopped. These changes occurred because during the SRP process in February, finance personnel failed to extend the dates of eligibility for the basic allowance for housing and the family separation allowance to reflect the end date of the current mobilization. Pay records showed that these 36 soldiers were entitled to receive one of these entitlements through October 2003, exactly 2 years after the date of the first mobilization. While the soldiers were paid for active duty beyond the October end date of eligibility in the system, the allowances were automatically turned off by the system. Most of these problems were caught shortly after occurring and were corrected by the end of the following month, resulting in about $5,750 of late payments. However, 4 soldiers failed to have their entitlements turned back on, resulting in total underpayments of $3,500. Soldiers of the 443rd Military Police Company complained that finance personnel at Fort Lee in March refused to help them and told soldiers that they needed to contact their unit administrator to fix their problems. The unit administrator, who did not mobilize with the unit, voluntarily went to Fort Lee to help ensure that all of the Company’s soldiers’ pay issues were addressed. However, finance personnel at Fort Lee asked him to leave after he attempted to help resolve some of his unit’s pay problems. Despite spending over 2 months at Fort Lee, many of the pay problems that began during mobilization were not corrected by the time the soldiers deployed to Iraq. In fact, 52 of the 121 soldiers left the mobilization station with unresolved pay-related problems. As summarized in table 18, we identified a number of pay problems associated with active duty pays and allowances during the 443rd Military Police Company’s deployment while on active duty. While deployed in Iraq, all of the soldiers experienced problems related to the location-based payments—specifically, problems with hardship duty pay, hostile fire pay, and the combat zone tax exclusion. All of the 114 soldiers deployed to Iraq with the 443rd Military Police Company experienced some sort of overpayment, underpayment, or late payment of at least one of these three entitlements. Soldiers in the 443rd Military Police Company were entitled to $100 per month for hardship duty pay for serving in Iraq. However, officials at the Army area servicing finance office paid the first partial month’s hardship duty pay more than 2 months after it was due to 107 of the 114 soldiers deployed to Iraq. Of the remaining 7 soldiers, 4 received hardship duty pay on time and 3 never received the first partial month’s hardship duty pay during our audit period. Additionally, none of the 113 soldiers remaining in Iraq during December 2003 received any hardship duty pay payments for the partial month they spent in-theater. Soldiers in the unit also experienced assorted individual problems relating to the payment of the hardship duty pay entitlement. For example, 1 soldier who remained on medical hold at Fort Lee received hardship duty pay payments, totaling over $350, despite never deploying. Two soldiers each received two hardship duty pay payments in a given month, resulting in over $150 in overpayments. Finally, one soldier continued to receive over $300 in hardship duty pay payments after leaving Iraq in August 2003. Of the 113 soldiers entitled to hostile fire pay during the deployment, 3 experienced some sort of problem with this pay. Two soldiers received overpayments of hostile fire pay, including 1 soldier who continued to receive hostile fire pay after he left the in-theater location and another soldier who erroneously received $300 in hostile fire pay instead of the correct $225 amount for 1 month. This second soldier also received part of his May 2003 hostile fire pay 75 days after it was due. Finally, 1 other soldier experienced a $450 underpayment of hostile fire pay because he stopped receiving the entitlement before leaving Iraq. Of the 114 soldiers deployed to Iraq, 112 received their first month’s combat zone tax exclusion more than 30 days after they were entitled to it. This resulted in late payments totaling over $33,000, more than the late payments from all other sources combined. Additionally, 3 soldiers experienced overpayments and underpayments related to the combat zone tax exclusion. One of these soldiers erroneously received over $250 as a combat zone tax exclusion repayment related to a bonus payment that was taxable. Another soldier did not receive his combat zone tax exclusion repayment for the last 2 months of his mobilization, creating an overwithholding of over $400. We were unable to determine the extent to which one additional soldier in the unit experienced problems with his combat zone tax exclusion, hardship duty pay, and hostile fire pay during the mobilization. His DD Form 214, Certificate of Release and Discharge from Active Duty, stated that the soldier served with his unit in theater from May 15, 2003, to December 6, 2003. However, the soldier did not receive any of these location-based entitlements during his tour of duty. Pay personnel at Fort McCoy stated that his records indicate he was on convalescent leave (leave for soldiers returning to duty after illness or injury) from May 21 to July 16, and therefore may not have been entitled to these allowances. Pay personnel at Fort McCoy were continuing to research this case and could not tell us anything further. Without additional information, we could not determine whether this soldier was paid correctly. In addition, during this phase, some of the soldiers of the 443rd Military Police Company also experienced various individual problems with active duty basic pay, the basic allowance for housing, and the overseas housing allowance. Because of delays in promotions, six soldiers experienced late payments of active duty basic pay and four of these soldiers also experienced late payments of basic allowance for housing. Other problems included one soldier who received overpayments of the basic allowance for housing throughout the mobilization, totaling over $850, because her spouse was a service member who periodically went on and off duty. Two other soldiers had their overseas housing allowance paid inconsistently and at varying rates, creating net overpayments for both soldiers. The soldiers of the 443rd Military Police Company began to demobilize in December 2003. As summarized in table 19, some soldiers continued to experience pay problems throughout their demobilization and even after release from active duty. These problems consisted primarily of differences between the last dates for which soldiers were paid and the dates of release from active duty as recorded on the DD Form 214, Certificate of Release or Discharge from Active Duty. Of the 115 soldiers who demobilized by the end of our audit period, including 2 who had been on medical hold, 6 soldiers were paid beyond their date of demobilization and 2 soldiers had their pay stopped shortly before demobilizing. The 6 soldiers paid beyond their date of demobilization were overpaid for an average of 19 days and nearly $2,500 each. This includes 1 soldier who was overpaid for at least 68 days and $10,500. This soldier, who demobilized in February 2004, stated that he contacted his demobilization station, home unit, and the pay section of the Regional Readiness Command by early April, but nevertheless continued to be paid through April 2004. The 2 soldiers whose pays were stopped before demobilizing were underpaid a total of almost $400. In addition to the problems associated with the date of release from active duty, several soldiers experienced other problems related to their demobilization. For example, the demobilization station processed “hardship duty pay for certain places” for 1 soldier from May 2003 to December 2003. This type of hardship duty pay has not been authorized for newly deployed soldiers since December 2001 and the soldier had received his correct “hardship duty pay for designated areas” while he was deployed in Iraq. This erroneous transaction during the soldier’s out-processing created an overpayment of approximately $150 that went undetected. Additionally, 7 of the 12 soldiers cross-leveled into the 443rd Military Police Company from Puerto Rico experienced late payments of their last month’s overseas housing allowance entitlement, totaling almost $1,500. A major in the Army’s Individual Ready Reserve, who lives in Maryland, volunteered for active duty. He received orders mobilizing him to active duty on March 6, 2003, in support of Operation Iraqi Freedom. The major was activated as a separate one-person unit. Because he was mobilized from an inactive status, he did not have a home unit. He reported to Fort McPherson, Georgia, on March 6, 2003, where he participated in an Army SRP. On March 9, 2003, he reported to Nellis Air Force Base in Nevada for training. Because he was to serve as an Army liaison to the Air Force while deployed, on March 17, 2003, he reported to Seymour Johnson Air Force base in North Carolina, where he underwent an Air Force mobilization in- processing review with the Air Force’s 4th Fighter Wing. He arrived in Qatar on March 25, 2003. He was assigned to serve as an Army Forces Command (FORSCOM) Ground Liaison Officer attached to the Air Force’s 379th Expeditionary Force at the Air Force base at Doha, Qatar. As a Ground Liaison Officer, he was responsible for a team of Army officers that briefed Air Force pilots before every mission during the Iraqi offensive on the latest information concerning the location of Army troops and enemy forces. He was also responsible for providing briefings to the Air Force general in charge of flight operations at Doha on the status and positions of coalition ground forces. He served in this capacity until May 1, 2003, when he left Qatar. On May 2, 2003, he underwent Air Force active duty outprocessing with the Air Force’s 4th Fighter Wing at Seymour Johnson Air Force Base. He arrived at Fort McPherson on May 4, 2003, for demobilization processing. He was demobilized from active duty on May 15, 2003, and returned to his home in an inactive status as a member of the Army’s Individual Ready Reserve. In August 2003, the major resigned his commission and received an honorable discharge from the Army Reserve. Key events associated with the major’s active duty pays and allowances for his 2003 mobilization are summarized in figure 7. As summarized in table 20, this one-soldier unit experienced various pay problems associated with his location-based active duty pays and allowances that continued until well after his demobilization to Individual Ready Reserve status. Specifically, we found that this single-soldier unit (1) did not have any underpayments, overpayments, or late payments during initial mobilization; (2) experienced overpayments and late payments associated with deployment location-based pays, allowances, and related tax benefits; and (3) continued to experience problems with active duty pays, allowances, and related tax benefits for months after his demobilization. The dollar amounts associated with overpayments and late payments we identified were about $8,000 and $300, respectively. Of the overpayments we identified, all were subsequently collected from the soldier by May 31, 2004. Finance personnel at the soldier’s mobilization station at Fort McPherson, Georgia, started his active duty pay entitlements associated with his initial mobilization. We did not identify any pay problems associated with the soldier’s initial mobilization to active duty. As summarized in table 21, we identified active duty pay and combat zone tax benefit problems associated with the soldier’s assigned deployment location while on active duty. When the soldier arrived at his assigned active duty deployment location in Qatar on March 25, 2003, he was entitled to receive hardship duty pay and was entitled to exempt his pay from federal taxes while assigned to that location. However, while the soldier went through an Air Force in-processing procedure when he arrived in Qatar, there were no procedures in place to provide flight manifest documentation to an Army area servicing finance office notifying it of his arrival. Such documentation is necessary to start the soldier’s hostile fire pay and related combat zone tax exclusion benefits. Because he was assigned to support an Air Force operation, he did not process through, or have any access to, an Army area servicing finance office to start his location-based pays and related tax benefits. It was not until he left Qatar and arrived at his demobilization station at Fort McPherson that finance personnel at that location received supporting documentation from the soldier and took the actions necessary to process transactions for him to receive his pay and tax benefit entitlements. Consequently, he did not receive any of his hostile fire pay until May 21, 2003, or his related combat zone tax exclusion benefits until June 4, 2003—after he returned from his overseas deployment. Army finance officials did not initiate the soldier’s hostile fire pay and combat zone tax exclusion benefit, which he was entitled to receive beginning in March 2003, until officials at his demobilization station took action to start this pay and tax benefit. The soldier was deployed to serve as an Army liaison to an Air Force unit with an Air Force finance office; he was unable to find anyone at or near his deployed location who could help him get his entitled location-based pay and related tax benefits started. Air Force finance personnel told the soldier to contact finance personnel back in the United States at Fort McPherson to address his pay problems. The soldier told us that while he was in Qatar he was able to contact DFAS by e- mail, but officials there told him there was little they could do to help him get his location-based pays and tax benefits started. He said that telephone calls to the United States were difficult because of time differences and his limited access to phones to make an overseas call. The soldier left Qatar on May 1, 2003, to return to his demobilization station at Fort McPherson. Fort McPherson issued orders to demobilize him from active duty to the Army’s Individual Ready Reserve as of May 15, 2003. As summarized in table 22, during his demobilization and after his release from active duty, the soldier continued to experience pay problems. These problems were overpayments associated with the soldier receiving active duty pay after the date of his demobilization from active duty. The soldier out-processed through Fort McPherson and received his DD Form 214, Certificate of Release or Discharge from Active Duty, with a release from active duty date of May 15, 2003. However, finance personnel at the Fort McPherson demobilization station did not take action to stop his active duty pays and allowances as of that date. As a result, he continued to receive active duty pays and allowances that he was not entitled to receive for a month after his demobilization—from May 16 through June 13, 2003. In addition, he continued to receive his combat zone tax exclusion benefits for the same period, May 16 through June 13, even though he had not only left the combat zone, but had already demobilized from active duty and returned home. The income tax withholdings for this period were refunded directly to the soldier. His pay was not stopped at the end of his active duty tour initially because finance personnel at Fort McPherson were waiting for his hardship duty pays to “clear,” but they then forgot to stop all pays related to active duty. This failure to stop the soldier’s active duty pays and allowances on time resulted in the soldier writing a $6,150.75 check to DFAS in an attempt to resolve all overpayment issues associated with his mobilization. As summarized in table 23, the soldier undertook a series of time-consuming phone calls and faxes to Fort McPherson, DFAS-Indianapolis, DFAS- Denver, and DFAS-Cleveland over a 13-month period to finally get his pay issues resolved. Ultimately, the soldier’s pay issues related to his March and April 2003 active duty deployment were only identified and resolved through the relentless efforts of the soldier and our inquiries into the matter. With the soldier’s recent $1,140.54 check to DFAS, his pay issues with his March and April 2003 mobilization were resolved—over a year after his deployment ended. The 629th Transportation Detachment was called to active duty in support of Operation Enduring Freedom on March 15, 2003, for a period not to exceed 365 days. Twenty-seven soldiers with the 629th Transportation Detachment received orders to mobilize; but only 24 soldiers actually deployed with the unit. The unit arrived at its home station, Fort Eustis, Virginia, on March 15, 2003, where it began the SRP in-processing. On March 18, 2003, the soldiers continued their mobilization processing at Fort Eustis, Virginia, which was also their designated mobilization station. The unit remained at Fort Eustis for approximately 2 months undergoing additional in-processing and training. On May 22, 2003, the 629th Transportation Detachment was deployed to Kuwait and was assigned responsibility for tracking supplies in and out of Army field locations in and around Kuwait. After completing its assigned mission, the unit left Kuwait on December 5, 2003, to return to its demobilization station. By the end of January 2004, all of the soldiers were released from active duty with the exception of 1 soldier who was placed on medical hold. A time line of key actions associated with the unit’s mobilization under Operation Enduring Freedom is shown in figure 8. As summarized in table 24, all 24 of the deployed soldiers experienced at least one pay problem associated with their activation to, during, and deactivation from, active duty service in support of Operation Enduring Freedom. Specifically, we found that (1) 5 soldiers experienced underpayments or late payments during their initial mobilization; (2) 24 soldiers experienced underpayments, overpayments, or late payments during their tour of active duty in and around Kuwait, including in-theater incentives such as hostile fire pay and hardship duty pay; and (3) 1 soldier was underpaid entitled pays and allowances associated with his demobilization. In total, we identified estimated overpayments of about $3,000, underpayments of about $2,000, and late payments of about $14,000, associated with the pay problems we identified. Specifically, we determined the following: More than half of the $3,000 in overpayments we identified was associated with the majority of the unit’s soldiers receiving an extra $75 payment of hostile fire pay during their tour of active duty in Kuwait. More than 70 percent of the soldiers deployed to Kuwait did not receive hardship duty pay in the months of May and December 2003, contributing to the underpayments of $2,000. An estimated $8,000 of the $14,000 in late payments we identified were associated with two soldiers. Available pay records for one soldier show he did not receive the correct amount of basic allowance for housing during his active duty tour until 9 months after his mobilization date. Another soldier did not receive the correct amount of basic pay and basic allowance for housing until approximately 3 months after his promotion had become effective. As summarized in table 25, we identified several soldiers who experienced underpayments or late payments related to basic pay and associated entitlements associated with the mobilization phase. Most, if not all, of these cases were likely the result of proper documentation not being submitted promptly, resulting in some soldiers receiving delayed housing allowances and promotions. For example, one soldier did not receive the correct amount of basic pay and basic allowance for housing based on a promotion that should have been effective in January 2003 but did not get processed until 3 months later in mid-April. We found the personnel action form was not signed until April 2003. Upon receipt of individual mobilization orders, the unit’s soldiers reported to their unit’s home station in Fort Eustis, Virginia, where they attended a SRP. The purpose of this SRP was to ensure that all soldiers had all required administrative paperwork, financial documents, and were physically fit for the ensuing mobilization. Personnel from the 99th Regional Readiness Command sent a team who conducted the finance portion of the SRP to verify the soldiers’ supporting financial documentation. If necessary, the 99th Regional Readiness Command team submitted transactions with the necessary supporting documentation to the Reserve Pay Center at Fort McCoy to update the soldiers’ Master Military Pay Accounts to correctly reflect their mobilized pay status. However, we identified several soldiers who did not have appropriate supporting documentation maintained in their files to justify basic allowance for housing payments. For example, we identified 12 soldiers who received basic allowance for housing payments for which we were unable to obtain supporting documentation (i.e., DA Form 5960). Total basic allowance for housing payments for those 12 soldiers amounted to over $110,000. Additionally, we identified inconsistencies with the determinations of soldiers’ entitlements to the family separation allowance made at the mobilization station. According to the DOD FMR Volume 7A, soldiers should be separated from their families by more than 50 miles in order to receive the family separation allowance. We found 10 soldiers from the 629th Transportation Detachment, including the soldier who was placed on medical hold, who received the family separation allowance while at their home station and mobilization station even though that location was less than 50 miles from their home. The soldiers were never informed by pay technicians at the unit or at their mobilization station that they were not entitled to the family separation allowance if they were staying at Fort Eustis but their home of record was within 50 miles, and we did not see any documentation showing that the unit commander had approved an exception to the mileage restriction on family separation allowance eligibility. As summarized in table 26, we identified a number of pay problems with five different types of active duty pays and allowances associated with the unit’s deployment while on active duty. During the soldiers’ deployment to Kuwait, all 24 of the 629th Transportation Detachment’s soldiers encountered pay problems related to hardship duty pay and hostile fire pay. Most soldiers did not receive any hardship duty pay during the month they arrived in-theater and the month that they left the theater. In addition, all of the soldiers received their combat zone tax exclusion benefit at least one month late. Per DOD FMR Volume 7A, soldiers who perform duties in designated areas for over 30 days are entitled to the hardship duty pay incentive. The regulation specified the general area of Kuwait as a designated area and provided $100 a month to all soldiers serving there. Per the same regulation, soldiers serving in Kuwait are also entitled to hostile fire pay of $225 per month. Both hardship duty pay and hostile fire pay should start at the same time upon the soldier’s arrival in Kuwait. In the case of the 629th Transportation Detachment, the soldiers had their military identification cards swiped into the Tactical Personnel System upon landing in Kuwait to document their date of arrival. However, most of the soldiers never received any payment for hardship duty pay in the month that they arrived in Kuwait, nor did most receive any hardship duty pay payment in the month that they left Kuwait. Officials at the local Army area servicing finance office did not initiate the unit’s hostile fire pay incentive until 1 month after the soldiers arrived in theater. Furthermore, the soldiers incorrectly received a hostile fire pay payment of $300 during the month of June (an overpayment of $75). One of the unit’s soldiers left Kuwait earlier than the rest of the unit, but the soldier’s hardship duty pay continued for another 6 months and his hostile fire pay continued for 1 extra month before it was stopped. Soldiers of the 629th Transportation Detachment returned to their demobilization station at Fort Eustis, Virginia, around December 5, 2003, and began the SRP out-processing. As summarized in table 27, we identified one soldier who experienced pay problems associated with the demobilization phase of his active duty tour. We identified one soldier who did not receive any family separation allowance payments during the last 3 months of active duty. This soldier’s home of record was more than 50 miles from the demobilization station in Fort Eustis, Virginia, and he was not commuting daily. Consequently, he should have received family separation allowance for these 3 months. Ten other soldiers in the unit who returned to Fort Eustis and lived within the 50-mile range of the demobilization station and did not have a commander’s exception on file received $250 per month in family separation allowance payments until their release from active duty. By January 2004, all mobilized soldiers, with the exception of the soldier who was on medical hold, were released from active duty. The 3423rd Military Intelligence Detachment was called to active duty in support of Operation Noble Eagle on December 3, 2002. A total of 11 soldiers from the unit were mobilized to support operations at the Intelligence and Security Command at Fort Belvoir, Virginia. The 3423rd Military Intelligence Detachment does not have a unit administrator during peacetime and had no dedicated unit administrator during the mobilization. The unit was called to active duty and reported to its mobilization station, Fort Lee, Virginia, where the soldiers went through in-processing during December 2002. After this processing, the unit went to the Army’s National Ground Intelligence Center in Charlottesville, Virginia, for 1 week of additional in-processing and was then transferred to Fort Belvoir. For the next 11 months, the unit carried out its mission to gather and analyze intelligence information in support of U.S. Army Intelligence and Security Command operations at Fort Belvoir. In November 2003, the 3423rd Military Intelligence Detachment began to demobilize at Fort Lee and by December 2, 2003, all but 1 soldier had been released from active duty. The unit reported that the remaining soldier stayed on active duty at Fort Belvoir for an additional year. A time line of key actions associated with the unit’s mobilization to active duty is shown in figure 9. As summarized in table 28, soldiers experienced a range of pay problems at every stage of the 3423rd Military Intelligence Detachment’s tour of active duty. The unit did not have a dedicated unit administrator to carry out pay support responsibilities during its active duty mobilization. Overall, all 11 soldiers in the unit experienced some type of pay problem associated with their activation to, during, or deactivation from active duty in support of Operation Noble Eagle. Specifically, we found that (1) 10 soldiers experienced underpayments, overpayments or late payments during their initial mobilization; (2) 9 soldiers experienced underpayments, overpayments, or late payments during their tour of active duty at Fort Belvoir; and (3) 9 soldiers experienced underpayments, overpayments, or late payments during their demobilization. The dollar amounts associated with the overpayments, underpayments, and late payments we identified were about $18,500, $4,000, and $5,000, respectively. Of the overpayments we identified, about $2,000 were subsequently collected from the unit’s soldiers as of January 31, 2004. As summarized in table 29, we found that 10 of the 11 soldiers from the 3423rd Military Intelligence Detachment experienced pay problems related to basic pay and the associated entitlements when called to active duty. Before mobilization, the unit attended several SRPs put on by the 94th Regional Readiness Command. Specifically, after September 11, 2001, the unit received warnings that it might be called up and therefore began attending SRPs to prepare for impending mobilization. The unit first attended a program at the Reserve center in Waterbury, Connecticut, in October 2001, along with several other units that were definitely mobilizing. The soldiers attended a second SRP in November 2002. The finance portion of the SRP consisted of a briefing that covered the different entitlements soldiers could expect to receive and a review of the soldiers’ Master Military Pay Accounts. Upon reporting to the active Army mobilization station at Fort Lee, the unit underwent a third SRP. We found 10 of the 11 soldiers in the 3423rd Military Intelligence Detachment were entitled to the continental U.S. cost of living allowance during their mobilization at a rate based on their principal place of residence at the time they were ordered to active duty. One of these 10 soldiers did not receive the entitlement during his mobilization, resulting in a $500 underpayment. The 9 remaining soldiers erroneously began receiving the overseas cost of living allowance rather than the continental U.S. cost of living allowance at the beginning of the mobilization. In April 2003, all 9 soldiers began correctly receiving continental U.S. cost of living allowance and the entitlement was paid retroactively in May to 8 of the soldiers for the period December 2002 through March 2003. The erroneous payments of the overseas cost of living allowance were collected immediately for 4 of the soldiers, while the erroneous payments for the other 4 soldiers were only partially collected later in the mobilization. The delay in collecting the overseas cost of living allowance for the 4 soldiers resulted in overpayments of over $3,500 that were not collected in full by the end of the mobilization. One soldier continued to receive the overseas cost of living allowance and the continental U.S. cost of living allowance concurrently through August 2003, totaling more than $2,500. DOD began to recoup these amounts in October 2003. In addition to the overpayments and underpayments associated with overseas cost of living allowance payments, discrepancies between the overseas and continental U.S. cost of living allowance rates for 8 of the 9 soldiers led to over $700 in late payments. We also found that 9 of the 10 soldiers in the 3423rd Military Intelligence Detachment received family separation allowance overpayments during mobilization. Because of pay clerks’ confusion regarding family separation allowance entitlement rules, the 9 soldiers began receiving the family separation allowance 1 to 3 days earlier than they should have, resulting in small overpayments that totaled almost $200 for the unit. Additionally, one soldier in the unit experienced a problem related to his basic allowance for housing pay during mobilization. Shortly after mobilization, the soldier’s basic allowance for housing entitlement erroneously switched from the “with dependents” rate to the “without dependents” rate for half of December 2002 and for January through March 2003. In April 2003, the soldier was repaid basic allowance for housing at the “with dependents” rate for January through March 2003. These switches resulted in $800 in payments more than 30 days after the soldier was entitled and almost $200 in underpayments for the period in December 2002 when the soldier did not receive basic allowance for housing at the “with dependents” rate. Furthermore, even though the soldier was deployed from his home in Connecticut to his active duty location at Fort Belvior in Virginia, he did not received his family separation allowance for the entire mobilization, creating an estimated $3,000 underpayment. As summarized in table 30, we identified a number of pay problems associated with active duty pays and allowances during the 3423rd Military Intelligence Detachment’s deployment while on active duty. Two soldiers experienced individual problems with active duty basic pay, basic allowance for housing, and foreign language proficiency pay. Additionally, during their deployment to Fort Belvoir, the unit’s soldiers experienced pay problems related to the basic allowance for subsistence provided to enlisted soldiers. Ten of the 11 soldiers in the unit experienced some sort of overpayment, underpayment, or late payment associated with their deployment. Two soldiers experienced problems relating to various pay entitlements during their deployment. One soldier received about $1,800 in active duty basic pay and basic allowance for housing payments more than 30 days after he was entitled to receive them because of a delay in processing his promotion. Another soldier did not receive his foreign language proficiency pay for 1 month of his deployment, creating a $100 underpayment. While we did not count any of the unit’s basic allowance for subsistence payments as pay problems because of incomplete documentation, seven enlisted soldiers in the unit experienced significant confusion over whether they received their correct basic allowance for subsistence payments. The unit’s enlisted soldiers initially received the regular basic allowance for subsistence until April 2003. At that time, all basic allowance for subsistence amounts paid to these soldiers were collected and a different basic allowance for subsistence rate, called “rations in kind not available,” was retroactively paid to these soldiers. In 2003, rations-in-kind-not- available payments were about $20 more per month than the regular basic allowance for subsistence. However, finance personnel at the Intelligence and Security Command (the unit’s servicing finance office while deployed at Fort Belvoir) determined that even though the unit was issued orders stating that housing and mess would not be provided, the soldiers actually could eat at the Fort Belvoir mess. This resulted in (1) a collection in May of all of the previous rations- in-kind-not available payments to the unit’s soldiers except for payments for the initial mobilization time prior to arrival at Fort Belvoir, and (2) a retroactive repayment of the regular basic allowance for subsistence. Nevertheless, the enlisted soldiers continued to receive the rations-in-kind- not-available rate from mid-May through July 2003. In July 2003, Fort McCoy again initiated transactions to collect the rations-in-kind-not- available payments and instead pay regular basic allowance for subsistence. The regular basic allowance for subsistence then continued for the rest of the unit’s mobilization, despite the fact that in June 2003, a committee of finance personnel at Fort Belvoir determined that it was not feasible for the soldiers to continue to use the mess facilities at Fort Belvoir because of mission requirements and transportation costs. The soldiers of the 3423rd Military Intelligence Detachment began to demobilize in November 2003. As summarized in table 31, some soldiers continued to experience pay problems throughout their demobilization and release from active duty. Of the 10 soldiers who demobilized by the end of our audit period, 9 continued to receive their active duty pay and entitlements past the date of separation from the Army. Two of the 9 overpaid soldiers continued to receive their entitlements for 28 days past the date of demobilization, while the remaining 7 soldiers were overpaid for 13 days. This resulted in $14,000 in overpayments of active duty basic pay, basic allowance for housing, basic allowance for subsistence, and where applicable, the family separation allowance and foreign language proficiency pay. When demobilizing through Fort Lee, the demobilization finance officials failed to change the pay status code in DJMS-RC to stop active duty pay for nine of the unit’s soldiers. The timing of the unit’s release from active duty made it more difficult to catch and correct these concerns, as the soldiers demobilized during the Thanksgiving holiday and a particularly severe snowstorm. The problem was eventually caught and corrected by the 94th Regional Readiness Command when personnel examined the Unit Commander’s Pay Management Report in January 2004. Finance personnel at the 94th Regional Readiness Command reported that available pay reports indicated most of the soldiers’ overpayments have now been collected from the unit’s soldiers. The 431st Chemical Detachment was called to active duty in support of Operation Enduring Freedom on January 16, 2003, for a period not to exceed 365 days. Ten soldiers who received orders to mobilize with the 431st Chemical Detachment reported to their home station in Johnstown, Pennsylvania, on January 16, 2003. They underwent an initial SRP at their Johnstown home station. On January 19, 2003, they arrived at their designated mobilization station at Fort Dix, New Jersey, where they remained for the next month undergoing additional in-processing and training. Approximately 1 month later, around February 22, 2003, 8 of the 10 soldiers from the 431st Chemical Detachment were deployed to Kuwait. Two soldiers from the unit left for Kuwait 1 month later, on March 20, 2003. The primary mission of the 431st Chemical Detachment while deployed in and around Kuwait was to track and report nuclear, biological, or chemical attacks so that soldiers in the area could take appropriate protective actions. After completing their mission, all 10 soldiers in the detachment left Kuwait on May 21, 2003. Upon returning to Fort Dix, the soldiers began the demobilization process and stayed at Fort Dix until the end of June 2003. For the period of July 1 through July 15, 2003, all of the soldiers in the 431st Chemical Detachment were placed on transitional leave. By July 15, 2003, all of the soldiers had been released from active duty. A time line of key actions associated with the unit’s mobilization under Operation Enduring Freedom is shown in figure 10. As summarized in table 32, all 10 of the unit’s soldiers experienced some sort of pay problem, primarily associated with the overseas deployment phase of their active duty mobilization. Pay problems included overpayments, underpayments, and late payments of pay entitlements and incentives, such as family separation allowance, hostile fire pay, and hardship duty pay associated with their initial mobilization and deployment to Kuwait. In total, we identified estimated overpayments of about $12,000, underpayments of about $2,000, and late payments of about $1,000 associated with the pay problems we identified. Of the estimated $12,000 in identified overpayments, we identified about $450 that was subsequently collected. Specifically, we determined that 2 soldiers did not receive correct payments for up to 6 months after their all 10 soldiers in the unit experienced underpayments, overpayments, or late payments associated with their tour of active duty deployment in Kuwait, including problems with hostile fire pay and hardship duty pay. As summarized in table 33, we identified six soldiers with pay problems related to overpayments of family separation allowance during the unit’s initial mobilization to active duty. Upon receipt of individual mobilization orders, the soldiers reported to their unit’s home station in Johnstown, Pennsylvania, where they attended a SRP. The purpose of this SRP was to ensure that all soldiers had all required administrative paperwork, financial documents, and were physically fit for the ensuing mobilization. SRP finance officials were required to verify the soldiers’ supporting financial documentation and submit transactions with the necessary supporting documentation to the Reserve Pay Center at Fort McCoy to update the soldiers’ Master Military Pay Accounts to reflect their mobilized status. However, we identified several soldiers who did not have appropriate supporting documentation maintained in their files to justify their basic allowance for housing payments. One soldier appeared to be underpaid for the basic allowance for housing during the period that he was called to report to his home station for active duty. During the first pay period of his mobilization, he was paid at a lower basic allowance for housing rate. Subsequent payments for the basic allowance for housing throughout his tour of duty were at a higher rate. We were not able to substantiate the higher amount through supporting documentation. The total basic allowance for housing payments to this soldier that could not be verified amounted to approximately $3,500. Furthermore, we identified four other soldiers who received basic allowance for housing payments for which we were unable to obtain supporting documentation (i.e., DA Form 5960). Total basic allowance for housing payments for those four soldiers amounted to approximately $30,000. In addition, we identified six soldiers in the 431st Chemical Detachment who received overpayments of the family separation allowance because they began receiving this entitlement upon reporting to their home station, even though that location was less than 50 miles from their homes and there was no evidence that they had an unreasonable commuting distance, as required by DOD FMR Volume 7A. Based on these criteria, the family separation allowance payments should not have started until the soldiers reached their mobilization station at Fort Dix, New Jersey. The family separation allowance overpayments to these soldiers totaled $150. As summarized in table 34, we found that during the soldiers’ deployment to Kuwait, they experienced problems related to hardship duty pay and hostile fire pay. In addition, all of the soldiers received their combat zone tax exclusion benefit at least 1 month late. Most soldiers did not receive the full amount of their hardship duty pay while deployed. Moreover, they continued to receive hardship duty pay well after they had returned to Fort Dix and demobilized. In total, all 10 deployed soldiers were incorrectly paid for either hardship duty or hostile fire pay. Soldiers of the 431st Chemical Detachment who deployed overseas had their identification cards scanned into the Tactical Personnel System upon landing at Kuwait International Airport. However, the unit’s hostile fire payments did not start until more than 2 months after the soldiers arrived in theater. Moreover, it took approximately 3 months from the time that the soldiers arrived to start receiving hardship duty payments. In fact, hardship duty payments were not processed until May 21, 2003, the same day that the soldiers left the designated hardship duty location. These delays resulted in the deployed soldiers being underpaid for most of their time while serving in the hardship duty location. Furthermore, hardship duty pay continued for another 7 months after the soldiers had left Kuwait. As a result, the soldiers continued to receive payments of hardship duty pay after their demobilization and release from active duty. Also, local Army area servicing finance officials did not terminate payments of hostile fire pay for the 2 months following the soldiers’ return to the United States. These two breakdowns in the process of paying the correct in-theater incentives to soldiers in a timely manner resulted in underpayments or late payments at the front end of the soldiers’ deployment and overpayments after the soldiers had returned. In addition, the unit administrator, who also deployed with the unit, stated that she had trouble finding anyone in the local Army area servicing finance office in Kuwait to assist with getting the unit’s hostile fire pay started. Since the 431st Chemical Detachment was working for the Marine Corps and was far away from the Army area servicing finance office, the unit was given the number at Fort Doha as its supporting finance office in Kuwait. The unit administrator made repeated telephone attempts to contact the finance office at Fort Doha but could only reach a recording that told her to call back later. This gap in a functioning supporting finance office for the deployed soldiers added to their frustration and confusion over in-theater pays. Upon the unit’s return to the U.S. in May 2003, most of the soldiers noticed that they continued to receive an additional $100 per month for 7 additional months. However, because their Leave and Earnings Statements were not clear as to what the payments represented, the soldiers contacted the unit administrator for assistance. The unit administrator determined that the payments represented erroneous hardship duty pay and tried to go through the unit’s chain of command to get the payments stopped, but received no response. The unit administrator also accessed the pay hotline at 888-PAY- ARMY, but was placed on hold for such a long time that she gave up. All 10 soldiers of the 431st Chemical Detachment arrived at the demobilization station at Fort Dix, New Jersey, on May 21, 2003, to begin the SRP out-processing. The soldiers were stationed at Fort Dix for approximately 1 month. At the end of June 2003, the soldiers returned to their home station in Johnstown, Pennsylvania, where they spent a few days before being placed on transitional leave for the first 2 weeks in July 2003. While on transitional leave, the soldiers continued to receive $250 per month for the family separation allowance even though they were not separated from their families. Staff making key contributions to this report include James D. Berry, Amy C. Chang, Francine M. DelVecchio, Jennifer L. Hall, Ken Hill, Kristi L. Karls, Jason M. Kelly, Tram Le, Julia C. Matta, Jonathan T. Meyer, Michelle Philpott, John J. Ryan, Jennifer F. Wilson, and Leonard E. Zapata. The Government Accountability Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts newly released reports, testimony, and correspondence on its Web site. To have GAO e-mail you a list of newly posted products every afternoon, go to www.gao.gov and select “Subscribe to Updates.” | In light of GAO's November 2003 report highlighting significant pay problems experienced by Army National Guard soldiers mobilized to active duty in support of the global war on terrorism and homeland security, GAO was asked to determine if controls used to pay mobilized Army Reserve soldiers provided assurance that such payments are accurate and timely. GAO's audit used a case study approach to focus on controls over three key areas: processes, people (human capital), and automated systems. The processes and automated systems relied on to provide active duty pays, allowances, and tax benefits to mobilized Army Reserve soldiers are so error-prone, cumbersome, and complex that neither DOD nor, more importantly, Army Reserve soldiers themselves, could be reasonably assured of timely and accurate payments. Weaknesses in these areas resulted in pay problems, including overpayments, and to a lesser extent, late and underpayments, of soldiers' active duty pays and allowances at eight Army Reserve case study units. Specifically, 332 of 348 soldiers (95 percent) we audited at eight case study units that were mobilized, deployed, and demobilized at some time during the 18-month period from August 2002 through January 2004 had at least one pay problem. Many of the soldiers had multiple problems associated with their active duty pays and allowances. Some of these problems lingered unresolved for considerable lengths of time, some for over 1 year. Further, nearly all soldiers began receiving their tax exemption benefit at least 1 month late. These pay problems often had a profound adverse impact on individual soldiers and their families. For example, soldiers were required to spend considerable time, sometimes while deployed in remote, hostile environments overseas, seeking help on pay inquiries or in correcting errors in their active duty pays, allowances, and related tax benefits. The processes in place to pay mobilized Army Reserve soldiers, involving potentially hundreds of DOD, Army, and Army Reserve organizations and thousands of personnel, were deficient with respect to (1) tracking soldiers' pay status as they transition through their active duty tours, (2) carrying out soldier readiness reviews, (3) after-the-fact report reconciliation requirements, and (4) unclear procedures for applying certain pay entitlements. With respect to human capital, weaknesses identified at our case study units included (1) insufficient resources allocated to key unit-level pay administration responsibilities, (2) inadequate training related to existing policies and procedures, and (3) poor customer service. Several automated systems issues also contributed to the significant pay errors, including nonintegrated systems and limited processing capabilities. |
Airports are a linchpin in the nation’s air transportation system. This is true for both the 71 largest airports, as well as for the nation’s 3,233 smaller commercial and general aviation airports. While small airports handle only about 10 percent of scheduled passenger traffic in total , they also serve a majority of the nation’s general aviation activity. For many communities, a small airport is their primary access to air transportation. Smaller airports also provide important economic benefits to their communities in the form of jobs and transport. The National Civil Aviation Review Commission—established by the Congress to determine how to fund U.S. civil aviation—reported in December 1997 that more funding is needed, not only to develop system capacity at the larger airports but also to preserve smaller airports. In 1996, tax-exempt bonds, the Airport Improvement Program (AIP), and passenger facility charges (PFC) together provided about $6.6 billion of the total $7 billion in funding for large and small airports. State grants and airport revenue contributed the remaining funding for airports. Table 1 lists these sources of funding and their amounts in 1996. The amount and type of funding varies significantly with airports’ size. The nation’s 3,233 smaller national system airports obtained about $1.5 billion in funding in 1996, about 22 percent of the total for 1996. As shown in figure 1, smaller airports relied on AIP grants for half of their funding, followed by tax-exempt airport and special facility bonds,and state grants. PFCs accounted for only 7 percent of smaller airports’ funding mix. Conversely, larger airports received more than $5.5 billion in funding, relying on airport bonds for 62 percent of their total funding, followed by PFC collections. AIP grants accounted for only 10 percent of larger airports’ funding. Small airports’ planned capital development during 1997 through 2001 may cost nearly $3 billion per year, or $1.4 billion per year more than these airports raised in 1996. Figure 2 compares small airports’ total funding for capital development in 1996 with their annual planned spending for development. Funding for 1996, the bar on the left, is shown by source (AIP, PFCs, state grants, and bonds). Planned spending for small airports, the bar on the right, is shown by the relative priority FAA has assigned to the projects, as follows: Reconstruction and mandated projects, FAA’s highest priorities, total $750 million per year and are for projects to maintain existing infrastructure (reconstruction) or to meet federal mandates, including safety, security, and environmental requirements (including noise mitigation requirements). Other high-priority projects, primarily adding capacity, account for another $373 million per year. Other AIP-eligible projects, a lower priority for FAA, such as bringing airports up to FAA’s design standards, add another $1.37 billion per year, for a total of nearly $2.5 billion per year in projects eligible for AIP funding. Finally, small airports anticipate another $465 million per year on projects that are not eligible for AIP funding, such as expanding commercial space in terminals and constructing parking garages. Planned development 1997 through 2001 (annualized) Given this picture of funding and planned spending for development for small airports, it is difficult to develop a precise estimate of the extent to which AIP-eligible projects are deferred or canceled because some form of funding cannot be found for them. FAA does not maintain information on whether eligible projects that do not receive AIP funding are funded from other sources, deferred, or canceled. We were not successful in developing an estimate from other information sources, mainly because comprehensive data are not kept on the uses to which airport and special facility bonds are put. But even if the entire bond financing available to smaller airports were spent on AIP-eligible projects, these airports would have, at a minimum, about $945 million a year in AIP-eligible projects that are not funded. Conversely, if none of the financing from bonds were applied to AIP-eligible projects, then the full $1.41 billion funding shortfall for smaller airports would apply to these projects. As a proportion of total funding, the potential funding shortfall for smaller airports is more significant than it is for large airports. For large airports, the difference between 1996 funding and planned development is about $1.5 billion. However, because large airports obtained $5.5 billion in funding in 1996 versus $1.5 billion for small airports, large airports’ potential shortfall represents 21 percent of their planned development costs as compared to small airports’ potential shortfall of 48 percent. Therefore, while larger and smaller airports’ respective shortfalls are similar in size, the greater scale of larger airports’ planned development causes their shortfall to differ considerably in proportion. Proposals to increase airport funding or make better use of existing funding vary in the extent to which they would help smaller airports and close the gap between their funding and the costs of planned development. For example, increasing AIP funding would help smaller airports more than larger airports because current funding formulas would channel an increasing proportion of AIP funds to them. Conversely, any increase in PFC funding would help larger airports almost exclusively because they handle more passengers and are more likely to have a PFC in place. Changes to the current design of AIP or PFCs could, however, lessen the concentration of benefits on one group of airports. FAA has also used other mechanisms to better use and extend existing funding sources, such as state block grants and pilot projects to test innovative financing. So far, these mechanisms have had mixed success. Under the existing distribution formula, increasing total AIP funding would proportionately help smaller airports more than large and medium hub airports. Appropriated AIP funding for fiscal year 1998 was $1.7 billion; smaller airports received about 60 percent of this total. We calculated how much funding each group would receive under the existing formula, at funding levels of $2 billion and $2.347 billion. We chose these funding levels because the National Civil Aviation Review Commission and the Air Transport Association (ATA), the commercial airline trade association, have recommended that future AIP funding levels be stabilized at a minimum of $2 billion annually, while two airport trade groups—the American Association of Airport Executives and the Airports Council International-North America—have recommended a higher funding level, such as AIP’s authorized funding level of $2.347 billion for fiscal year 1998. Table 2 shows the results. As indicated, smaller airports’ share of AIP would increase under higher funding levels if the current distribution formula were used to apportion the additional funds. Increasing PFC-based funding, as proposed by the Department of Transportation and backed by airport groups, would mainly help larger airports, for several reasons. First, large and medium hub airports, which accounted for nearly 90 percent of all passengers in 1996, have the greatest opportunity to levy PFCs. Second, such airports are more likely than smaller airports to have an approved PFC in place. Finally, large and medium hub airports would forgo little AIP funding if the PFC ceiling were raised or eliminated. Most of these airports already return the maximum amount that must be turned back for redistribution to smaller airports in exchange for the opportunity to levy PFCs. If the airports currently charging PFCs were permitted to increase them beyond the current $3 ceiling, total collections would increase from the $1.35 billion that FAA estimates was collected during 1998. Most of the additional collections would go to larger airports. For every $1 increase in the PFC ceiling, we estimate that large and medium hub airports would collect an additional $432 million, while smaller airports would collect an additional $46 million (see fig. 2). In total, a $4 PFC ceiling would yield $1.9 billion, a $5 PFC would yield $2.4 billion, and a $6 PFC would yield $2.8 billion in total estimated collections. In recent years, the Congress has directed FAA to undertake steps to find ways to extend existing AIP funds, especially for small airports that rely more extensively on AIP funds than do large airports. The airport community’s interest in these efforts has varied. For example, the state block grant program, which allows the participating states to direct grants to smaller airports, has been proven successful. Others efforts, such as pilot projects to test innovative financing and privatization, have received less interest from airports and are still being tested. Finally, one idea, using AIP grants to capitalize state revolving loan funds, has not been attempted but could help smaller airports. Implementing this idea would require legislative changes. In 1996, we testified before this Subcommittee that FAA’s pilot program for state block grants was a success. The program allows FAA to award AIP funds in the form of block grants to designated states, which, in turn, select and fund AIP projects at small airports. In 1996, the program was expanded from seven to nine states and made permanent. Both FAA and the participating states believe that they are benefiting from the program. In recent years, FAA, with congressional urging and direction, has sought to expand airports’ available capital funding through more innovative methods, including the more flexible application of AIP funding and efforts to attract more private capital. The 1996 Federal Aviation Reauthorization Act gave FAA the authority to test three new uses for AIP funding—(1) projects with greater percentages of local matching funds, (2) interest costs on debt, and (3) bond insurance. These three innovative uses could be tested on up to a total of 10 projects. Another innovative financing mechanism that we have recommended—using AIP funding to help capitalize state airport revolving funds—while not currently permitted, may hold some promise. FAA is testing 10 innovative uses of AIP funding totaling $24.16 million, all at smaller airports. Five projects tested the benefits of the first innovative use of AIP funding—allowing local contributions in excess of the standard matching amount, which for most airports and projects is otherwise fixed at 10 percent of the AIP grant. FAA and state aviation representatives generally support the concept of flexible matching because it allows projects to begin that otherwise might be postponed for lack of sufficient FAA funding; in addition, flexible funding may ultimately increase funding to airports. The remaining five projects test the other two mechanisms for innovative financing. Applicants have generally shown less interest in these other options, which, according to FAA officials, warrant further study. Some federal transportation, state aviation, and airport bond rating and underwriting officials believe using AIP funding to capitalize state revolving loan funds would help smaller airports obtain additional financing. Currently, FAA cannot use AIP funds for this purpose because AIP construction grants can go only to designated airports and projects. However, state revolving loan funds have been successfully employed to finance other types of infrastructure projects, such as wastewater projects and, more recently, drinking water and surface transportation projects.While loan funds can be structured in various ways, they use federal and state moneys to capitalize the funds from which loans are then made. Interest and principal payments are recycled to provide additional loans. Once established, a loan fund can be expanded through the issuance of bonds that use the fund’s capital and loan portfolio as collateral. These revolving funds would not create any contingent liability for the U.S. government because they would be under state control. Declining airport grants and broader government privatization efforts spurred interest in airport privatization as another innovative means of bringing more capital to airport development, but thus far efforts have shown only limited results. As we previously reported, the sale or lease of airports in the United States faces many hurdles, including legal and economic constraints. As a way to test privatization’s potential, the Congress directed FAA to establish a limited pilot program under which some of these constraints would be eased. Starting on December 1, 1997, FAA began accepting applications from airports to participate in the pilot program on a first-come, first-served basis for up to five airports, at least one of which must be a general aviation airport. Thus far, two airports—one general aviation and one nonhub commercial service airport—have applied to be part of the program. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to 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 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 discussed airport funding issues as they apply to smaller airports, focusing on: 1) how much funding has been made available to airports, particularly smaller airports, for their capital development and what are the sources of these funds; (2) comparing airports' plans for future development with current funding levels; and (3) what effect will various proposals to increase or make better use of existing funding have on smaller airports' ability to fulfill their capital development plans. GAO noted that: (1) in 1998, GAO reported that the 3,304 airports that make up the federally supported national airport system obtained about $7 billion from federal and private sources for capital development; (2) the nation's 3,233 smaller airports accounted for 22 percent of this total, or about $1.5 billion; (3) as a group, smaller airports depend heavily on federal grants, receiving half of their funding from the federally-funded Airport Improvement Program (AIP) and the rest from airport bonds, state grants, and passenger facility charges; (4) by contrast, the 71 largest airports in the national airport system obtained $5.5 billion in funding, mostly from tax-exempt bonds and relied on AIP for only 10 percent of their funding; (5) small airports planned to spend nearly $3 billion per year for capital development during 1997 through 2001, or $1.4 billion per year more than they were able to fund in 1996; (6) smaller airports' planned development consists of projects eligible for AIP grants, like runways, and projects not eligible for grants, like terminal retail space; (7) at least $945 million and as much as $1.4 billion of smaller airports' planned development that are eligible for grants may not be funded on an annual basis; (8) the difference between funding and planned development is much greater for smaller commercial and general aviation airports than it is for large airports; (9) several initiatives to increase or make better use of existing funding have emerged in recent years, including increasing the amount of AIP funding and raising the maximum amount airports can levy in passenger facility charges; (10) under current formulas, increasing the amount of AIP funding would help smaller airports more than larger airports, while raising passenger facility charges would mainly help larger airports; and (11) other initiatives for making better use of federal grant monies, such as AIP block grants to states, have primarily been directed toward smaller airports, but none appears to offer a major breakthrough in reducing the shortfall between funding and the levels airports plan to spend on development. |
When implementing contracting reform, CMS initially planned to establish 15 A/B MAC jurisdictions and 4 DME MAC jurisdictions. At that time, CMS also planned to award four additional MAC contracts for processing Medicare claims for home health and hospice care, but the agency later decided to divide this workload among four of the A/B MAC contracts instead of establishing separate contracts for home health and hospice care. Since the initial implementation of contracting reform, CMS has consolidated some of the A/B MAC jurisdictions so that, as of February 2015, there were 12 A/B MAC jurisdictions. (See apps. I, II, and III for maps of the A/B, DME, and Home Health and Hospice MAC jurisdictions that were operational as of February 2015.) Under the FAR, CMS could choose from two broad types of contract structures for the MAC contracts—fixed-price contracts and cost- reimbursement contracts. Because of uncertainty about the amount of costs MACs would likely incur during the initial implementation of the MAC contracts, CMS opted to structure the MAC contracts as a cost-plus- award-fee contract, which is a type of cost-reimbursement contract that allows an agency to provide financial incentives to contractors if they achieve specific performance goals. In its 2007 MAC acquisition strategy, CMS stated that fixed-price contracts for MACs would be difficult to administer because little was known about the expected costs of these contracts in light of the concurrent implementation of several other new Medicare initiatives, such as the Part D prescription drug benefit and Medicare Advantage plans, among other things. Agency officials also said that they believed a cost-plus-award-fee contract structure would allow CMS to stress the importance of quality performance over the course of the contracts and would accommodate frequent changes in MACs’ workloads or responsibilities that CMS anticipated handling over the course of the contracts. CMS decided to structure each MAC contract with a 1-year base performance period and four optional 1-year performance periods. Under the cost-plus-award-fee contract, MACs receive a base fee, which is fixed at the inception of the contract, plus reimbursement for allowable costs. The MACs also may earn an incentive, known as an award fee, based on their performance on standards that are defined by CMS in advance of each 1-year performance period. During the procurement process, MAC offerors propose to CMS the amounts of the base fees and award fees they would like to be eligible to earn over the course of their contracts, which are subject to negotiation to arrive at the final base and award fee amounts with successful offerors. For the MACs that were in operation as of January 2014, base fees represented about 1 to 3 percent of the MACs’ total contract values, while the award fees that the MACs were eligible to earn represented about 1 to 5 percent of the total contract values. Over the course of MAC contracts, prior to the start date for each 1-year performance period, CMS can revise the metrics included in MACs’ award fee plans and adjust the distribution of award fees across the metrics to promote performance in high-priority areas and to emphasize areas where MACs may be able to influence a positive programmatic outcome. For the 12 A/B MACs that were in operation as of January 2014, the total estimated value for the 5-year contract period—if all option years are exercised—is over $5.2 billion, with the total estimated contract values ranging from about $326 million to $609 million per A/B MAC. For the four DME MACs that were in operation as of January 2014, the estimated 5-year contract value—if all option years are exercised—is about $624 million. Estimated 5-year contract values for the DME MACs ranged from about $92 million to $257 million per MAC. See table 1 for details about the ranges of base fees and available award fee pools that CMS estimated the MACs in operation as of January 2014 were eligible to earn over the course of their 5-year contracts. For each MAC, CMS develops a statement of work that outlines the functional requirements—or responsibilities—that the MACs are to fulfill over the course of their contracts. CMS oversees MACs’ performance in carrying out the responsibilities outlined in their statements of work in a variety of ways, including but not limited to the following: Reviewing MACs’ quality control plans. Under their statements of work, each MAC is responsible for developing a quality control plan, which must be submitted to CMS within 45 days after the contract is awarded and updated annually thereafter, when the contract is renewed for additional option years. CMS reviews the MACs’ quality control plans and approves them after ensuring that they include all required elements. Among other things, the quality control plan specifies procedures—such as an audit and inspection system and a formal system for implementing corrective actions—to which the MAC will adhere, in order to ensure that the MAC meets its contract performance requirements. Assessing MACs’ performance on the quality assurance surveillance plan. Consistent with the FAR, CMS develops a quality assurance surveillance plan to outline performance standards that all MACs are expected to meet, in accordance with their statements of work. At the end of each contract year, CMS assesses each MAC’s performance on the set of surveillance plan standards that CMS has established for each of 11 different business function areas. For example, one business function area is provider customer service, and two of the quality assurance surveillance plan standards for that area relate to the timeliness of the MAC’s responses to telephone and written inquiries from providers. After CMS completes its annual surveillance plan review for each MAC, the MACs have an opportunity to dispute CMS’s assessment or provide more information that may result in a change to the MAC’s performance score. In some cases, CMS may require that the MAC complete an action plan to address deficiencies cited in the quality assurance surveillance plan review. Assessing MACs’ performance through Contractor Performance Assessment Reporting System reviews. At the end of each contract year, CMS is required to prepare a Contractor Performance Assessment Reporting System report for each MAC, which provides an overall rating of each MAC’s performance during the contract year. MACs’ performance that they gather through various sources, such as the MACs’ cost reports, the results of quality control plan and quality assurance surveillance plan reviews, and award fee evaluations. Using information aggregated from all of these sources, CMS rates the MACs in areas such as quality, schedule, cost control, business relations, and personnel management. The Contractor Performance Assessment Reporting System stores these reports electronically and makes them available for other federal agencies to review in the event that an entity holding a MAC contract later competes for other federal contracts. The base year of each MAC contract is comprised of an implementation period and an operational period of performance, each of which requires a separate Contractor Performance Assessment Reporting System report, but these two reports are completed only after the end of the base year of the contract. Assessing MACs’ performance on metrics included in their award fee plans. Award fees are the key performance incentive included in the type of cost-reimbursement contract CMS selected for the MACs under the FAR. Award fee plans include fewer performance standards than the quality assurance surveillance plan and are intended to (among other things) reward MACs for being innovative, cost-effective, and collaborative for the overall benefit of the Medicare program. CMS develops the award fee plan and, at the end of each contract year, reviews MACs’ performance on the standards included in the plan, to determine whether each MAC is eligible to earn some, all, or none of its available award fee pool. CMS assigns a certain percentage of the award fee to each of the performance standards included in the plan. To be eligible to earn any percentage of the award fee, the MAC must achieve at least a “satisfactory” rating in each performance element under its most recent Contractor Performance Assessment Reporting System evaluation, signifying that it has substantially met all cost, schedule, and technical performance requirements of its contract. Further, the MAC must meet all or almost all of the significant criteria included in its award fee plan. MACs that perform at this level are eligible to earn up to 50 percent of their award fees. Only MACs that exceed all or almost all of the significant award fee criteria while also substantially meeting all cost, schedule, and technical performance requirements of their contracts are eligible to earn up to 100 percent of their award fees and an “excellent” rating for the award fee. MACs generally have not earned all of the award fees for which they have been eligible. For example, in its January 2014 report, the HHS Office of Inspector General analyzed data from two performance periods and found that MACs had earned between 35 and 86 percent of their overall award fee pools. MACs have a number of key responsibilities related to the Medicare program, as outlined in their statements of work, and these responsibilities have generally remained the same since contracting reform began in 2006. Among the responsibilities, MACs are charged with processing Medicare claims submitted by providers—which involves processing the claim to the point of payment, denial, or other action—in a timely and accurate manner. In addition, MACs are responsible for conducting medical reviews of claims to determine whether the claims are for services covered by the Medicare program and whether the services were medically necessary. MACs also handle first-level appeals, or requests for redeterminations for any claims that were initially denied. Further, the MACs are responsible for maintaining a Medicare provider customer service program, which has three main components: a provider outreach and education program, a contact center to handle provider inquiries, and self-service technology for providers to access Medicare information at any time. For descriptions of MACs’ key responsibilities, see appendix IV. According to CMS officials, with limited exceptions, MACs’ responsibilities are functionally similar across all of the MAC contracts. One exception is that there are slight differences between the responsibilities of the A/B MACs and those of the DME MACs. For example, DME MACs are not responsible for enrolling medical equipment suppliers in the Medicare program, whereas the A/B MACs have the responsibility of enrolling providers and suppliers. Enrollment of medical equipment suppliers is handled centrally by the National Supplier Clearinghouse contractor. Another exception is that the MACs can have different jurisdiction-specific responsibilities. For instance, some MACs serve jurisdictions in which Medicare Strike Force teams are located. The Medicare Strike Force teams investigate and prosecute potential fraud in specific locations with a high historic level of program fraud. The MACs provide additional support, perform special analyses, and carry out follow-up actions for certain providers as requested by the Strike Force teams. Additionally, certain MACs have had jurisdiction-specific responsibilities related to Medicare demonstration projects regarding specific types of providers, such as rural community hospitals, or for specific activities or services, including enrollment of providers that offer home health services. Although MACs’ responsibilities are generally similar across each of the contracts, CMS officials told us that the MACs often have different workloads for certain responsibilities, based on factors such as the provider mixes in their jurisdictions. For example, some MAC jurisdictions have a large number of long-term care hospitals. Since these types of hospitals may receive higher payments for the services they provide than other types of hospital providers, the MACs must review information about the long-term care hospitals they serve to ensure that hospitals qualify for the higher payments. As a result, these MACs may spend more time and resources than MACs with fewer long-term care hospitals would spend fulfilling contract requirements associated with processing claims from long-term care hospitals. CMS officials also told us that the responsibilities of the MACs have generally remained the same since the implementation of contracting reform, although legislative changes have affected some of the MACs’ workloads for certain responsibilities. One such change was the creation of the nationwide Recovery Auditor Program by the Tax Relief and Health Care Act of 2006, which changed how Medicare claims are reviewed after they have been paid to identify any improper payments. Prior to the implementation of the nationwide recovery auditor program in 2010, the MACs were responsible for conducting post-payment reviews to recover improper payments, but the Recovery Auditors now conduct the bulk of these reviews. If the Recovery Auditor finds overpayments of certain claims, the MACs recover those overpayments from the providers. Although the MACs are conducting fewer postpayment reviews than they originally did, CMS officials told us that the MACs’ workload for recovering overpayments identified by the Recovery Auditors’ reviews has increased.(PPACA) required the revalidation of providers’ and suppliers’ eligibility to participate in the Medicare program. Although the A/B MACs and the National Supplier Clearinghouse have always had responsibility for provider enrollment, the PPACA requirement to revalidate providers was added to the A/B MACs’ and the National Supplier Clearinghouse’s responsibilities. As of November 2014, the MACs and the National Supplier Clearinghouse had sent revalidation notices to more than 1.04 million Medicare providers and suppliers. Although there were some differences between A/B MACs’ and DME MACs’ reported costs, most of the reported costs for both the A/B MACs and the DME MACs were for a few key responsibilities. On average, both the A/B MACs and the DME MACs reported a large portion of their costs were incurred for similar activities, including claims processing and the Provider Customer Service Program. However, the A/B MACs reported a higher average percentage of their costs for financial management than did the DME MACs. Additionally, on average, the DME MACs reported a higher portion for appeals than did the A/B MACs. For the nine A/B MACs included in our review, the total costs reported by all nine MACs were $732.1 million. These MACs’ reported total costs for their respective full contract years ranged from $41.4 million to $132.9 million, with an average of $81.3 million per MAC. Four responsibility areas—claims processing, financial management, Provider Customer Service Program, and provider enrollment—accounted for about 60 percent of the nine A/B MACs’ reported costs during the most recent full contract year for which cost data were available. Four other key responsibilities accounted for about 26 percent of the A/B MACs’ reported costs: appeals (about 7 percent), medical review (about 7 percent), administrative requirements (about 7 percent), and infrastructure requirements (about 6 percent). The nine A/B MACs in our review incurred the remainder of their reported costs—about 14 percent— for other responsibilities, such as reopening of initial claims determinations, the Medicare secondary payer program, and jurisdiction- specific requirements.percentages of A/B MACs’ total reported costs, by key responsibility area, for the most recent full contract year for which data were available for MACs that were in operation at the time of our review. Officials from CMS and the MACs we interviewed agreed that they have learned many lessons since the initial implementation of the MAC contracts, and together, they have implemented improvements to increase the MACs’ operational efficiency and effectiveness. The MACs’ statements of work outline CMS’s expectation that the MACs will continuously refine their business processes to foster efficiencies to promote the best value for the government and use innovative solutions to improve program operations. CMS officials we interviewed explained that they routinely encourage, solicit, and review ideas from MACs about how to improve their operational efficiency and effectiveness. These officials explained that they have gathered ideas about increasing efficiency and effectiveness from the MACs in the following ways: In contract solicitations, CMS instructs MAC offerors to propose programmatic or operational innovations they would implement if awarded a MAC contract and to describe the expected benefits of the proposed innovations. When MACs are transitioning into each new contract, CMS requires them to formally submit lessons learned documents, which detail challenges or other insights identified by MACs while transferring operations from previous contractors. These lessons learned may be beneficial to other MACs during future contract implementation periods. In the fall of 2013, CMS created an innovations submissions mailbox for the MACs to send in improvement or innovation requests. The MACs are to use this system when they want to implement a new process, service, technology, or other improvement, but there are funding needs or other contract requirements that CMS must approve in order for the MAC to implement the planned improvement. CMS convenes meetings annually with MAC executives, and they often discuss process improvement ideas at these meetings. CMS also acknowledges MACs’ ideas for significant process improvement through the Contractor Performance Assessment Reporting System, a web-based application it uses to record MAC performance evaluations. CMS and the MACs have convened workgroups related to various key responsibilities, in which the MACs collaborate and share ideas. According to CMS officials, when a particular MAC’s innovations have merit across the MAC community, CMS will incorporate the practices into subsequent MAC statements of work, to spread the operational improvement to other MACs. Officials from CMS and the four A/B MACs and one DME MAC we interviewed listed the following examples of lessons learned and innovations that some of the MACs have implemented since the implementation of contracting reform: Provider self-service portals. Three of the four A/B MACs and the one DME MAC we interviewed said that they had developed Internet- based provider self-service portals, which allow providers to validate their eligibility, submit claims electronically, request claim reconsiderations, and check the status of claims and reconsiderations, among other things. MAC officials said that this has reduced their expenditures on resources devoted to telephone-based provider customer service. Data analytics. Officials from one A/B MAC described how they have begun using data analytics to more effectively identify provider- specific patterns of billing errors so that they can conduct targeted outreach and education to providers and try to prevent future billing errors. Clinical editing software. CMS officials described the software that one MAC has deployed to improve the effectiveness of its prepayment edits. The software enables the MAC to electronically flag errors in Medicare claims that are not likely to meet the criteria for Medicare payment when the provider submits the claim for payment, rather than after the MAC begins processing the claim. The MAC explained that the provider is then offered an opportunity to correct errors before transmitting the claim to the MAC for payment. This reduces the resources this MAC must devote to the appeals process, the CMS officials said. Representation at administrative law judge hearings. Another MAC described an innovation it had piloted in its DME MAC jurisdiction, which CMS has since required of all A/B and DME MACs. The innovation addresses the rate at which the MACs’ decisions to deny coverage for Medicare services or DME were being overturned at administrative law judge hearings, which are convened when the MAC and a Medicare qualified independent contractor have both determined that a claim should be denied and the beneficiary or provider disagrees with that determination. In the past, the MACs did not send representatives to these hearings, and many of the disputed claims were ultimately paid. The MACs now send physicians to administrative law judge hearings to represent the MAC and explain why it denied payment for claims that are the subject of the hearings. More of the MACs’ initial determinations are being upheld, which results in savings of Medicare dollars, the MAC said. CMS officials said that the agency includes in its MAC performance reviews an assessment of whether the MAC has generated ideas or process improvements that add value to the government. These ideas and innovations are documented in the Contractor Performance Assessment Reporting System, which may contribute to a favorable past performance evaluation for the MAC when its contract is recompeted. While they have made various changes since the implementation of contracting reform, officials we interviewed from both CMS and the MACs described some challenges created by the structure of the MAC contracts that may constrain continued improvements in MAC efficiency and effectiveness. One challenge CMS officials identified was the 5-year limit on MAC contract terms, which they said constrained their ability to respond to issues with MACs’ performance. These officials stated that they were reluctant to decide not to exercise an option year for a MAC based on performance issues. According to the officials, it was impractical to award a new contract within the 5-year contract terms permitted by the MMA because it takes approximately 18 to 24 months to solicit, award, and implement a new MAC contract. The officials said they would be more likely to consider replacing MACs midcontract if the contracts lasted longer than 5 years. To illustrate this, CMS officials told us that they had issued only one written notification to a MAC, advising that the agency might not exercise a contract option year—unless the contractor improved its performance—since the implementation of contracting reform. According to the CMS officials, the MAC ultimately improved its performance after receiving the notice, but CMS’s decision to continue the contract was also partially influenced by the agency’s conclusion that the potential benefit of replacing the MAC before the end of its contract term was outweighed by the risks and costs that would be associated with recompeting the contract sooner than planned. In addition, the CMS officials we interviewed stated that a potential benefit of increasing the time between MAC contract competitions could be that CMS and the MACs would have more time to develop innovations and that the MACs would have more time to implement them to yield performance improvements. The MAC officials we interviewed echoed these sentiments. The officials we interviewed from CMS and the MACs said they would support a legislative change to increase the maximum time between MAC contract competitions from 5 years to 10 years. In its January 2014 report, the HHS Office of Inspector General recommended that CMS seek legislation increasing the limit on MAC contract duration. The Medicare Access and CHIP Reauthorization Act of 2015, enacted in April 2015, increased the maximum time between MAC contract competitions to 10 years. According to the MAC officials we interviewed, the competitive nature of the MAC contracting environment has made MACs reluctant to share certain innovations or operational improvements with other MACs. The MAC officials said that they must balance CMS’s desire for them to share innovations with other MACs with trying to protect any competitive advantages they have in the contracting environment. From the perspective of officials from two of these MACs, collaboration and sharing of ideas was more widespread among the legacy contractors, which were not selected through competitive processes. After the initial transition from the legacy contractors to MACs, officials from one MAC said that there was a period of time when MACs may have overvalued a particular improvement or innovation as being proprietary or a competitive advantage and been reluctant to share ideas with other MACs. In the view of this contractor, MACs have since become more willing to share ideas that are retrospective and aimed at fixing past problems. However, they still want to protect true innovations, which are ideas that address problems more prospectively and aim to find better ways of fulfilling their contract requirements. CMS officials also described their recent decision to delay for 5 years the planned consolidation of two pairs of A/B MAC jurisdictions, based on their experiences with the recent consolidation of three other pairs of A/B MAC jurisdictions. In 2010, CMS announced that it planned to consolidate the 15 original A/B MAC jurisdictions to 10 jurisdictions before 2017. Consolidations had been implemented in three pairs of A/B MAC jurisdictions by February 2014, but CMS decided in March 2014 that it would delay for 5 years the consolidation of the two remaining pairs of MAC jurisdictions. The agency gave several reasons for this decision. First, CMS officials found that operational cost reductions associated with the first three consolidations were smaller than expected, and they were concerned that merging the remaining two pairs of A/B MAC jurisdictions could affect contractor performance negatively in key areas, including provider customer service. CMS was also concerned about the heightened complexity of the final two MAC jurisdiction consolidations because some of the affected jurisdictions were responsible for home health and hospice workloads. Finally, CMS was concerned about the business landscape that has evolved since the implementation of contracting reform. According to the CMS officials we interviewed, MACs conduct highly specialized work and, in the view of the officials, few other potential contractors would be capable of performing such specialized work successfully. The agency has already limited the share of the A/B MAC workload that can be serviced by a single contractor or affiliated contractors.almost the maximum workload CMS has specified that a single contractor can hold, CMS was concerned that further A/B MAC workload consolidations and reductions in the number of MAC marketplace participants could constrain CMS’s ability to respond to other challenges that might arise. While CMS has made modifications to its cost-plus-award-fee structure for MAC contracts—such as revising the metrics included in MACs’ award fee plans and adjusting the distribution of award fees across the metrics to promote performance in high-priority areas and areas where MACs have performed poorly in the past—the agency has not formally revisited its MAC contracting approach since the implementation of contracting reform. According to the FAR, changing circumstances may make certain contracting approaches more appropriate later in the course of a series of contracts or a long-term contract than they were at the outset. Moreover, CMS indicated in its 2007 acquisition strategy that once a baseline cost and level of effort had been established, the agency would reassess whether the cost-plus-award-fee contract structure was still appropriate for the MACs. However, CMS’s assessment of alternative contracting approaches since the implementation of contracting reform has been limited. In recent contract justification documents, CMS has indicated why a firm fixed-price contract structure remains an unsuitable approach for MAC contracts and included a limited discussion of why the use of incentive fees—a type of fee available under the cost-reimbursement contract structure—would not be appropriate for MACs.justification documents fulfill CMS’s responsibility under the FAR to document the circumstances, facts, and reasoning behind taking individual contract actions (such as entering into a contract in a given These contract MAC jurisdiction). In addition, the FAR also requires agencies to perform acquisition planning and, where a written evaluation plan is required, to review their acquisition plans and revise them as appropriate at key dates specified in the plan or whenever significant changes occur, but at least annually. While CMS’s decision to continue using the cost-reimbursement contract structure for the MAC contracts may be appropriate, there are a number of other contracting approaches that could be introduced within or in addition to the cost-reimbursement structure. CMS officials have discussed some of them internally but not documented any formal assessments of the alternatives by revising CMS’s 2007 MAC acquisition strategy. A comparative evaluation of the possible costs and benefits of alternative contracting approaches would provide a more evidence-based rationale for CMS’s chosen approach for the MAC contracts. Without formally assessing the potential benefits and risks of alternative contracting approaches, CMS lacks assurance that the current contract structure is the optimal method for incentivizing MACs’ performance, and CMS may be missing opportunities to enhance MACs’ efficiency and effectiveness. Following are four examples of potential alternative contracting approaches which may be permissible under the FAR, if properly documented and approved, along with some of the potential risks and benefits that CMS could consider. While some of these approaches are not explicitly mentioned in the FAR, they are also not prohibited. The FAR allows agencies to develop and test new acquisition methods, provided they are not explicitly precluded by federal law, executive order, or regulation. Using award terms. One type of incentive available to CMS is the award term. Unlike the contract option years that exist under CMS’s current MAC contracting approach, which CMS can exercise at its discretion once it has complied with the FAR requirements for exercising an option, award terms would incentivize MACs’ performance by automatically extending their contracts, as long as they met preestablished performance requirements. CMS officials told us that, while they had not documented an assessment of this alternative, they had discussed it internally and concluded that the statutory 5-year limit on MAC contract terms limited the potential of the award-term approach to serve as a greater motivator to MACs’ performance than the option years that are available under the existing cost-plus-award-term contract structure. We agreed that award terms may be a greater performance motivator if MAC contracts lasted longer than 5 years; however, there was nothing that would have precluded CMS from adopting the award- term approach within the 5-year terms for MAC contracts. For example, CMS could have restructured MAC contracts so that years two and three would be option years, and years four and five would be award-term years. CMS had not formally analyzed the potential risks and benefits of the award-term approach in the context of the 5-year contract term or compared these to the current option year approach. Given the recent legislative change that will permit MAC contracts to last up to 10 years, the award term approach may have more potential than CMS previously thought. Among the factors that CMS could consider would be whether this incentive could increase or decrease CMS’s administrative costs associated with monitoring MACs’ performance over the course of their contracts and the extent to which the agency may need to revise its performance metrics or thresholds, if at all, in order to accommodate the implementation of award terms. Implementing negative performance incentives. Under the FAR, agencies can also establish cost-reimbursement contracts with negative performance incentives. For example, under this type of contract, CMS theoretically could deduct from MACs’ base fees if they failed to meet certain performance thresholds. Alternatively, CMS could include nonmonetary negative incentives in MAC contracts, such as reducing the length of the contract if the MAC failed to meet established performance thresholds. For example, the contract could provide that, if a MAC’s performance fell below a certain level, CMS could reduce the length of the last option year of the contract by 3 months. For even lower levels of performance, CMS could impose reductions of 6 months, 9 months, or 1 year. The CMS officials we interviewed had not documented an assessment of whether monetary or nonmonetary negative incentives for poor performance would be appropriate for MAC contracts. However, they said that they had discussed it internally and concluded that the targets for existing MAC performance metrics are too high to accommodate negative performance incentives. For example, the CMS officials said that, while other federal contracts may require contractors to meet a certain requirement 80 percent of the time, MACs are required to meet many of their requirements 95 to 100 percent of the time. Transitioning certain elements within the MAC contracts to a fixed-price structure. In 2007, CMS documented its rationale for using a cost-reimbursement contract structure for the MAC contracts. However, while maintaining the overall cost-reimbursement contract structure, CMS could use a fixed-price contract structure for separate contract components; that is, CMS could set a firm price separately for certain contract responsibilities. In that case, the MACs would only be paid according to the fixed price for each contract component that was set at the beginning of the contract. In its 2007 acquisition strategy and more recent contract justification documents, CMS concluded that it would be too difficult to predict at the outset of each contract the workloads and specific costs that could be incurred for each of the MACs’ responsibilities. That is, CMS has stated that the fixed-price contract structure is not appropriate because legislative changes in Medicare coverage and payment policy, as well as other factors outside CMS’s and the MACs’ control, could cause the agency to make near-constant technical changes to MACs’ contracts over the course of each contract term. CMS officials we interviewed said they had engaged in some internal discussions about whether there were any elements within MACs’ contracts that could be transitioned from a cost-reimbursement to a fixed-price contract structure, but they had not formally analyzed the feasibility of doing so or which contract responsibilities have the potential to be appropriate for a fixed-price contract structure. Given that CMS has been collecting MAC cost reports for more than 8 years, the agency has the data it would need to analyze the potential benefits or risks of transitioning certain MAC responsibilities to a fixed- price structure. For example, while it may not be appropriate to transition the responsibilities of provider enrollment or medical review to a fixed-price structure—because of the unpredictability of future workloads MACs could incur for these particular responsibilities— CMS could evaluate whether it would be appropriate to transition certain other MAC requirements—such as certain claims processing production activities—to a fixed-price approach. Transitioning certain elements of the MAC contracts to an incentive fee structure. Another contracting approach available to CMS is the incentive fee. Under this arrangement, CMS would establish target costs that it would expect each MAC to incur for each contract responsibility. Using an agreed-upon formula that CMS would negotiate with each MAC, if the total costs reported by the contractor were less than the target costs, the contractor would earn a total fee that is greater than the target fee. If the total costs were greater than the target costs, the MAC would earn a total fee that is less than the target fee. For example, each MAC is required to have a Provider Customer Service Program to educate providers on Medicare requirements and respond to their inquiries. Using historical cost data, CMS could establish a target cost for these programs and incentivize the MACs to reduce costs in this area through techniques such as encouraging providers to use self-service information portals rather than seeking information through written inquiries. CMS officials told us that they initially decided against using the cost- plus-incentive-fee contract structure for MACs because they believed that changing Medicare requirements precluded the establishment of specific cost, schedule, or performance targets from the outset of contracting reform, and CMS’s recent contract justification documents continue to reflect that belief. There is no indication, however, that CMS has engaged in an analysis that might help identify whether there are certain MAC responsibilities for which the cost-plus- incentive-fee approach might be feasible, without transitioning to this approach for all MAC contract responsibilities. Now that CMS has more experience with MAC contracts and has more data on past costs and performance for MACs’ key responsibilities, CMS may be able to identify selected responsibilities that could be transitioned to an incentive fee structure. CMS has accumulated a considerable amount of data on MACs’ reported costs and performance under the cost-plus-award-fee contract structure the agency established when the first MACs became operational 8 years ago. The FAR states that certain contracting approaches may be more appropriate later in the course of a series of contracts or a long-term contract than they were at the outset, and CMS indicated in its 2007 acquisition strategy that it would revisit its contracting approach once it had collected baseline information. However, CMS has not engaged in a formal analysis of whether several other contracting approaches have the potential to increase MACs’ efficiency and effectiveness. Instead, recent contract justification documents have included a limited assessment of potential alternatives. Without using the wealth of data it has collected since the implementation of contracting reform to analyze other available contracting approaches, CMS may be missing opportunities to increase MACs’ efficiency and effectiveness. We recommend that CMS conduct a formal analysis, using its experience and data it has collected since the implementation of the first MAC contracts, to determine whether alternative contracting approaches could be used—even if only for selected MAC contract responsibilities—to help promote improved contractor performance. We provided a draft of this report to HHS and received written comments, which are reprinted in appendix V. In its comments, HHS concurred with this recommendation and said it plans to analyze alternative contracting approaches for MACs. Finally, HHS provided technical comments, which we addressed as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from its issuance date. At that time, we will send copies to the Secretary of Health and Human Services, appropriate congressional committees, and other interested parties. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs are on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VI. Appendix IV: Key Responsibilities of Medicare Administrative Contractors (MAC) Description MACs are to process Medicare claims to the point of payment, denial, or other adjudicative action in a timely and accurate manner. Additionally, MACs are responsible for adhering to all claims processing rules outlined in CMS’s Internet-only manuals. MACs are to process provider applications for enrollment in the Medicare program, including prescreening of applications, verifying and validating the information in the enrollment application, and ensuring that the applying providers are not excluded from participation in the Medicare program. MACs are responsible for establishing a Provider Customer Service Program to assist providers in understanding and complying with Medicare’s operational policies, billing procedures, and processes. The Program is to enable providers to understand, manage, and bill Medicare correctly, with the goal being to reduce the Medicare paid claims error rate and improper payments. Each MAC’s program should consist of three major components: Provider outreach and education for educating providers and their staff, Provider contact center for handling provider inquiries, and Provider self-service technology, including technology that allows access to Medicare information at any time of the day. MACs are to decrease the paid claims errors in coverage, coding, and billing through the Medical Review program. The Medical Review program is designed to promote a structured approach to how Medicare policy is interpreted and implemented, which often requires the review of medical records to determine whether the services were medically necessary. MACs are responsible for implementing a comprehensive Medicare Secondary Payer program, which is intended to ensure that plans with primary insurer liability pay before Medicare pays for a particular service. A local coverage determination is a decision made by a MAC to cover a particular item or service on a MAC-wide basis, in accordance with the Social Security Act (i.e., a determination as to whether the item or service is reasonable and necessary). MACs are to publish local coverage determinations to provide guidance to the public and medical community within their jurisdictions. MACs are to develop local coverage determinations by considering medical literature, advice of local medical societies and consultants, public comments, and comments from providers. Additionally, MACs are to ensure that all local coverage determinations are consistent with statutes, rulings, regulations, and national policies related to coverage, payment, and coding. A reopening of a Medicare claim is a remedial action taken to change the final determination that resulted in an overpayment or an underpayment, even though the determination was correct based on the evidence of record. Reopenings are separate from the appeals process and are a discretionary action on the part of the MAC. The MAC’s decision to reopen a claim determination is not an initial determination and is not appealable. Description A party dissatisfied with the MAC’s initial determination about Medicare coverage for items or services has the right to request within 120 days that the MAC review its initial determination. Within 60 days of receiving the request for redetermination, a MAC employee who did not take part in the initial determination must review the claim and supporting documentation and issue a redetermination either affirming, partially reversing, or fully reversing the MAC’s initial determination. Parties permitted to appeal initial determinations include beneficiaries and their representatives, states, providers, physicians, and other suppliers. MACs are responsible for deterring and detecting fraud and abuse. The MACs may receive information about fraud or abuse from several sources, including provider inquiries or medical review, and are required to refer all suspected cases to the Program Safeguard Contractors (PSC) or Zone Program Integrity Contractors (ZPIC) for investigation. Additionally, MACs should communicate with the PSCs and ZPICs to coordinate efforts and prevent duplication of review activities. MACs are responsible for maintaining accounting records in accordance with specific government accounting principles and applicable government laws and regulations. MACs are expected to report financial activity to CMS in accordance with the financial reporting requirements set forth in CMS’s Internet-only manuals and the MACs’ statements of work. Additionally, the MACs are responsible for receiving, reviewing, and auditing (as necessary) institutional provider cost reports. MACs are responsible for establishing and maintaining a Program Management Office, which has defined management processes and organization in order to successfully carry out the responsibilities of the contract. One part of the Program Management office requires the MACs to communicate with CMS officials about a variety of issues. MACs are required to establish or use infrastructure to carry out the requirements of the contract. This includes telecommunication activities and management of electronic data. MACs are to comply with various administrative requirements that outline specific needs for carrying out the contract, such as key personnel, security, quality assurance, public relations, responding to congressional inquiries, participation in meetings and workgroups, continuity planning and disaster preparedness, internal controls, and compliance program. In addition to the contact named above, William T. Woods, Director; Martin T. Gahart, Assistant Director; Christie Enders; John Krump; Victoria Klepacz; Alexis C. MacDonald; Elizabeth T. Morrison; Mary Quinlan; and Jennifer Whitworth were major contributors to this report. Medicare Program Integrity: Increased Oversight and Guidance Could Improve Effectiveness and Efficiency of Postpayment Claims Reviews. GAO-14-474. Washington, D.C.: July 18, 2014. Medicare Program Integrity: Increasing Consistency of Contractor Requirements May Improve Administrative Efficiency. GAO-13-522. Washington, D.C.: July 23, 2013. Medicare Program Integrity: Few Payments in 2011 Exceeded Limits under One Kind of Prepayment Control, but Reassessing Limits Could Be Helpful. GAO-13-430. Washington, D.C.: May 9, 2013. Medicare Program Integrity: Greater Prepayment Control Efforts Could Increase Savings and Better Ensure Proper Payment. GAO-13-102. Washington, D.C.: November 13, 2012. Medicare Contracting Reform: Agency Has Made Progress with Implementation, but Contractors Have Not Met All Performance Standards. GAO-10-71. Washington, D.C.: March 25, 2010. | The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) required CMS to select claims administrative contractors through a competitive process and to do so in accordance with the FAR. In fiscal year 2013, MACs processed almost 1.2 billion claims totaling more than $363 billion in Medicare payments. GAO was asked to assess CMS's implementation of contracting reform and examine whether CMS could do more to increase MACs' effectiveness. This report evaluates (1) differences in responsibilities among MACs and the costs associated with these responsibilities, including any changes since the implementation of contracting reform; (2) lessons learned, if any, since CMS implemented contracting reform that could be used to increase MAC efficiency and effectiveness; and (3) alternative contracting approaches that CMS could use to enhance contractor performance. To do this work, GAO reviewed the FAR and CMS documents—including contracting documentation and MAC cost reports—and interviewed officials from CMS and selected MACs. GAO also reviewed the FAR to identify alternative contracting approaches. As of February 2015, 16 Medicare Administrative Contractors (MAC) administered claims submitted by Medicare providers and suppliers. Twelve were A/B MACs that administered Medicare Part A and Part B claims for inpatient hospital care, outpatient physician and hospital services, and home health and hospice care, among other services, in specific jurisdictions. Four other MACs administered claims for durable medical equipment (DME). GAO found that the A/B and DME MACs are typically expected to carry out similar key responsibilities, a few of which—including claims processing and customer service—have accounted for most of their reported costs. Since the implementation of contracting reform, beginning in 2006, the key responsibilities included in MACs' statements of work have generally remained consistent, with limited exceptions. Further, while similar key responsibilities accounted for the majority of A/B MACs' and DME MACs' costs, there were some differences between A/B MACs and DME MACs in the shares of total costs that were accounted for by certain responsibilities. For example, the DME MACs spent a higher portion on appeals, on average, than did the A/B MACs. Officials from the Centers for Medicare & Medicaid Services (CMS) and the MACs that GAO interviewed have identified lessons learned since the implementation of contracting reform, and they have made improvements to increase operational efficiency and effectiveness. For example, MACs have developed Internet-based provider portals to reduce expenditures on telephone-based provider customer service. However, both CMS and MAC officials identified challenges for continued improvements in MAC efficiency and effectiveness, such as MACs' desire to protect their competitive advantage by not sharing certain innovations or operational improvements with other MACs. CMS selected a cost-plus-award-fee contract structure for the MACs when it initially implemented contracting reform. This is a type of cost-reimbursement contract that allows the agency to provide financial incentives for achieving specific performance goals. While CMS has made modifications to its cost-plus-award-fee structure for MAC contracts—such as revising the performance metrics included in MACs' award fee plans and adjusting the distribution of award fees across the metrics to promote performance in areas where MACs have performed poorly in the past—the agency has not formally revisited its MAC contracting approach since the implementation of contracting reform. Moreover, its assessment of alternative contracting approaches has been limited. The Federal Acquisition Regulation (FAR) states that changing circumstances may make different contracting approaches more appropriate later in the course of a series of contracts or a long-term contract than they were at the outset. Further, CMS indicated in its 2007 MAC acquisition strategy that once a baseline cost and level of effort had been established, the agency would reassess whether the cost-plus-award-fee contract structure was still appropriate for the MACs. There are a number of other contracting approaches that could be introduced within or in addition to the cost-reimbursement structure. Without formally assessing the potential benefits and risks of alternative contracting approaches, CMS may be missing opportunities to enhance MACs' efficiency and effectiveness. GAO recommends that CMS conduct an analysis to determine whether alternative contracting approaches could be used to help promote improved contractor performance. In its comments, the Department of Health and Human Services concurred with this recommendation and said it plans to analyze alternative contracting approaches for MACs. |
OSC, which does not have in-house contracting staff, has an agreement with ARC, an office within Treasury’s Bureau of the Public Debt, to provide contracting support for a fee. As a member of the Treasury franchise fund, ARC does not receive direct appropriated funds, but instead relies on revenue from its federal agency customers to pay organizational expenses. Franchise funds are government-run, self-supporting, business-like enterprises that provide a variety of common administrative services, such as payroll processing, information technology support, and contracting. The agreement between ARC and OSC is a mechanism for interagency contracting. This type of fee-for-service procurement process generally involves three parties: the agency requiring a good or service, the agency placing the order or awarding the contract, and the contractors that provide the goods and services. The requiring agency officials determine the goods or services needed and, if applicable, prepare a statement of work, sometimes with the assistance of the ordering agency. The contracting officer at the ordering agency ensures that the contract or order is properly awarded or issued (including any required competition) and administered under applicable regulations and agency requirements. If contract performance will be ongoing, a contracting officer’s representative—generally an official at the requiring agency with relevant technical expertise—is normally designated by the contracting officer to monitor the contractor’s performance and serve as the liaison between the contracting officer and the contractor. While interagency contracting can offer the benefits of improved efficiency and timeliness, this approach needs to be effectively managed. Due to the challenges associated with interagency contracts, we recently designated interagency contracting as a governmentwide high-risk area. As authorized by OSC’s appropriation, OSC may use 5 U.S.C. § 3109 to hire intermittent consultants. Section 3109 permits agencies, when authorized by an appropriation or other statute, to acquire the temporary or intermittent services of experts or consultants. Under the statute, appointments of experts and consultants may be made without regard to competitive service provisions and classification and pay requirements. Individuals appointed under this authority may not be paid in excess of the highest rate payable for a GS-15 unless a higher rate is expressly provided for by statute or an appropriation. Under section 3109, OPM is responsible for prescribing criteria governing circumstances in which it is appropriate to employ an expert or consultant and for prescribing criteria for setting pay. Section 3109 of title 5 and OPM’s implementing regulations in 5 C.F.R. Part 304 provide for broad discretion in the appointment of experts and consultants. In promulgating its regulations, OPM recognized that agencies need to obtain outside opinion and expertise to improve federal programs, operations, and services and that by bringing in the talent and insights of experts and consultants, agencies can work more economically and effectively. OSC’s primary mission is to protect federal employees from prohibited personnel practices. It carries out this mission by conducting investigations, attempting informal resolution through discussions with the agency during the investigation phase (or by offering mediation), and, when necessary, prosecuting corrective and disciplinary actions before the MSPB. An individual may also request that the Special Counsel go before the MSPB to seek to delay an adverse personnel action, such as a termination, pending an OSC investigation. If an agency fails to remedy a prohibited personnel practice upon request by OSC, corrective action may be obtained through litigation before the MSPB. OSC may also seek disciplinary action against an employee believed to be responsible for committing a prohibited personnel practice by filing a complaint with the MSPB. However, when the disciplinary action involves presidential appointees (subject to Senate confirmation), OSC forwards its complaint against the appointee, a statement of supporting facts, and any response of the appointee to the President for appropriate action. Obtaining the assistance of OSC may be an individual’s only recourse with regard to an alleged prohibited personnel practice, unless the individual can pursue the matter with the MSPB or through the discrimination complaint process. Only employees who have been subject to an adverse action, such as a termination, demotion, or suspension beyond 14 days, may appeal to the MSPB and argue that such adverse action was the result of a prohibited personnel practice. An employee would not be able to go directly to the MSPB to complain that a geographic relocation was the result of a prohibited personnel practice. Even when an employee alleges that he or she was retaliated against for whistleblowing, he or she must first go to OSC and wait 120 days before filing directly with the MSPB, unless that employee was subject to an adverse action as noted above. An employee may also pursue resolution of a prohibited personnel practice through the federal equal employment opportunity (EEO) process if the prohibited practice relates to discrimination covered under the antidiscrimination laws enforced by the EEOC. In contracting with MPRI for the organizational assessment, several required steps were not taken: competition was not sought among Schedule vendors, and there was no convincing demonstration of why a sole-source order was necessary, the determination of the reasonableness of MPRI’s price was not OSC officials performed duties normally done by contracting officer’s representatives without authorization or training and, further, performed other duties that should have been reserved for the contracting officer. Contracting officers are generally required by the Competition in Contracting Act to promote and provide for full and open competition in soliciting offers and awarding government contracts. Use of GSA’s Schedule program is considered a competitive procedure as long as the procedures established for the program are followed. In this instance, GSA’s procedures required ordering offices to prepare a request for quotes and evaluate contractor catalogs and price lists, transmit the request to at least three contractors, and after evaluating the responses, place the order with the Schedule contractor that represented the best value. GSA’s Schedule for Management, Organizational and Business Improvement Services (MOBIS), under which the MPRI task order was issued, includes these special ordering procedures. At the time the MPRI order was placed (April 2004), neither the FAR nor GSA’s ordering procedures explicitly provided for sole-source orders under GSA Schedule contracts. However, ordering offices could meet competition requirements by properly justifying such an order. Rather than follow the required GSA special ordering procedures by placing the task order competitively on behalf of OSC, ARC approved a written sole-source justification prepared by OSC. The justification stipulated that the required services were available from only one responsible source—MPRI—and no other contractor could satisfy agency requirements. When supplies or services are available from only one responsible source and no other type of supplies or services will satisfy agency requirements, full and open competition need not be provided for. However, the justification merely asserted that “no other contractor except MPRI, Inc. has the experience and background in this type of sensitive assessment.” It did not contain sufficient facts and rationale to justify a sole-source order and did not provide the minimum required information. For example, the justification did not demonstrate that the proposed contractor’s unique qualifications or the nature of the acquisition required an exception to full and open competition, describe efforts made to ensure that offers were solicited from as many potential sources as practicable, determine that the anticipated cost would be fair and reasonable, or describe the market research conducted and the results. The only support in OSC’s justification for the statement that MPRI was uniquely qualified for the task is a statement that “an informal market survey reveals that only MPRI has the demonstrated past performance in bringing together the required unbiased and highly ethical subject matter experts to complete this type of assessment in the time allocated.” However, the cited market survey does not provide a credible foundation for the conclusion that only MPRI could perform the work. The Special Counsel and his Deputy asked three vendors, including MPRI, for presentations. OSC officials could not recall how these three vendors were selected, and no documentation was available—such as a request for quotes—that set forth the requirement to which the vendors were responding. Rather, the request was communicated orally to the vendors. OSC provided us with proposals submitted by two of the vendors and stated that MPRI submitted a statement of work as its proposal. This statement of work subsequently became part of ARC’s official contract file. We found that the summary statement of OSC’s requirement and the scope of work differ among the three proposals. OSC officials explained that the two vendors’ proposals were not well-matched to what the Special Counsel had communicated to them as OSC’s requirements and that MPRI offered a “no-frills” approach that met OSC’s needs. Nevertheless, in the absence of a documented request for quotes or other solicitation tool, it is not possible to determine whether MPRI and the other vendors were responding to the same set of requirements. Further, our recent search of GSA’s Web site revealed that 1,668 vendors (1,163 of them small businesses) had contracts under GSA’s MOBIS schedule, many of which could have potentially performed the required services. The sole-source justification listed other factors as well. It stated that “there is insufficient time and no contractor’s currently have the expertise to meet Government’s requirements given the required budget limitations.” There is no explanation in the justification as to why only this contractor could perform the task within the required time frame. In fact, despite the reference to urgency, 3 days before the period of performance was to end, OSC asked ARC to change the required completion date, almost doubling the time frame from 3 to 5-½ months (with no increase in price). While acknowledging that the final, written report was a contract deliverable in the statement of work, OSC officials explained that MPRI met their needs within the 3-month period by providing a briefing on its findings that enabled OSC to begin addressing the problems that had been identified. Further, contracting without providing for full and open competition cannot be justified on the basis of concerns related to the amount of funds available. Thus, the justification’s reference to budget constraints necessitating a sole-source order is not a valid rationale. ARC contracting officials did not question or validate OSC’s justification, but told us they relied to a great extent on OSC’s input in justifying the sole- source order. They said that they are now paying closer attention to requests from customer agencies, including OSC, for sole-source orders. OSC officials told us that, because ARC did not raise questions about the justification, they assumed it was adequate. A sole-source justification is required to document a determination by the contracting officer that the anticipated cost to the government will be fair and reasonable. Neither ARC, which was responsible for doing so, nor OSC adequately documented that MPRI’s price was reasonable. Although vendors’ GSA Schedule labor rates have already been determined by GSA to be fair and reasonable, ordering agencies are required to evaluate the contractor’s price for orders requiring a statement of work. The contractor’s price is based on the labor rates in the Schedule contract, the mix of labor categories, and the level of effort required to perform the services. Normally, when ordering services from GSA Schedules that require a statement of work, the ordering office is responsible for evaluating the contractor’s level of effort and mix of labor proposed to perform the specific tasks being ordered and for making a determination as to whether the price is reasonable. ARC officials told us that they relied on OSC to conduct the price reasonableness assessment by reviewing a breakout of MPRI’s price by skill mix, number of hours, and rates for each labor category. They maintain that the minimum requirements for price reasonableness documentation were met. However, we found no documentation demonstrating that the required price evaluation had been performed. OSC officials stated that the informal market survey was adequate to determine MPRI’s price as reasonable because MPRI’s price—which the Deputy Special Counsel negotiated with the vendor—was lower than the other vendors’ prices. However, the absence of a solicitation instrument that would show all three vendors responded to the same requirement, and the disparities in the vendors’ proposed scopes of work, do not support OSC’s assertion. One of the contracting officer’s key responsibilities is ensuring that the government monitors the contractor’s performance. The contracting officer, in this case ARC, may designate a contracting officer’s representative in the requiring agency, in this case OSC, to act as the contracting officer’s technical expert and representative in the monitoring and administration of a contract or task order. ARC’s standard designation letter to contracting officer’s representatives outlines the scope of these responsibilities, including such things as monitoring the contractor’s performance, representing the government in meetings with the contractor, keeping the contracting officer informed, and reviewing the contractor’s invoices. ARC follows Treasury’s training program for contracting officer’s representatives, which consists of a basic acquisition course of at least 24 hours that includes pre-award, post-award, and procurement ethics training. ARC contracting staff named OSC’s former human resource chief, who had taken the required training, as the contracting officer’s representative for the MPRI task order. However, two other OSC officials not named by ARC, the Special Assistant and Director of Management and Budget and the Deputy Special Counsel, who had not received the training, effectively acted in the role of contracting officer’s representatives on the MPRI order. In an April 20, 2004, e-mail to OSC staff, the Special Counsel named the Special Assistant as the liaison between the agency and the contractor. The statement of work names this official as the “governing authority” for the effort and as responsible for coordinating with the contractor on “any other direct costs” and certain travel requirements. Also, the Deputy Special Counsel was responsible for approving MPRI’s contract execution plan and the contract deliverables. Further, ARC’s delegation letter to contracting officer’s representatives prohibits the delegation of or responsibility for certain duties, such as soliciting proposals, making commitments or promises to a contractor relating to the award of a contract, and negotiating the price with the contractor. The Special Counsel and Deputy Special Counsel, as discussed above, solicited proposals from three vendors, and the Deputy negotiated the final price with MPRI, functions that should have been performed by the ARC contracting officer. ARC contracting staff were not aware that the OSC officials had performed these duties until we informed them. They said that only the former human resource chief had received the training and authorization to act as a contracting officer’s representative. OSC officials said that ARC, as their contracting office, never told them they were not following proper contracting practices. The tasks specified in the statement of work for the consultant that OSC hired on March 17, 2004, and that he completed before his departure were consistent with OPM criteria for appropriate uses of expert and consultant appointments. The employee, who was employed on an intermittent basis, was tasked with two major lines of work related to efficiency and curriculum development. OSC management expressed confidence in his qualifications and used its discretion to both hire him and set his compensation rate. OPM regulations permit agency heads to establish expert or consultant pay rates, but in doing so to consider specified factors, including level of difficulty of the work, qualifications of the expert or consultant, and pay rates of individuals performing comparable work. At the suggestion of the Special Counsel, OSC officials hired Alan J. Hicks as an intermittent employee on March 17, 2004, using the appointment authority under 5 U.S.C. § 3109. According to the appointment paperwork, Mr. Hicks’s appointment was to last from March 17, 2004, until March 16, 2005, and he was to work an intermittent schedule. His pay rate was set slightly below the highest rate for a GS-15. Mr. Hicks resigned his appointment effective October 24, 2004. During the 7 months Mr. Hicks was employed by OSC, he worked a total of 123 hours for a total of $6,621.09 in pay. Before hiring Mr. Hicks, the Special Counsel identified him as a possible consultant based on prior knowledge of Mr. Hicks’s work as the headmaster of a private secondary school. The Deputy Special Counsel told us that he justified Mr. Hicks’s pay on the basis of his qualifications— specifically, his experience as headmaster and his educational level. He also noted that the Special Counsel had worked with Mr. Hicks and respected his opinion and judgment. According to Mr. Hicks’s resume, during the 10 years of his headmaster position, he was responsible for a number of administrative functions, including designing and writing student curricula, recruiting and training faculty and staff, establishing financial and organizational structures of the school, hiring and management decisions, as well as teaching history, logic, and biology. According to his resume, Mr. Hicks had also taught at the college level. OPM regulations provide that agencies may appoint qualified experts or consultants to an expert or consultant position that requires only intermittent and/or temporary employment. While OPM regulations do not establish specific criteria for determining qualifications, they do generally describe the expectations for such positions and what constitutes appropriate tasks for experts and consultants to perform. For example, the regulations describe a consultant as a person who can provide valuable and pertinent advice generally drawn from a high degree of broad administrative, professional, or technical knowledge or experience. Furthermore, a consultant position is one that requires providing advice, views, opinions, alternatives, or recommendations on a temporary or intermittent basis on issues, problems, or questions presented by a federal official. The regulations also provide examples of inappropriate uses of expert/consultant appointments, including work performed by the agency’s regular employees. Mr. Hicks’s tasks were related to addressing OSC’s backlog that we identified in our March 2004 report. Specifically, an OSC official noted that his experience in curricula development at the boarding school was viewed as key to cross-train employees in different units so those employees could be utilized in a number of ways to address workload. According to the OSC official, Mr. Hicks’s efforts would complement those of MPRI. The official said he was confident that Mr. Hicks was fully qualified to do the work, and that OSC used management discretion to approve the appointment. Another official observed that Mr. Hicks provided both an outside perspective and experience that regular OSC staff did not have. Officials also said that although Mr. Hicks only worked at OSC for a short time, the agency was pleased with the value he added. Both the duties set out in Mr. Hicks’s statement of work, as well as those duties he actually performed, were consistent with OPM regulations. According to the statement of work prepared by the human resource chief at the Deputy Special Counsel’s direction, Mr. Hicks was to (1) review and analyze OSC program policies and procedures for efficiency and make recommendations and develop written revisions to these policies and procedures and (2) develop a long-term training curriculum and deliver training. Shortly before he terminated his consultant work for OSC, Mr. Hicks submitted a report outlining the work that he performed. In his report, Mr. Hicks made a number of observations on his concurrence with MPRI’s conclusions. The report also said he was involved in a number of other tasks, including examining operational training manuals, meeting with staff concerning the procedures for handling assisting with and attending the Special Counsel’s testimony before a preparing a paper for presentation at a staff retreat on philosophical matters related to work, meeting with MPRI to discuss its assessments and to share his observations based on his work, and having numerous conversations with the Special Counsel concerning the assessment team, his recommendations for curriculum and training, and the need for streamlined procedures. While most of the tasks that Mr. Hicks actually performed were consistent with those enumerated in his statement of work, Mr. Hicks also worked on whistleblower disclosure cases. According to an OSC official, Mr. Hicks spent approximately 25 percent of his time working through 50 disclosure case files. The OSC official stated that Mr. Hicks was not provided disclosure case files that contained sensitive information for which a security clearance would have been required. While Mr. Hicks noted in his report that this work on the disclosure cases “served the dual purpose of analysis of procedures and a reduction of backlog,” an OSC official stated that Mr. Hicks’s efforts were related to an analysis of the process of handling disclosures and not the type of efforts OSC’s disclosure unit employees perform in handling such cases. According to the OSC official, while Mr. Hicks contacted some of the whistleblowers directly, it was for the purpose of determining those individuals’ impressions about the process. This official stated that these activities were performed at the initiative of the Special Counsel and his senior staff, in order for Mr. Hicks to gain a better understanding of those processes and procedures specified in the statement of work. This official stated that prior to Mr. Hicks’s arrival at OSC, the Special Counsel forwarded to Mr. Hicks statutory provisions on OSC’s duties relating to disclosures from whistleblowers, including the obligation of OSC to maintain the confidentiality of a whistleblower’s identity. Although OSC employees, like other federal employees, can seek redress for alleged prohibited personnel practices through OSC, this may be unworkable for OSC employees in certain circumstances. Two other agencies with redress roles, MSPB and EEOC, have acknowledged the need to avoid conflicts when their employees have complaints and have taken steps to avoid such conflicts when their employees use their agency’s respective redress processes. Title 5 of the United States Code protects federal employees, including OSC employees, from prohibited personnel practices. OSC employees who believe that a prohibited personnel practice has occurred may seek redress from OSC. OSC employees may also seek redress through appealing adverse actions to the MSPB and filing EEO complaints. According to OSC officials, there are two ways in which an OSC employee could bring a prohibited personnel practice allegation within OSC. First, OSC employees may use the agency’s administrative grievance system. If fact-finding is needed for a complaint filed against OSC staff, an OSC employee who has not been involved in the matter being grieved and, when possible, does not occupy a position subordinate to any official involved in the matter being grieved, is selected to conduct a review and prepare a report. Ideally, that employee is also located in a different geographic area; for example, an OSC employee in Dallas could be assigned to a complaint filed in Washington, D.C. OSC officials stated that this would ensure objectivity and independence in the processing of the complaint. Fact- finding is conducted informally and includes the collection of documents and statements of witnesses, as necessary. The grievant’s second-level supervisor would render a decision based upon the fact-finder’s report and any comments on the report provided by the grievant. The grievant may appeal this decision to the Deputy Special Counsel, or, if the matter was grieved to the Deputy Special Counsel in the first instance, to the Special Counsel. Both current and former OSC officials stated that this process could be successfully used when the prohibited personnel practice allegation relates to the actions of an official below the Deputy Special Counsel level. However, if the administrative grievance system were to be used to address grievances against the Special Counsel or the Deputy Special Counsel, there would be a conflict of interest since the final decision maker in this process is the Special Counsel. Second, OSC officials stated that OSC employees who believe a prohibited personnel practice has occurred can file a complaint with OSC in the same fashion as an individual from outside OSC. However, OSC employees do not have an outside agency to represent them in an independent manner— the role that OSC plays for non-OSC employees in cases involving prohibited personnel practices. When an employee raises a prohibited personnel practice allegation against the Special Counsel, addressing such an allegation within OSC becomes unworkable because, OSC officials stated, all OSC employees ultimately report to the Special Counsel. OSC officials also stated that there cannot be an independent review when the employee performing the investigation reports to the individual being investigated. According to former and current OSC officials, the difficulty also extends to allegations against the Deputy Special Counsel because the Deputy Special Counsel, who is typically a noncareer senior executive, has a confidential relationship with the Special Counsel. According to the previous Special Counsel, an effort among senior staff to establish procedures for handling OSC employee allegations of prohibited personnel practices against senior OSC officers, including the Special Counsel, was initiated during her tenure. However, the effort was not completed, she said, noting that OSC staff did not reach a consensus over what the alternative process should be for handling complaints against the Special Counsel. The previous Special Counsel and current OSC officials who were involved in this effort told us that one of the options being considered was to have the matter investigated by an outside inspector general. At the time, however, concern was expressed about allowing inspectors general, who were subject to OSC’s investigative and prosecutorial authority, to investigate the Special Counsel. The potential difficulties described above were recently illustrated when a complaint was filed anonymously against the Special Counsel on behalf of a number of OSC employees. The complainants requested that the complaint be referred to the chairman of the PCIE for an independent investigation, including a recommendation for corrective or disciplinary action. The PCIE is an interagency council, including presidentially appointed inspectors general, charged with promoting integrity and efficiency in federal programs. The complaint stated that OSC could not investigate these allegations because the Special Counsel could not oversee an investigation of which he is the subject and that all OSC staff are his subordinates. The complaint further observed that the complainants’ ability to remain anonymous would be jeopardized if any OSC staff were assigned to work on the investigation. As discussed above, current OSC policy and procedures do not provide for special handling of complaints against the Special Counsel or the Deputy Special Counsel. The Deputy Special Counsel told us that he and the Special Counsel agreed that OSC should not handle the complaint, and subsequently forwarded it to the PCIE’s Integrity Committee and notified the chair of the PCIE. In mid- October, 2005, the chair assigned OPM’s inspector general to conduct the investigation. Two other agencies in the executive branch with major roles in ensuring the protection of employee rights, the MSPB and EEOC, have taken steps to address potential conflicts of interest when their own employees use their agencies’ respective redress processes. The MSPB is an independent quasi-judicial agency established to protect federal merit systems against prohibited personnel practices and to ensure adequate protection for employees against abuses by agency management. MSPB carries out this mission, in part, by adjudicating federal employee appeals of adverse personnel actions. The MSPB has developed regulations which state that MSPB employee appeals are not to be heard by board-employed administrative judges who hear appeals from employees of other federal agencies, but instead are to be heard by administrative law judges (ALJ). According to the MSPB General Counsel, MSPB does not employ its own ALJs; rather, MSPB has a memorandum of understanding with the National Labor Relations Board to use its ALJs for MSPB employee appeals and other matters, including whistleblower retaliation cases brought by OSC. MSPB regulations further provide that the board’s policy is to insulate the adjudication of its own employees’ appeals from agency involvement as much as possible. The regulations provide that if an initial decision rendered by the ALJ is appealed to the board, the initial decision will not be altered unless there has been “harmful procedural irregularity” in the proceedings or there is a clear error of law. According to the MSPB General Counsel, this provides the board with very limited review authority. Finally, the regulations state what procedures are to be followed if a board member must recuse himself or herself from a specific case. The EEOC is responsible for enforcing the federal sector employment discrimination prohibitions contained in the federal antidiscrimination statutes, including Title VII of the Civil Rights Act of 1964, as amended. As part of this responsibility, EEOC provides for the adjudication of complaints and hearing of appeals. As is the case for all individuals who file a formal complaint of discrimination, EEOC employees may either request a hearing before an administrative judge or a final decision by the agency itself. However, according to EEOC officials, when EEOC employees request a hearing over their complaint of discrimination, such hearings are not to be conducted by the administrative judges employed by EEOC, but rather through contract administrative judges. EEOC officials state that using contract administrative judges is necessary to preserve the neutrality of the process, since EEOC’s administrative judges are coworkers of any EEOC complainant. EEOC officials also told us that if an employee of its Office of Equal Opportunity (OEO), EEOC’s own EEO office, raises an allegation of discrimination, the matter is sent outside the agency to another agency’s EEO office for informal counseling, investigation, and/or mediation to guard against potential conflicts of interest within the OEO. Steps can be taken to ensure that OSC employees have alternative avenues of recourse when their prohibited personnel practice allegations involve the Special Counsel or the Deputy Special Counsel. Potential options are discussed below. However, unlike the MSPB and the EEOC, which have taken steps to address potential conflicts of interest when their own employees use their respective redress processes, OSC would need explicit authority for implementing such options. OSC employees could be afforded an external investigation of their prohibited personnel practice allegations against the Special Counsel or Deputy Special Counsel through an independent entity. Most of the current and former OSC officials we spoke with acknowledged that the option of such an external investigation is warranted. If such an external investigation were authorized, it may be desirable to also provide the results of the investigation to the President, who has the authority to take appropriate corrective action. However, OSC would need specific authority to implement this option since OSC does not have the mechanism to provide for such investigations. OSC employees could be afforded expanded rights to appeal directly to MSPB that would specifically encompass prohibited personnel actions involving the Special Counsel or the Deputy Special Counsel. As discussed above, OSC employees, as is the case with other federal employees, can take allegations of prohibited personnel practices to the MSPB only when certain adverse actions have been taken against those employees. One OSC official observed that care should be taken in expanding jurisdiction so as to prevent minor personnel actions from being appealable to the board. Since the MSPB appeals process is in statute, this option would require legislation for implementation. OSC employees who believe a prohibited personnel practice has occurred can file a complaint with OSC in the same fashion as an individual from outside the agency. However, OSC employees do not have an external, independent agency like OSC to represent them. This becomes particularly important when the complaint is filed against the Special Counsel or the Deputy Special Counsel. When an employee raises a prohibited personnel practice allegation against the Special Counsel, addressing such an allegation within OSC becomes unworkable because OSC employees ultimately report to the Special Counsel, including the complainant and any staff who would conduct an internal investigation. This difficulty extends to allegations against the Deputy Special Counsel because this individual has a confidential relationship with the Special Counsel. Steps could be taken to ensure that OSC employees, who cannot effectively obtain the services of OSC in addressing allegations of prohibited personnel practices, have alternative avenues of redress. Adequate management oversight is critical to ensuring that, in an interagency contracting environment, the requiring agency and the agency ordering the services on its behalf work together to follow proper contracting procedures. In agreeing to issue the sole-source order for the organizational assessment despite the flawed justification, and in being uninvolved in and unaware of the pre- and post-award activities conducted by OSC officials, ARC contracting officials neglected to fulfill their responsibilities. For their part, OSC officials demonstrated a lack of awareness of their responsibilities in the process of engaging MPRI and overseeing the contractor’s work. Due to the unique nature of OSC and the difficulties involved when a prohibited personnel practice allegation is made against the Special Counsel or the Deputy Special Counsel, Congress should consider affording OSC employees (and former employees and applicants for employment) alternative means of addressing prohibited personnel practice allegations other than going through OSC. These means could include establishing (1) a right to an external investigation through an independent entity, where the entity would forward its findings to the President, who would decide the appropriate action, as is done when OSC handles allegations of prohibited personnel practices against Senate- confirmed presidential appointees; or (2) an expansion of the personnel actions that could be the basis for an appeal directly to the MSPB. We recommend that the Director of ARC’s Division of Procurement take the following two actions to ensure that (1) documents prepared by program offices requesting contracting assistance—such as statements of work and sole-source justifications—are carefully reviewed for compliance with competition requirements and (2) ARC contracting staff, through regular communication with the program offices they support, ensure that only authorized program officials act as contracting officer’s representatives. We also recommend that the Special Counsel put in place procedures to ensure that only those officials who have taken the required training and been designated as contracting officer’s representatives act in that role and that program staff do not exceed their authority in interacting with contractors. On September 23, 2005, we provided a draft of this report to OSC and to ARC for review and comment. OSC’s written response is included in appendix I, and ARC’s written response is included in appendix II. OSC and ARC agreed with our recommendations. However, OSC suggested several wording changes to the report and expressed concern about the tone of the section on the sole-source order with MPRI. While we clarified our wording in several places, we did not make other changes suggested by OSC in its comment letter for the reasons discussed below. OSC recommended we add a paragraph that, in addition to making reference to our earlier report on case backlogs at OSC (which is discussed in the first paragraph of our current report), would make other points that are already addressed in our report. Thus, we did not include OSC’s suggested language. OSC pointed out that ARC, as the contracting office, did not question the sole-source justification and that, if it had done so, another approach could have been taken for the procurement. Our report already clearly reflects the fact that this was ARC’s responsibility and that ARC contracting personnel did not question the validity of the sole-source justification but, rather, relied on OSC’s rationale. OSC suggested we revise the wording in our report to state that program staff participated in negotiations with MPRI, rather than state that the Deputy Special Counsel negotiated the price with the company. Our discussions with OSC officials—including one with the Deputy himself— support our finding that the Deputy negotiated the final price with MPRI, and we have added the word “final” to make that clear. There is no evidence that ARC “set the final price,” as OSC suggests; rather, ARC issued a task order using the final price provided to it by OSC. OSC also took exception to our statements that the Deputy Special Counsel was responsible for approving MPRI’s contract execution plan and contract deliverables and suggested we change the wording to “Also, OSC program officials were included in the approval process for MPRI’s contract execution plan and contract deliverables.” Again, the evidence supports our finding as stated in the report. In fact, the contract’s statement of work names the Deputy as the contracting officer’s representative, as the official responsible for approving MPRI’s contract execution plan, and as the recipient of the contractor’s monthly reports. Further, the contract execution plan is addressed to the Deputy and it identifies him as the contracting officer’s representative. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the date of this letter. At that time, we will send copies of this report to OSC, the Bureau of the Public Debt, and interested parties. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. If you or your staff have questions about this report, please call me at (202) 512-9490. Key contributors to this report included Kimberly Gianopoulos, Karin Fangman, Sharon Hogan, Michele Mackin, and Adam Vodraska. | In January 2005, the U.S. Office of Special Counsel (OSC) implemented a plan, in part, to address a backlog of pending cases. This report discusses actions related to the development of this plan, including whether required practices and procedures were followed in contracting for the services of a management consulting company and in hiring an intermittent employee as a consultant. Also, the report identifies avenues of redress available to OSC employees for filing prohibited personnel practice allegations against OSC, and other redress options that could be made available. At OSC's request, the Administrative Resource Center (ARC), an office within the U.S. Department of the Treasury's Bureau of the Public Debt which provides OSC with contracting support for a fee, issued a $140,000 sole-source task order for an organizational assessment to a consulting firm, Military Professional Resources, Inc. (MPRI). In doing so, several required steps were not taken: competition was not sought among Schedule vendors and there was no convincing demonstration of why a sole-source order was necessary; the determination of the reasonableness of MPRI's price was not documented; and OSC officials performed duties normally done by contracting officer's representatives without authorization or training and, further, performed other duties that should have been reserved for the contracting officer. ARC officials told us they relied largely on OSC's input in justifying the sole-source order and determining MPRI's price to be reasonable and that they were unaware that the OSC officials had performed contracting-related duties. They told us that they are now paying particular attention to requests from their customers, including OSC, for sole-source orders. OSC officials said that they relied on ARC's expertise, as their contracting office, to ensure that proper contracting procedures were followed. The tasks specified in the statement of work for the consultant that OSC hired as an intermittent employee and that he completed before his departure were consistent with Office of Personnel Management criteria for appropriate uses of expert and consultant appointments. The intermittent employee was tasked with two major lines of work related to efficiency and curriculum development. OSC management expressed confidence in the individual's qualifications and was within its discretion to both hire him and set his level of compensation. While OSC employees, like other federal employees, are protected against prohibited personnel practices and may seek redress from OSC in making such allegations, this option becomes unworkable because of potential conflicts of interest when an OSC employee raises such an allegation of a prohibited personnel practice against either of the two top OSC officials. Two other federal agencies with redress roles, the Merit Systems Protection Board (MSPB) and the Equal Employment Opportunity Commission, have taken steps to address potential conflicts of interest when their own employees use their agency's respective redress processes. Steps could be taken to ensure that OSC employees have alternative avenues of recourse; for example, they could have an external investigation conducted through an independent body or broader appeal rights to the MSPB. OSC could not independently implement these options, and would need to be given authority to do so. |
VA’s mission is to promote the health, welfare, and dignity of all veterans in recognition of their service to the nation by ensuring they receive medical care, benefits, social support, and lasting memorials. Its three major components, the Veterans Benefits Administration (VBA), the Veterans Health Administration (VHA), and the National Cemetery Administration are primarily responsible for carrying out this mission. Over time, the use of information technology has become crucial to the department’s effort to provide benefits and services, with its budget for IT exceeding $1 billion annually. In reporting on VA’s IT management over the past several years, we have highlighted challenges the department has faced in achieving its “One VA” vision, including that information systems and services were highly decentralized and that its administrations controlled a majority of the IT budget. For example, according to an October 2005 memorandum from the former CIO to the Secretary of Veterans Affairs, the CIO had direct control over only 3 percent of the department’s IT budget and 6 percent of the department’s IT personnel. In addition, in the department’s fiscal year 2006 IT budget request, the Veterans Health Administration was identified to receive 88 percent of the requested funding, while the department was identified to receive only 4 percent. We have previously pointed out that, given the department’s large IT funding and decentralized management structure, it was crucial for the department CIO to ensure that well- established and integrated processes for leading, managing, and controlling investments were followed throughout the department. Further, a contractor’s assessment of VA’s IT organizational alignment, issued in February 2005, noted the lack of control for how and when money is spent. The assessment found that project managers within the administrations had the ability to shift money to support individual projects. Also, according to the assessment, the focus of department-level management was only on reporting expenditures to the Office of Management and Budget and Congress, rather than on managing these expenditures within the department. We have reported in the past on key factors that are needed in order to successfully transform an organization to be more results oriented, customer focused, and collaborative in nature. We reported that conducting large-scale change management initiatives are not simple endeavors and require the concentrated efforts of both leadership and employees to realize intended synergies and to accomplish new organizational goals. We also noted that there are a number of key practices that can serve as the basis for federal agencies to transform their cultures in response to governance challenges, such as those that an organization like VA might face when transforming to a centralized IT management structure. Among the significant factors we identified as critical for ensuring the success of VA’s move to centralized management are ensuring commitment from top leadership, establishing a governance structure to manage resources, linking the IT strategic plan to the organization strategic plan, using workforce strategic management to identify proper roles for all communicating change to all stakeholders, and dedicating an implementation team to manage change. VA’s plans for realigning the management of its IT program include elements of several of the six factors that we identified as critical to the department’s implementation of a centralized management structure (see table 1). Additional departmental actions could increase assurance that the realignment will be completed successfully. Without further action to fully address the factors we have identified, the risk to successfully centralizing the IT operations increases and the long-term benefits of the realignment may not be realized. It is important that an organization’s top leadership supports and sustains major change initiatives through to completion. We have testified that top leadership involvement for making management improvements is critical to overcoming an organization’s natural resistance to change, marshaling the resources needed to improve management, and building and maintaining organizationwide commitment to new ways of doing business. In addition, in reporting on the results of a forum to identify useful practices and lessons learned from major private- and public-sector organizational transformations, we noted that a key factor for successful organizational transformation was ensuring that top leadership drives the effort. The department has addressed this critical success factor through multiple actions. For example, in February 2007, the Secretary approved a new organization structure for centralized IT management. This structure was recommended by the realignment contractor following its review of the department’s strategic business objectives, existing organization structure, and business processes and will serve as the framework for organizing the IT workforce under the centralized model. The structure assigns roles and responsibilities for IT management that VA expects will provide the Office of Information and Technology leadership the organizational stature and credibility to deal effectively with the administrations on IT matters. Another example of the Secretary’s commitment to the realignment came through approval of the transfer of IT personnel to the Office of Information and Technology. Previously these personnel had been assigned to the administrations (e.g., VHA and VBA) and staff offices. The movement of these personnel should enable the CIO to improve control over IT development and operations in the department. A governance structure should ensure suitable stakeholder participation in the change initiative and reflect clearly defined stakeholder roles, responsibilities, and decision-making authority. When an organization is considering a major change initiative, it must ensure there is an established governance structure in place that provides for the effective use and oversight of resources during and after the change. According to VA’s independent verification and validation contractor, two critical aspects of governance are (1) the inclusion of relevant stakeholders in the development of any new processes resulting from the initiative and (2) holding these parties accountable for execution of their responsibilities throughout the entire life cycle of the initiative. We have reported that organizations need to establish a governance structure that represents the entire stakeholder community and reflects clearly defined roles, responsibilities, and decision-making authority among the different levels of leadership. VA has partially addressed this critical success factor. In particular, while the governance plan for centralized management has been approved by the Secretary, the department has not yet established boards necessary to provide governance over the centralized structure and processes that are being developed. One of these boards—the Business Needs and Investment Board—is to provide investment control for the department’s IT projects. According to VA officials, this board had not been established because some of the positions on the board had not yet been filled by permanent staff. In addition, the documentation that the department provided to us lacks detailed descriptions of how the new organization would support a completed, centralized IT governance process. Until the department establishes the elements needed to provide governance over its new IT structure and processes, the department cannot provide assurance that implementation of centralized management will be successful. Our November 2002 report noted that organizations attempting a transformation needed to establish a coherent mission with integrated strategic goals and align the transformed organization to support those goals. For example, if an organization’s strategic goal is top-quality medical care, IT strategic goals and the related transformation should be aligned to support that goal. An IT strategic plan should define, in cooperation with the relevant stakeholders, how IT will contribute to the enterprise’s strategic objectives and related costs and risks. Industry documentation further notes that planning helps ensure that leadership understands the link between an organization’s direction and how IT is aligned to meet the organization’s goals. According to this documentation, an organization and its strategies should be integrated, clearly linking enterprise goals and IT goals, and recognize opportunities as well as current limitations. Further, integration of enterprise and goals should be broadly communicated throughout the organization to ensure that all users and stakeholders have a clear sense of what the organization is attempting to accomplish. However, VA has not addressed this critical success factor because it has not yet updated an IT strategic plan to reflect the goals of the new centralized structure. According to department officials, a draft version of an updated IT strategic plan is expected to be completed by June 30, 2007. Additionally, this plan is expected to support the department’s strategic plan, which includes the goals of each of the department’s administrations. Until the IT strategic plan is updated, the department will have neither a clear link between the department’s strategic plan and the IT strategic plan nor assurance that the realignment will meet the goals in these plans. Workforce strategic management is necessary to ensure that an organization has the personnel resources capable of developing and delivering the services required of the organization. We have previously reported that success in major change initiatives is more likely when the best individuals are selected for each position based on their competencies rather than on where they work. That is, the new organization needs to avoid a situation where key personnel are selected on the basis of an understanding that each of the originating components gets its “turn” in the selection process. Such an approach not only undermines the quality of the selections but also raises questions about top leadership’s ability and commitment to creating a new, integrated organization. We have also reported that it is important to establish an organizationwide knowledge and skills inventory to exchange knowledge among transforming organizations. Valuable information resides in the organizational components of transformations, and when these components are combined, these intellectual assets are extremely powerful and beneficial to employees and stakeholders. Knowledge and skills inventories not only capture the intellectual assets of the new organization but also signal to employees that their particular expertise is valued by the organization. In addition, industry documentation notes that workforce strategic management should be supported by well-defined personnel competencies, staffing of appropriate roles, training, and related factors necessary for high performance. The department has taken steps to partially address this critical success factor. As stated previously, the department has aligned almost all of its IT workforce under the CIO, having transferred approximately 6,000 personnel from the administrations to the CIO’s office. In addition, the department has identified the responsibilities for workforce strategic management within its new organizational structure—the Assistant Secretary for Information Technology has responsibility for workforce planning; the Deputy Assistant Secretary for Information Technology Resource Management has responsibility for ensuring the alignment of IT workforce skills with IT goals and objectives; and the Human Resources and Training Management Office has responsibility for developing and executing the human capital plan that supports the IT strategy. Nonetheless, key tasks remain to be completed in order for this critical factor to be fully addressed. For example, department officials indicate that VA is currently assessing the roles and responsibilities of the approximately 6,000 staff that have been permanently assigned to the Office of Information and Technology, but the department has not yet established a knowledge and skills inventory to determine what skills are available in order to decide the proper roles for all employees within the new organization. Also, the department has not yet developed policies and procedures to centrally manage the IT personnel, assessed personnel requirements, defined training requirements, or created career and training paths and requirements for the personnel. Until the department completes these important tasks, the success of the realignment is at risk because IT personnel may be situated in inappropriate positions within the department or they may lack adequate training to fulfill their job requirements. Any major change initiative should be supported by an effective communication strategy that shares expectations, reports on progress, and articulates the mission, service objectives, and policies and procedures. Our 2002 report on transformations noted that such communication should reach out to employees, customers, and stakeholders, engaging them in a two-way exchange. Furthermore, communication should provide for feedback about progress and concerns from stakeholders that will result in meaningful improvement in the transformation. The department has partially addressed this critical factor for successful implementation of its new structure. In particular, VA has taken actions to improve communication for the realignment by addressing staff concerns. During our site visits to two VA medical centers, communication of realignment goals and activities had been a concern for IT staff. The staff at these locations reported they had difficulty communicating directly with VA headquarters staff responsible for the realignment to obtain responses to issues. In addition, the department’s realignment contractor reported in its survey of 167 VA facilities that 47 percent of VA facility staff wanted to see more information about the realignment and 23 percent of VA facility CIOs reported little opportunity for feedback from the VA field sites. In response to these concerns, the department distributed policy memoranda on changes resulting from the realignment and requested employee input on the realignment through a forum on the VA Web site. In addition, the department held conferences for Office of Information and Technology management and staff (which included sessions with the VA CIO) to communicate the goals and activities of the realignment. Nonetheless, further action could help ensure sustained communication throughout the realignment effort. Specifically, while the department has identified the Business Relationship Management Office as the single point of contact between the Office of Information and Technology and the administrations, it has not yet staffed this office. According to the department, it has concentrated its efforts to date on transferring staff to the CIO’s office and on creating a new organizational structure. However, the performance of the Business Relationship Management Office in communicating the needs of the administrations to the Office of Information and Technology will be critical to the success of the realignment. Until this office is fully staffed, VA increases the risk that communication across the department will be inadequate, jeopardizing user and stakeholder support for the initiative. We reported in 2003 that a dedicated implementation team that is responsible for the day-to-day management of a major change initiative is critical to ensure that the project receives the focused, full-time attention needed to be sustained and successful. Specifically, the implementation team is important to ensuring that various change initiatives are implemented in a coherent and integrated way. The team must have the necessary authority and resources to set priorities, make timely decisions, and move quickly to implement the transformation. In addition, the implementation team can assist in tracking implementation goals for a change initiative and identifying performance shortfalls or schedule slippages. It is important for the team to use performance metrics to provide a succinct and concrete statement of expected performance versus actual performance. Because of its close involvement with the change initiative, the implementation team can also suggest corrections to remedy any problems. The department has not addressed this critical success factor because it has not dedicated an implementation team to manage the realignment effort and track its progress. At the conclusion of our review, staff from the IT realignment office, which was responsible for overseeing the realignment, had been reassigned to other areas of responsibility within the department’s new structure. In addition, the Director of the Realignment Office told us that multiple offices will assume responsibility for managing the realignment through July 2008. For example, the Office of Quality and Performance Management will oversee process implementation across the Office of Information and Technology, and the Office of Oversight and Compliance Management will assess whether the department is complying with the new processes. However, there is no one entity currently responsible for managing the realignment. In addition, according to the Director of the Realignment Office, the department has developed performance metrics to measure progress on the implementation of the new management processes. However, metrics have not yet been developed to assess progress in implementing key milestones of the realignment. He noted that the department planned to develop performance metrics for tracking the progress of the realignment and that these metrics would be finalized by mid-June 2007. Also, the department expects to implement the new IT management processes incrementally by July 2008, but it has missed key implementation dates for these processes. Implementation of the first 9 of 36 processes was to begin in March 2007; however, as of early May 2007, the department had only begun pilot testing two of the new processes. With the dissolution of the IT Realignment Office in June, and the absence of any one entity currently dedicated for managing the realignment, it is less likely that VA will be able to ensure that the realignment is managed effectively throughout its implementation. Within VA’s new centralized management structure, the CIO is expected to be responsible for ensuring that there are fiscal controls over the department’s IT appropriation and for overseeing capital planning and execution. These responsibilities are consistent with the Clinger-Cohen Act of 1996, which requires federal agencies to develop processes for the selection, control, and evaluation of major systems initiatives. According to the department, it plans to establish the CIO’s control over the IT budget by (1) designating organizations with specific roles and responsibilities for controlling the budget to report directly to the CIO, (2) implementing an IT governance structure that assigns budget oversight responsibilities to specific governance boards, and (3) developing and implementing IT portfolio management and financial management processes in the new organization. While these measures show the potential for establishing the CIO’s control of the budget, the department has not yet fully implemented them; thus, their effectiveness in ensuring accountability for the budget has not yet been established. As one measure to establish CIO control within the new organization, two deputy assistant secretaries under the CIO are expected to have responsibility for managing and controlling different aspects of the IT budget. Specifically, the Deputy Assistant Secretary for IT Enterprise Strategy, Policy, and Programs is to have responsibility for the creation, implementation, and control of an integrated IT portfolio, and for the design, development, and implementation of a portfolio management process. In addition, the Deputy Assistant Secretary for Information Technology Resource Management is to have responsibility for managing budget execution and compliance, including tracking actual expenditures against the budget. However, as of May 2007, the deputy assistant secretary positions had been filled with acting officials, and department officials could not provide a date for when permanent appointees would be named to these positions. In addition, while these offices had been identified in the new organization structure, VA had not determined when personnel would be staffed to the offices and would assume their budget oversight responsibilities. Until these positions are filled with permanent appointees, the department cannot ensure their effectiveness in managing and controlling the IT budget. As a second measure, the IT governance plan, which was approved by the Secretary in April 2007, describes VA’s approach to enhancing governance, including management of the IT budget. The plan states that the decision to undertake IT investments requires adherence to the governance process to assure that investments align with the department’s strategic plan. In addition, it states that investment governance decisions should address how the department will program and budget resources against the IT business plan, meet customer demands, and allocate funding according to the needs and requirements of the administrations and staff offices. According to the plan, two governance boards are to have responsibility for overseeing the development and approval of the budget and monitoring budget execution: The Business Needs and Investment Board is to provide departmentwide investment control for the IT programs. Its responsibilities are to include reviewing investments, formulating and approving budgets, determining the source and amount of funding for IT projects, and monitoring budget execution. This board is to be chaired by the Principle Deputy Assistant Secretary of the Office of Information and Technology, and its membership is to include senior representatives of the administrations and staff offices, resource management offices, and selected IT service managers. The IT Leadership Board is to develop and approve the departmentwide IT budget based on information submitted to it by the Business Needs and Investment Board. This board is to be chaired by the CIO, and membership is to include key executive leaders in the Office of Information and Technology, administrations, and staff offices. In addition to these two governance boards, the Strategic Management Council is to be responsible for making decisions on the overall level of IT spending and priorities for the department and for approving budgets. The Strategic Management Council was in place prior to the realignment effort and the governance plan noted that it would be included as part of the governance structure. It is chaired by the Deputy Secretary, and its membership includes senior department leadership. As an example of the planned interaction between the boards, the Business Needs and Investment Board is to ensure that the administrations and staff offices’ requirements have been identified, documented, justified, scoped, planned, and prioritized and that funds have been allocated. This information is to be forwarded with all other prioritized requirements to the IT Leadership Board for review and endorsement and then sent on to the Strategic Management Council for departmentwide approval. As of early May 2007, however, VA officials stated that neither the Business Needs and Investment Board nor the IT Leadership Board had been established. VA officials also could not provide a date for when they would be set up. Until the governance boards are in place with the Strategic Management Council, the department will lack a complete governance model for the new organization. As a third measure to establish the CIO’s control over the IT budget, VA plans to implement processes that specifically address portfolio management and financial management. As noted earlier in this report, it is crucial for the CIO to ensure that well-established and integrated processes are in place for leading, managing, and controlling VA’s IT resources. These two processes represent how the CIO organization intends to carry out its responsibilities for the development and control of the budget. Specifically, the IT portfolio management process is to address how the CIO will manage the department’s investment portfolio to achieve strategic objectives and allocate funding. The process is to include steps VA will take to identify, select, initiate, manage, and control its projects. According to the realignment assistance contractor, implementation of this process should help VA make better investment decisions and gain better control over its projects. The financial management process, according to its charter, will address how the CIO organization plans to manage IT investment programs, address costs and benefits of investments, and provide a formal budgeting process for managing the IT portfolio against the budget. According to the realignment assistance contractor, implementation of this process should provide the CIO with accurate cost information to support IT investment decisions and justify expenditures, and enable this official to ensure that the Office of Information and Technology operates in a cost-effective manner by providing a sound basis for cost-benefit analyses. While the department had identified individuals who would be responsible for implementing these two processes, an official in the realignment office told us that the schedule for implementing the processes had not been established. The official stated that VA nonetheless expected to complete implementation of all management processes and meet the July 2008 target date for full implementation of the realignment. However, the absence of a schedule to implement these two processes increases the risk that they will not be implemented in a timely manner, thus reducing their effectiveness in contributing to improved IT budget accountability and oversight. The department has taken various actions that address several of the factors we identified as critical to its realignment, including establishing a new organizational structure, approving its governance plan, and transferring IT staff to the CIO’s authority. While these are positive steps, the department has much work to complete in order to ensure the success of its efforts. For example, the department has not yet developed detailed IT governance process descriptions to address the management of IT resources, established a knowledge and skills inventory to determine the proper roles for employees transferred to the new organization, or identified the personnel requirements, career paths, and training requirements for these employees. Further, the department has not fully staffed offices necessary for supporting the new structure, identified an implementation team that will be responsible for managing the change to the new management structure, or developed performance metrics to assess progress in implementing key milestones of the realignment. The department’s continued focus on ensuring that these important actions are taken is essential to successfully achieving and realizing the benefits of the realignment. While department officials and realignment documents identified three measures of the realignment that are to provide the CIO with control over the IT budget, VA has yet to identify how and when this control will be achieved. Specifically, the department has not yet staffed with permanent appointees the two deputy assistant secretary positions that will have responsibility for IT budget management and control, established the two governance boards that are to have IT budget oversight responsibility, or developed a schedule for implementation of the IT portfolio management and financial management processes. Without showing how and when such controls will be in place, it remains unclear if VA’s actions will result in optimizing its IT investment management process to provide the CIO with full control over the budget. To ensure that VA’s IT realignment is successfully accomplished, we recommend that the Secretary of Veterans Affairs direct the Chief Information Officer to take the following six actions: Develop detailed IT governance process descriptions that address how the department will manage IT resources within the centralized organization. Establish a knowledge and skills inventory to determine what skills are available in order to decide the proper roles for all employees transferred to the new organization. Assess personnel requirements under the centralized management model, including career paths and appropriate training requirements. Fully staff all offices necessary for supporting the new organizational structure. Dedicate an implementation team responsible for change management processes throughout the transformation to a centralized IT structure. Expedite the development of performance metrics to track the progress of the realignment. In addition, to ensure that centralized control of the IT budget is established, we recommend that the Secretary of Veterans Affairs direct the Chief Information Officer to take the following three actions: Establish milestones to permanently staff the deputy assistant secretary position for IT Enterprise Strategy, Policy, and Programs and the deputy assistant secretary position for IT Resource Management. Commit to a date for establishing the Business Needs and Investment Board and the IT Leadership Board. Establish a schedule for the implementation of the IT portfolio management and financial management processes. In providing written comments on a draft of this report, the Deputy Secretary of Veterans Affairs agreed with our findings and generally concurred with our recommendations. (The department’s comments are reproduced in app. II.) The comments described actions planned that respond to our recommendations: for example, developing and implementing an IT career management program that includes a knowledge and skills inventory for Office of Information and Technology employees, and fully implementing the IT governance plan by October 2007. In addition, the comments provided further information on the department’s actions taken since receiving our draft report, such as the establishment of the Business Needs and Investment Board that is a key component of the IT governance process; establishment of offices responsible for ensuring compliance with IT policies, directives and core IT processes; and filling a senior executive position in the Office of Information and Technology. If the actions that the department has planned to undertake are properly implemented, they should help ensure that the IT realignment is successfully accomplished. Although the department concurred with all our recommendations, it provided an alternative approach to dedicating an implementation team responsible for change management processes throughout the transformation to a centralized IT structure. Its written comments indicated that change management would be the responsibility of two organizations in the new structure. However, in our view, having a dedicated implementation team, responsible for day-to-day management of major change initiatives, is crucial to VA’s ability to ensure that the IT realignment is fully and successfully implemented in a coherent, integrated, and coordinated manner. The approach articulated in the department’s comments does not make clear how progress will be monitored, schedule slippages or shortfalls identified, and solutions to problems developed and implemented. Without having a dedicated implementation team, as we recommend, the department may increase the risk to the success of the realignment. We are sending copies of this report to the Chairman and Ranking Member of the Committee on Veterans’ Affairs, House of Representatives. We are also sending copies to the Secretary of Veterans Affairs 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 and your staff have any questions about this report, please contact me at (202) 512-6304 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report are listed in appendix III. To determine whether the Department of Veterans Affairs (VA) realignment plan includes critical factors for successful implementation of a centralized management approach, we obtained and analyzed realignment documents from VA, its realignment contractor, and the independent verification and validation (IV&V) contractor. These documents included the realignment contract request for quotes and memorandums signed by the Secretary and Deputy Secretary relating to approval of the permanent assignment of operations and maintenance and development staff to the Office of Information and Technology. The documents also included the establishment of the VA single information technology (IT) leadership authority. We also obtained and analyzed the realignment contractor’s performance work statement, which detailed the work the contractor was to perform. In addition, we reviewed other contractor deliverables, such as process charters for the new IT management processes, the “to be” organization structure transition plan, and the transition management plan. VA also provided IV&V contractor documents that assessed each of the realignment contract deliverables. We reviewed these documents to identify problems and concerns raised by the IV&V contractor. To identify factors critical to the success of the centralization effort, we reviewed GAO products relevant to organizational transformation. We also reviewed industry best practices documentation, such as the IT Governance Institute’s Control Objectives for Information and related Technology 4.0, to identify industry standard success factors for IT organizations. To validate the success factors, we met with IV&V contractor officials to elicit their input on the relevance and soundness of factors we identified for consideration in our assessment of the realignment effort. IV&V contractor officials concurred that the factors we developed are critical to VA’s successful IT realignment. In addition, we compared documents obtained from VA and realignment contractor officials against these factors to determine the level to which the critical success factors were included. We also conducted monthly meetings with the VA realignment team and the realignment contractor to determine whether these critical success factors were being considered in the implementation of the realignment. We visited the VA medical center and a benefits administration office in Baltimore and a VA medical center in Philadelphia to become familiar with the methodology that the realignment contractor was using to assess VA’s readiness for the realignment. We observed teams from the realignment contractor as they gathered information that would be used to create a baseline of IT activities and a transition plan for the department. We selected these locations due to the schedule availability of the department and the contractor and because they are representative of VA facilities. To determine how the centralized management approach will ensure that the CIO is accountable for VA’s entire IT budget, including those funds that previously had been administered by its administrations, we reviewed VA and realignment contractor documentation and plans that specifically address IT budget oversight and execution under the realignment. These documents included roles and responsibilities for those VA organizations listed in the single IT leadership organization structure that are to have responsibility for IT portfolio and financial management, the IT Governance Plan, and the IT Portfolio Management and Financial Management Process Design and Implementation Plans. To supplement our analysis, we met with officials in VA’s Office of Information and Technology who are responsible for managing and executing the IT budget. We conducted our work in VA offices in Washington, D.C., and at VA facilities in Baltimore and Philadelphia from June 2006 through May 2007 in accordance with generally accepted government auditing standards. In addition to the contact named above, major contributors to this report were Barbara Oliver, Assistant Director; Nabajyoti Barkakati; Jacki Bauer; Neil Doherty; Nancy Glover; B. Scott Pettis; J. Michael Resser; and Eric Trout. | The Department of Veterans Affairs (VA) spends nearly $1 billion yearly to support its information technology (IT) needs; yet it has encountered persistent challenges in managing IT projects. In October 2005, VA initiated a realignment to centralize its IT management program that it plans to complete by July 2008. GAO was requested to determine (1) whether the department's realignment plan includes critical factors for successful implementation and (2) how the centralized management approach is to ensure that the chief information officer (CIO) is accountable for the department's entire IT budget. To do so, GAO identified critical success factors, analyzed realignment and budget documents, and held discussions with VA officials. VA's plans for realigning the management of its IT program include elements of several factors that GAO identified as critical to the department's implementation of a centralized structure; additional departmental actions could increase assurance that the realignment will be completed successfully. Since undertaking the realignment, VA has concentrated its efforts on transferring approximately 6,000 staff to the CIO's authority and on creating a new organizational structure. It has also taken certain actions to establish an IT governance plan, identify workforce management responsibilities, and increase communication about the realignment with staff. However, it has not yet created a knowledge and skills inventory to help determine proper roles for all employees in the new organization, established governance boards to manage resources, or dedicated an implementation team to manage change and track the progress of the realignment with performance metrics. As a result, the department risks jeopardizing the success of its efforts and may not realize the long-term benefits of the realignment. Within the new structure, the CIO is to have responsibility for ensuring that there are fiscal controls over the IT appropriation and for overseeing capital planning processes, budget execution, and financial management programs. According to the department, it plans to establish the CIO's control by (1) designating organizations with specific roles and responsibilities for controlling the budget to report directly to the CIO; (2) implementing a governance structure that assigns budget oversight responsibilities to specific governance boards; and (3) developing and implementing IT portfolio management and financial management processes. While these measures show the potential for establishing control of the budget, VA has not yet fully implemented them or committed to a time frame for doing so. Thus, their effectiveness in ensuring the CIO's accountability for the budget has not yet been established. |
The issues raised in this report relate directly to weaknesses in the Navy’s funds control system that result in its inability to ensure that it has not incurred obligations in excess of available budget authority. As the Supreme Court has made clear over the years, the Appropriations Clause of the U.S. Constitution, often referred to as the congressional “power of the purse,” reflects a fundamental proposition that a federal agency is dependent upon the Congress for its funding. “The established rule is that the expenditure of public funds is proper only when authorized by Congress, not that public funds may be expended unless prohibited by Congress.” By appropriating budget authority to an agency, the Congress makes public funds available to the agency for obligation and expenditure. The Antideficiency Act is one of a number of statutes enacted by the Congress to protect its prerogative over the public purse. It provides that an officer or employee of the United States government may not “make or authorize an expenditure or obligation exceeding an amount available in an appropriation or fund for the expenditure or obligation,” or enter into a contract or other obligation for the payment of money “before an appropriation is made.” It further requires that the head of each executive agency prescribe a system of administrative control to restrict obligations and expenditures to amounts available. In addition, the Federal Managers’ Financial Integrity Act requires that agencies’ controls reasonably ensure that obligations and costs comply with applicable law and revenues and expenditures applicable to agency operations are recorded and accounted for properly so that accounts and reliable financial and statistical reports may be prepared and accountability of assets may be maintained. Proper obligation and expenditure recording practices are essential to sound funds control and compliance with the Antideficiency Act. Obligations include amounts of legal liability incurred, for example, when contracts are awarded or orders placed, even though the agency may not receive goods or make payment until some future period of time. Expenditures include such transactions as the issuance of a check, either in paper or electronic form, or the disbursement of cash to pay an obligation incurred. To ensure sound funds control and compliance with the act, an agency’s funds control system must record obligation and expenditure transactions as they occur. An agency may not avoid the requirements of the act, including the reporting requirements discussed below, by failing to record obligations or expenditures. Whenever an agency discovers evidence of a possible overobligation or overexpenditure, it must investigate that evidence. If the investigation shows that the appropriation, in fact, is overobligated or overexpended, the Antideficiency Act requires reporting the overobligation or overexpenditure to the President and the Congress. Office of Management and Budget (OMB) Circular A-34, Instructions on Budget Execution, which provides funds control implementation guidance, requires agencies to include in such reports the primary reason for the violation, a statement of any circumstances the agency believes to be extenuating, a statement of the adequacy of the agency’s funds control system and whether the head of the agency determines a need for changes in the system, and a statement of any action taken by the head of the agency to prevent recurrence of the same type of violation. The act applies to expired and canceled appropriations, the types of appropriations at issue in this report, as well as current appropriations. At the end of the period of availability of a fixed-year appropriation, the appropriation expires and for the next 5 fiscal years is available only for recording, adjusting, and liquidating obligations properly chargeable to that appropriation. However, an agency may not charge new obligations to an expired appropriation. For example, an agency using a fiscal year appropriation entered into a contract in fiscal year 1998. In fiscal year 1999, it incurs increased costs due to changes in specifications that fall within the contract’s scope of work. The agency must obligate the increased costs of this contract modification against the fiscal year 1998 expired appropriation. If an adjustment to an obligation properly chargeable to an expired appropriation exceeds the remaining unobligated balance of the expired appropriation, the agency has violated the Antideficiency Act. The agency could also violate the act if, in liquidating an obligation, the agency were to exceed the remaining unexpended balance of the expired appropriation. At the end of this 5-year period, the appropriation is closed and any remaining balance, whether obligated or unobligated, is canceled. What this means is that the appropriation is no longer available for any obligation, obligation adjustment, or expenditure at all. Obligation adjustments and liquidations (expenditures) that an agency would otherwise have charged against the expired appropriation are, at this point in time, chargeable against a current appropriation available for the same purpose, but only to the extent of the lesser of 1 percent of the current appropriation or unexpended balance of the expired appropriation. Any overobligation or overexpenditure of this amount constitutes a violation of the Antideficiency Act. The Navy’s payment and accounting processes are generally separate functions carried out by separate offices in different locations. Under the Navy’s processes, the accounting for a payment occurs after the payment has been made. The Navy’s payments are made either by DFAS disbursing stations aligned with the Navy or other disbursing stations on behalf of the Navy, such as those aligned with the Army or the Air Force. The disbursing stations then transmit documentation supporting the payment transactions to the DFAS accounting stations to match and record Navy payments to the corresponding obligations. Problem disbursements arise when the accounting stations are not provided the documentation that permits this matching in a timely manner. To resolve problem in-transit disbursements, DFAS and the Navy must locate accurate, detailed accounting data for each in-transit disbursement (including, for example, a contract, travel order, or other authorizing document number, and information on the cognizant organization and program) necessary to match these transactions to the corresponding obligation recorded in the accounting system and verify that the correct appropriation was charged. According to DOD’s problem disbursement policy, when DFAS or the Navy determine that a corresponding obligation was not recorded or it cannot be identified, the Navy must adjust its accounting records by directing DFAS to record an obligation to support the disbursement. The objective of this review was to assess the funds control and financial reporting implications of the Navy’s long-standing inability to record obligations and expenditures to properly resolve in-transit transactions. To complete this work, we reviewed DOD funds control regulations and Navy funds control policies reviewed DOD Comptroller policy for researching and correcting problem disbursements, including in-transit transactions, issued between June 1995 and December 1996. To obtain an understanding of the December 1996 policy revision, which extended the time frame for recording overobligations, we reviewed Navy’s December 4, 1996, briefing document to the DOD Comptroller, which identified potential overobligations under the then existing problem disbursement policy. We discussed with DOD, DFAS, and Navy officials limitations on the Navy’s ability to research and correct problem in-transits, which resulted in the request for the policy change, and reviewed Navy and DFAS records on disbursements and collections not yet recorded in the Navy’s accounting system, including in-transit transactions recorded in DFAS’ problem disbursement database, and the Navy’s cuff records—separately prepared spreadsheets that are not reflected in the Navy’s accounting system. Navy’s cuff records identify the amount of obligations that the Navy would need to record to resolve problem disbursements and provide evidence of potential overobligations. We also reviewed the Navy’s SF-133, Reports on Budget Execution, and its FMS-2108, Year End Closing Statement, on appropriation balances. We discussed this information with Navy and DFAS officials, respectively. The data in this report are based on Navy and DFAS records. We did not independently verify or audit the accuracy of these data. We performed our work from March 1997 to June 1998 in accordance with generally accepted government auditing standards at DFAS Cleveland and operating locations in Charleston, South Carolina; Norfolk, Virginia; San Diego, California; and the Navy’s Financial Management Office in Washington, D.C. We requested written comments on a draft of this report from the Under Secretary of Defense (Comptroller). These comments are presented and evaluated in the “Agency Comments and Our Evaluation” section and are reprinted in appendix III. The Navy’s funds control policies and procedures do not ensure that the Navy can match payments to corresponding obligations before or at the time a payment is made. This has resulted in problem disbursements and the need for the Navy, after a payment has been made, to match the disbursement to an obligation or to record an obligation to cover the disbursement. In May 1997 testimony, the Under Secretary of Defense (Comptroller) stated that DOD “has confidence in its existing budgetary accounting systems to control and account for funds provided to DOD through the Congressional appropriation process. Those systems successfully support the budgetary process, generally have adequate funds control processes, and satisfy requirements for appropriation balances and availability.” However, our findings in this report illustrate that significant breakdowns in funds control have resulted in the Navy’s problems in promptly resolving its in-transit transactions and maintaining accurate and reliable appropriation balances. In addition, these problems have a major effect on the accuracy and reliability of the Navy’s financial reporting, including its annual financial statements required under the CFO Act. We found evidence that as of September 30, 1997, the Navy may have overobligated 29 canceled and expired appropriations totaling $290 million. The Navy’s obligation records for nine canceled appropriations, as of September 30, 1997, show that these appropriations may be overobligated. In addition, cuff records (separately prepared spreadsheets that are not reflected in the Navy’s accounting system) evidence possible overobligations in 20 expired appropriations. The potential overobligations shown in the records of the 9 canceled appropriations and the potential overobligations identified in the cuff records for the 20 expired appropriations reflect the results of the Navy’s efforts to research and resolve problem in-transit disbursements. The DOD Comptroller has issued policy guidance on researching and resolving problem disbursement transactions and investigating potential overobligations that may result. The Navy defines problem in-transits as disbursements that DFAS accounting stations have matched to a Navy appropriation, reducing the appropriation’s unexpended balance, but have not been able to match to a recorded obligation of that appropriation within 120 days from the date of the transaction. The DOD Comptroller’s initial June 1995 policy required DFAS to (1) research in-transit disbursements within 180 days of their designation as a problem disbursement (allowing a total of 300 days to match disbursements to obligations) and (2) if unable to match a problem disbursement to an obligation within 180 days, record an obligation or an obligation adjustment (an increase or decrease to an existing obligation). The policy also set minimum research requirements and established criteria for discontinuing research when there is no reasonable expectation that supporting documentation can be located. According to DOD’s funds control regulations, if evidence of a potential Antideficiency Act violation is found, an investigation is to be initiated. The regulations state that this investigation consists of a preliminary review to gather basic facts about a potential violation to determine whether a formal investigation is warranted. The preliminary review would include, for example, checking for duplicate transactions. If the preliminary review determines that there is a potential violation of the act, a formal investigation is to be initiated. The formal investigation is to encompass a review of all activity within the appropriation to determine if a violation of the act has, in fact, occurred. DOD’s problem disbursement policy was revised on at least two occasions, permitting the Navy to delay recording and investigating potential overobligations that may result in Antideficiency Act violations. The October 1996 policy revision directed that (1) obligations resulting from actions to resolve problem disbursements be recorded in an appropriation only up to the amount of that appropriation’s unobligated balance, (2) if, during the 5-year expired phase, obligational authority becomes available, record obligations for problem disbursements before recording any program obligational adjustments, and (3) record any remaining obligations when the appropriation cancels—5 years after the appropriation expires. Thus, this policy provided that recording obligations for problem disbursements would take priority over recording program obligational adjustments. This policy also suspended the requirement to conduct investigations of potential Antideficiency Act violations caused by recording problem disbursements until 6 months after the appropriation canceled. Under DOD’s funds control regulations, obligations are to be recorded at the time they occur and Antideficiency Act investigations are to be initiated when there is evidence that a violation may have occurred. However, under the October 1996 policy revision, the Navy was not required to record obligations needed to cover problem disbursements on an ongoing and current basis if recording the obligation would cause the appropriation to be potentially overobligated. This policy runs counter to the funds control objectives of the Antideficiency Act. In response to a briefing from Navy financial managers, the DOD Comptroller revised the problem disbursement policy again on December 16, 1996, to avoid the negative impact on appropriations that affect the Navy’s readiness resulting from recording obligations to resolve problem in-transit disbursements. For example, the December policy change allowed program obligational adjustments to be recorded to appropriations, eliminating the requirement to record, on a priority basis, obligations to resolve problem in-transit disbursements. Under this policy revision, the Navy is not required to establish obligations to resolve problem in-transits that cannot be matched to an existing obligation in a current or expired appropriation until June 30 of the fiscal year in which the cited appropriation account is scheduled to cancel—in other words, about 90 days short of 5 years after the appropriation has expired. This can amount to a total of about 8 years after the original disbursement transaction occurred in those cases where an appropriation covered 3 fiscal years. Of the 29 potentially overobligated appropriations, 8 appropriations covered at least 3 fiscal years. In the December 1996 briefing, the Navy requested that the DOD Comptroller revise the obligation requirement for in-transits because the Navy’s ability to resolve them was limited. The briefing document noted the number of overobligated appropriations that the Navy would have to investigate and report if it complied with the 180-day policy for recording obligations to resolve problem in-transit disbursements. We identified evidence of overobligations in the nine canceled appropriations through discussions with Navy financial management officials on the Navy’s implementation of the DOD Comptroller’s problem disbursement policy. We reviewed Navy journal vouchers (documentation of transactions) used to record these obligations. The Navy’s obligation records for these nine canceled appropriations, as of September 30, 1997, show that the appropriations may have obligations in excess of available budget authority. Appendix I contains a list of the nine canceled appropriations and the amounts by which the Navy may have obligations in excess of available budget authority. We also identified evidence of overobligations in the 20 expired appropriations through discussions with Navy financial management officials on the reasons why the DOD Comptroller policy was revised to extend the period for recording obligations needed to resolve problem in-transits. Navy officials showed us cuff records identifying obligations that the Navy’s research indicated are necessary to resolve problem in-transit disbursements in these 20 appropriations. The Navy uses these cuff records to track obligations that it concludes are necessary to resolve problem disbursements. The data on these spreadsheets are not reflected in the Navy’s accounting system. Navy officials told us that they had not recorded these obligations against the appropriations because they were not required to do so by the DOD Comptroller’s December 16, 1996, policy for resolving problem disbursements. However, if the obligations shown in the cuff records were recorded in the Navy’s accounting system, the obligation records for these 20 expired appropriations, like the records for the 9 canceled appropriations, would show that these appropriations also may have obligations in excess of available budget authority. Appendix II contains a list of the 20 expired appropriations and the amounts by which the cuff records show that these appropriation accounts may have obligations in excess of available budget authority as of September 30, 1997. As stated earlier, DOD’s current policy, as revised on December 16, 1996, does not require the Navy to record these obligations in its accounting system until 3 months before the appropriation is scheduled to cancel. Navy officials also stated that while available evidence as of September 30, 1997, may show that the 29 appropriations appear overobligated, they do not believe them to actually be overobligated. They indicated that an Antideficiency Act investigation of each appropriation could result in identifying (1) other disbursements recorded incorrectly against the appropriation, (2) obligations that are no longer valid and can be deobligated, or (3) other accounting errors that would, when corrected, reduce recorded obligations, leaving funds available to permit recording of these disbursement transactions without incurring an overobligation. The officials also stated that “historical trends” suggest that over a period of time, as a result of ordinary business operations, the Navy will be able to deobligate previously recorded obligations. Navy officials told us that they had completed all research of the problem in-transit disbursements that resulted in the obligations recorded in the 9 canceled appropriations and identified in the cuff records for the 20 expired appropriations. As of the completion of our review, the Navy had not initiated an Antideficiency Act investigation of any of these 29 appropriations. An agency may not avoid the requirements of the act, including its reporting requirements, by failing to record obligations or to investigate potential violations. Also, the Navy cannot rely on the possibility that over the course of time, as a result of ordinary business activity, these potential overobligations will be resolved. Moreover, the Navy has no assurance on an ongoing basis that it has sufficient budget authority to cover adjustments to other obligations incurred during the normal course of business and properly chargeable to these appropriations, as discussed previously. Further, an agency may not establish a policy to avoid proper funds control and the consequences of the Antideficiency Act. The DOD Comptroller’s current policy, permitting the Navy to delay recording obligations for problem in-transits for 5 years or more, runs counter to the funds control objectives of the Antideficiency Act. It allows the Navy to ignore evidence of potential overobligations, and delay for over 5 years required Antideficiency Act investigations and any resulting reports to the Congress and the President, limiting their ability to maintain oversight. In addition, DOD’s current problem disbursement policy, which states that an investigation be initiated for potential Antideficiency Act violations that have not been resolved within 6 months after the appropriation cancels, would apply to the nine canceled accounts, although DOD did not ensure that the policy was followed. The Navy’s ongoing problems in properly and promptly recording its transactions also affect the reliability of its financial reporting, including its annual financial statements. For example, these unrecorded transactions particularly affect the Statement of Net Cost and the Statement of Budgetary Resources. Until transactions are recorded accurately and in a timely manner and reflected in these financial statements, the Navy and DOD will remain unable to achieve the goal of producing reliable financial statements. The Statement of Net Cost is intended to provide information on an agency’s cost of operations and would generally be derived from cost accounting information. However, because the Navy and DOD lack appropriate cost accounting systems, they use obligation and expenditure data to calculate costs. The reliability of this information is impaired not only because obligation data do not represent actual cost, but also because the Navy’s obligation data are unreliable, as evidenced by the delay in recording in-transit transactions and the potential overobligations discussed in this report. This factor further limits the reliability of the Statement of Net Cost. The Statement of Budgetary Resources is required for federal agencies beginning with fiscal year 1998. The purpose of the Statement of Budgetary Resources is to have audited budget information, which is reconciled to the Statement of Net Cost. This statement is intended to provide information on the type of resources used to fund the operation of the agency, as well as the year-end status of those funds. The required supplementary information to support this statement includes information by appropriation on obligations and expenditures for the period. Therefore, inaccurate and incomplete information on expenditures and obligations directly affects the reliability of this statement. Until the Navy corrects the fundamental deficiencies in its system of funds control to allow for accurate recording of its transactions on an ongoing and current basis, its ability to produce accurate information on the status of its obligations and expenditures will continue to be severely compromised. As evidenced by the 29 potentially overobligated expired and canceled appropriations discussed in this report, the Navy’s failure to adequately and timely account for disbursements against recorded obligations impairs its ability to ensure, in accordance with the Antideficiency Act’s funds control requirements, that on an ongoing basis, obligations and disbursements do not exceed the budget authority made available by the Congress. The DOD Comptroller’s current policy, permitting the Navy to delay recording obligations for problem in-transits for 5 years or longer, runs counter to the funds control objectives of the Antideficiency Act. It allows the Navy to ignore evidence of potential overobligations, and delay for almost 5 years required Antideficiency Act investigations and any resulting reports to the Congress and the President. DOD may not avoid the requirements of the act by failing to record obligations or expenditures and to investigate evidence of overobligations or overexpenditures. To do so affects not only DOD’s ability to maintain funds control, but also limits the effectiveness of congressional oversight. Incomplete and inaccurate information on the Navy’s transactions also affects the reliability of its financial information used for financial reporting, including its annual financial statements, a mechanism for oversight by the Congress and the public. We recommend that the DOD Comptroller revise the problem disbursement policies and procedures to ensure that the Navy’s funds control system maintains, on an ongoing and current basis, accurate and reliable unobligated and unexpended balances for the Navy’s expired and canceled appropriations consistent with the Antideficiency Act and requirements for accurate and timely financial reporting. The DOD Comptroller should also monitor compliance with the revised policies and procedures. We also recommend that the Navy’s Assistant Secretary (Financial Management and Comptroller) in concert with DFAS record obligations in the Navy’s official accounting and funds control records for the 20 expired appropriations identified in the Navy’s cuff records, immediately investigate any of the 9 canceled appropriations and the 20 expired appropriations that are potentially overobligated, and report any overobligations to the Congress and the President pursuant to the Antideficiency Act and implementing guidance in OMB Circular A-34. In written comments on a draft of this report, DOD indicated that it recognized and concurred with the intent of our recommendations. DOD stated that it has implemented various policies and procedures intended to ensure that the funds control systems of each of the DOD components maintain accurate unobligated and unexpended balances and comply with the Antideficiency Act. DOD also stated that we did not validate and should not have relied on the Navy’s cuff records to identify potential overobligations because (1) the Navy advised the Under Secretary of Defense (Comptroller) that its cuff records may not accurately reflect amounts that should be properly recorded in the applicable Navy accounts and (2) even if the obligations were recorded, a number of the accounts addressed in our report would show a positive balance, and it would be premature to conduct Antideficiency Act investigations based on these cuff records. We disagree with DOD’s and the Navy’s assertions. DOD’s problem disbursement policy allows DOD agencies, including the Navy, to undermine the funds control objectives of the Antideficiency Act and OMB guidance. As stated in our report, DOD’s policy inappropriately allows the Navy to ignore evidence of potential overobligations for almost 5 years, and to maintain inaccurate and unreliable appropriation balances during that period of time. Further, DOD’s comments ignore the basis for our finding that obligations recorded in the Navy’s cuff records should be recorded in the Navy’s official accounting records. The level and quality of research supporting amounts in the cuff records is no different from the research supporting amounts that the Navy has already recorded in the official obligation records to resolve other problem in-transit disbursement transactions. The obligations recorded in the Navy’s cuff records are a direct result of extensive, multiyear DFAS and Navy efforts to research and resolve the Navy’s problem in-transit disbursement transactions. When this research fails to identify a corresponding obligation, the Navy will record an obligation in its official records, but only up to the amount of the appropriations’ remaining unobligated budget authority. According to Navy officials, an amount is recorded in cuff records when official accounting records show insufficient unobligated budget authority to cover the obligation. The only reason that the Navy records these amounts in cuff records rather than in its official accounting records is that DOD policy permits delayed recording of the amounts in the official accounting records where such recording would show the related appropriations to be overobligated. Because the same level and quality of research supports obligations that the Navy records in both its official records and the cuff records, the cuff records represent affirmative evidence of possible overobligations. The Navy, by its own admission, would have recorded these amounts in its official records had there been sufficient unobligated budget authority to cover these obligations. As recommended in our report, the Navy should record these amounts and, without further delay, begin investigations of this evidence. Although DOD and the Navy now assert that the cuff records are unreliable, both have used the cuff records as evidence of possible overobligations. As discussed in our report, the Navy offered, and the DOD Comptroller accepted, the Navy’s cuff records as evidence of overobligations in 29 Navy appropriations if the Navy were to record such obligations as required by DOD’s previous problem disbursement policy. As a result, the DOD Comptroller revised this policy to extend the time frame for recording such obligations for nearly 5 years. Moreover, pursuant to the revised policy, the Navy used these same records as sufficient evidence of the amount of obligations they needed to record in its official records for the nine canceled appropriation accounts listed in appendix I to this report. DOD also suggested that the Navy’s cuff records should be reviewed further. DOD stated that preliminary reviews conducted by the Navy indicate that the cuff records may not accurately reflect the amount of obligations that should be recorded in some of the appropriation accounts in question. However, DOD did not provide documentation to support this assertion. We are concerned that DOD’s comments represent a further attempt to avoid the requirements of the Antideficiency Act and, at the very least, underscore DOD’s serious difficulties in resolving its problem disbursements and maintaining accurate, reliable accounting records. Moreover, unless DOD establishes accurate and current appropriation balances by recording transactions when they occur, it will be difficult, if not impossible, for DOD to effectively monitor and report on the use of resources provided by the Congress. DOD also stated, but offered no documentation, that even if the Navy recorded cuff record amounts in its official records, a number of the appropriations would show a positive balance. Although DOD stated that it would be premature, for this reason, to conduct an Antideficiency Act investigation, it suggested a review of the transactions in the cuff records and those in the Navy’s official records. We agree that the Navy should investigate the account balance of any potentially overobligated appropriations, as recommended in our report. This sort of investigation could result in identifying (1) other disbursements recorded incorrectly against the appropriation, (2) obligations that are no longer valid and can be deobligated, or (3) other accounting errors that would, when corrected, reduce recorded obligations, leaving funds available to permit recording of these disbursement transactions without incurring an overobligation. As we recommended, the Navy should report any overobligations found as a result of such an investigation to the Congress and the President pursuant to the Antideficiency Act and implementing guidance in OMB Circular A-34. This report contains recommendations to the Under Secretary of Defense (Comptroller) and the Assistant Secretary of the Navy (Financial Management and Comptroller). Within 60 days of the date of this letter, we would appreciate receiving written statements on actions taken to address these recommendations. We are sending copies of this letter to the Chairmen and Ranking Minority Members of the Senate Committee on Armed Services, the House Committee on National Security, the Senate Committee on Governmental Affairs, the House Committee on Government Reform and Oversight, the House and Senate Committees on Appropriations and the Director of the Office of Management of Budget. We are also sending copies to the Secretary of Defense and the Secretary of the Navy. Copies will also be made available to others upon request. Please contact me at (202) 512-9095 if you or your staffs have any questions on this report. Major contributors to this report are listed in appendix IV. The following are GAO’s comments on the Department of Defense’s letter dated November 24, 1998. 1. DOD’s problems resulting from its outdated finance and accounting systems are long-standing. However, DOD’s inability to match disbursement transactions to obligations at the time a payment is made is not a temporary situation as DOD’s comments have indicated. As discussed in our report, some of the unmatched transactions represented by the Navy’s cuff records are at least 8 years old. 2. We recognize that DOD has made progress in addressing problem disbursements. However, as stated in our May 1997 report, DOD cannot ensure accurate and consistent reporting. For example, our testing of problem disbursement amounts reported by DOD as of May 31, 1996, showed that the $18 billion reported by DOD was understated by at least $25 billion. We reported that DOD significantly understates the magnitude of its problem disbursements by (1) netting positive and negative amounts that result from disbursements, collections, reimbursements, or adjustments and (2) excluding certain transactions. DOD continues to understate the magnitude of its problem disbursements by reporting net amounts. For example, DOD’s April 1998 testimony on financial management, indicated that as of January 31, 1998, DOD’s problem disbursements totaled $14.3 billion, including in-transits, when, in fact, the absolute value of DOD’s problem disbursements would have totaled $22.6 billion, if positive and negative amounts had not been used to offset one another. 3. DOD stated that it requires its component agencies to research and resolve problem disbursements and to record obligations for those disbursements that are not matched to a corresponding obligation within specified time frames. A fundamental premise of funds control accounting is that an agency records its obligations at the time incurred and disburses funds based on an obligation to pay. The 5-year time frame allowed by DOD’s policy for recording obligations to resolve problem in-transit disbursements undermines fund control accounting. DOD stated that its policy requires review and confirmation of the accuracy, completeness, and timeliness of commitment and obligation transactions at least three times a year. According to DOD officials, DOD’s requirement for a triannual review of obligations was implemented about 3 years ago. These reviews do not retroactively cover prior obligations, and they do not cover the obligations recorded in the Navy’s cuff records. Regardless, the Navy’s failure to record all known obligations impairs the effectiveness of DOD’s triannual review of obligations as a funds control mechanism. 4. The statements and recommendations in our report are consistent with our past position on potential Antideficiency Act violations. When our audits have identified potential overobligations or overexpenditures, we have recommended that DOD investigate the transactions and report any resulting overobligations and/or overexpenditures to the President and the Congress pursuant to the act.5. We appropriately consider the obligations in the Navy’s cuff records to be affirmative evidence of potential overobligations. The particular Navy cuff records that we discuss in this report represent the Department of the Navy’s determination, after an extensive, multiyear research effort, of the obligations that need to be recorded in the Navy’s accounting system to match in-transit disbursement transactions that have already occurred. As discussed in this report, DOD and Navy officials told us that all research to identify existing obligations for the transactions represented by the cuff records has been performed. The only reason that these obligations have not been recorded in the Navy’s accounting system is that DOD policy permits the Navy to delay such recording for almost 5 years if recording the amounts in official records would indicate potential overobligations that would need to be investigated pursuant to OMB’s funds control guidance and the Antideficiency Act. Although DOD and the Navy now assert that the cuff records are unreliable, both have used the cuff records as evidence of possible overobligations. As discussed in our report, the Navy and the DOD Comptroller accepted the Navy’s cuff records as evidence of overobligations in 29 Navy appropriations if the Navy were to record such obligations as required by DOD’s previous problem disbursement policy. As a result, the DOD Comptroller revised this policy to extend the time frame for recording such obligations for nearly 5 years. Moreover, pursuant to the revised policy, Navy officials used these same records as sufficient evidence of the amount of obligations they needed to record in the Navy’s official records for the nine canceled appropriation accounts listed in appendix I of this report. 6. DOD stated, but offered no documentary support, that even if the Navy recorded cuff record amounts in its official records, a number of the appropriations would show a positive balance. Although DOD asserted that it would be premature, for this reason, to conduct an Antideficiency Act investigation, it suggested a review of the transactions in the cuff records and those in the Navy’s official records. We agree, and recommended in our report, that the Navy should undertake an investigation to accurately establish the balances in the 29 appropriations discussed in our report. As explained in our report, this sort of investigation could result in identifying (1) other disbursements recorded incorrectly against the appropriation, (2) obligations that are no longer valid and can be deobligated, or (3) other accounting errors that would, when corrected, reduce recorded obligations, leaving funds available to permit recording of these disbursement transactions without incurring an overobligation. As we recommended, the Navy should report any overobligations found as a result of such an investigation to the Congress and the President pursuant to the Antideficiency Act and implementing guidance in OMB Circular A-34. 7. We disagree with DOD’s position that it has implemented procedures intended to ensure adequate funds controls and compliance with the Antideficiency Act. Current policies and procedures permit the Navy to delay for about 5 years (1) the recording of obligations needed to support payments already made, (2) avoid the initiation of Antideficiency Act investigations of any potential violations, and (3) any resulting reports of violations to the Congress and the President. During this time, the Navy’s appropriation balances are unreliable, leaving DOD and the Congress without assurance that the Navy has not incurred obligations in excess of available budget authority. Based on the findings in our report, we have recommended that DOD revise its problem disbursement policies and procedures to ensure that the Navy’s funds control system maintains, on an ongoing and current basis, accurate and reliable unobligated and unexpended balances in expired and canceled accounts. 8. See comments 5 and 6. Department of Defense: Financial Audits Highlight Continuing Challenges to Correct Serious Financial Management Problems (GAO/T-AIMD/NSIAD-98-158, April 16, 1998). Correspondence to the Honorable Charles E. Grassley, United States Senate, on “Fast Pay” Provision of DOD Reform Act (B-279620, March 31, 1998). CFO Act Financial Audits: Programmatic and Budgetary Implications of Navy Financial Data Deficiencies (GAO/AIMD-98-56, March 16, 1998). DOD Procurement: Funds Returned by Defense Contractors (GAO/NSIAD-98-46R, October 28, 1997). Financial Management: DOD Progress Payment Distribution Procedures (GAO/AIMD-97-107R, July 21, 1997). DOD High-Risk Areas: Eliminating Underlying Causes Will Avoid Billions of Dollars in Waste (GAO/T-NSIAD/AIMD-97-143, May 1, 1997). Financial Management: The Prompt Payment Act and DOD Problem Disbursements (GAO/AIMD-97-71, May 23, 1997). Financial Management: Improved Reporting Needed for DOD Problem Disbursements (GAO/AIMD-97-59, May 1, 1997). Contract Management: Fixing DOD’s Payment Problems Is Imperative (GAO/NSIAD-97-37, April 10, 1997). DOD Problem Disbursements: Contract Modifications Not Properly Recorded in Payment System (GAO/AIMD-97-69R, April 3, 1997). Financial Management: Improved Management Needed for DOD Disbursement Process Reforms (GAO/AIMD-97-45, March 31, 1997). DOD Problem Disbursement Reporting Excludes In-Transits (GAO/AIMD-97-36R, February 20, 1997.) High-Risk Series: Defense Financial Management (GAO/HR-97-3, February 1997). CFO Act Financial Audits: Increased Attention Must Be Given to Preparing Navy’s Financial Reports (GAO/AIMD-96-7, March 27, 1996). Financial Management: Challenges Facing DOD in Meeting the Goals of the Chief Financial Officers Act (GAO/T-AIMD-96-1, November 14, 1995). Financial Management: Status of Defense Efforts to Correct Disbursement Problems (GAO/AIMD-95-7, October 5, 1994). Financial Management: Financial Control and System Weaknesses Continue to Waste DOD Resources and Undermine Operations (GAO/T-AIMD/NSIAD-94-154, April 12, 1994). DOD Procurement: Millions in Overpayments Returned by DOD Contractors (GAO/NSIAD-94-106, March 14, 1994). Financial Management: DOD Has Not Responded Effectively to Serious, Long-standing Problems (GAO/T-AIMD-93-1, July 1, 1993). Financial Management: Navy Records Contain Billions of Dollars in Unmatched Disbursements (GAO/AFMD-93-21, June 9, 1993). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 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 legislative requirement, GAO reviewed the effects of in-transit disbursements on the Navy's funds control and financial reporting. GAO noted that: (1) the Navy and the Department of Defense (DOD) have not established adequate funds control as required by the Antideficiency Act; (2) current policies and procedures permit the Navy to delay for about 5 years: (a) the recording of obligations in excess of available budget authority; (b) the initiation of required Antideficiency Act investigations; and (c) any resulting reports of violations to Congress and the President; (3) during this time, the Navy's appropriation balances are unreliable, leaving DOD and Congress without assurance that budget authority has not been exceeded; (4) according to Navy records, as of September 30, 1997, obligations for 9 cancelled and 20 expired appropriations may have exceeded available budget authority by a total of $290 million; (5) in accordance with DOD policy, obligations have been recorded in the nine appropriations that have cancelled; (6) at the time of GAO's review, the Navy's records indicated that these obligations may have exceeded budget authority; (7) although the Navy maintained cuff records (separately prepared spreadsheets used to track obligations) that it also would need to record to resolve problem in-transit disbursements in the 20 expired appropriations, these obligations were not recorded in the Navy's accounting system; (8) if these obligations had been recorded, the obligation records for the 20 expired appropriations would have shown that these appropriations also may have obligations that exceed available budget authority; (9) Navy officials stated that an investigation of these appropriations would show that they are not overobligated; (10) at the time of GAO's review, the Navy had not initiated an Antideficiency Act investigation of any of the 29 appropriations, although DOD policy requires investigations of the 9 cancelled appropriations with recorded obligations in excess of available budget authority; (11) in addition to the lack of control over funds, these problems have a major effect on the accuracy and reliability of the Navy's financial reporting, including its annual financial statements required under the Chief Financial Officers Act; and (12) until transactions are recorded accurately and in a timely manner, and reflected in these financial statements, the Navy and DOD will remain unable to achieve the goal of producing reliable financial statements. |
We conducted this performance audit from June 2014 to May 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. According to the Department of Defense, combatant commanders have traditionally used forward presence to enhance crisis response, provide deterrence, gain trust, create allies, and build partner capacity. Combatant commander demand for forward presence is at historically high levels and is rising. The Navy reports that it met about 44 percent of the requests from combatant commanders around the world for Navy forces to support ongoing operations and theater security cooperation efforts in its assignment of forces for fiscal year 2015. The Navy has reported that it would require over 150 more ships to fully source all combatant commander requests for Navy forces. To meet these increasing demands for forward presence in recent years, the Navy has extended deployments; increased operational tempos; and shortened, eliminated, or deferred training and maintenance. The Navy also has assigned more surface combatants and amphibious warfare ships to overseas homeports to meet increasing demands for presence. Since 2006, the Navy has nearly doubled the percentage of the fleet assigned to overseas homeports. In 2006, 20 ships were homeported overseas (7.1 percent of the fleet); by the end of fiscal year 2015, 40 ships are expected to be homeported overseas (14.1 percent of the fleet). By 2017, with an additional destroyer homeported in Yokosuka, Japan, 41 ships are expected to be homeported overseas, or 13.9 percent of the projected fleet (see fig.1). The Navy plans to have surface and amphibious ships homeported in the following areas of operations by the end of fiscal year 2015 (see fig. 2): 5th Fleet area of operations: Manama, Bahrain (14 ships); 6th Fleet area of operations: Gaeta, Italy, and Rota, Spain (5 ships); 7th Fleet area of operations: Yokosuka and Sasebo, Japan (21 ships). The Navy assigns its ships to a homeport; this is where the ship is based, its crewmembers and their families reside, and from where it is primarily managed and maintained. The Navy assigns a U.S. homeport to all newly commissioned ships entering its fleet and may request that a ship’s homeport be moved from the United States to an overseas base to respond to strategic needs such as the demand for increased forward presence. For example, the transfer of four destroyers from U.S. homeports to Rota, Spain, beginning in 2014 was based on a presidential decision to provide ballistic missile defense in Europe. The process of moving a ship to an overseas homeport involves changing the overseas force structure, which can include the physical movement of a military unit, the introduction or removal of military capability, treaty notification, host-nation notification, and public announcement of physical overseas force structure. Overseas force-structure changes require the approval of the Secretary of Defense and coordination with the U.S. State Department. According to Navy officials, forward-deployed ships are typically homeported overseas for a period of 7 to 10 years before being replaced with a ship of the same class from the United States. See appendix IV for an expanded discussion of the Navy’s complete homeporting process. Homeporting ships overseas provides considerable additional time in a forward area of operations and other benefits ranging from increased opportunities for collaboration with partners and allies to faster response time for emerging crises. However, this additional time is available primarily because training and maintenance periods are shorter than those provided for ships homeported in the United States. We found that the Navy incurs higher operations and support costs for ships homeported overseas than for ships homeported in the United States, and moving ships overseas requires overseas infrastructure investments and results in U.S.-based economic losses. Further, the Navy’s high pace of operations for its overseas-homeported ships impacts crew training and the material condition of these ships—overseas-homeported ships have had lower material condition since 2012 and experienced a worsening trend in overall ship readiness when compared to U.S.- homeported ships. Operating forward is one of the Chief of Naval Operations’ three tenets for the Navy, along with putting warfighting first and being ready. According to Navy officials, maintaining forward presence through overseas homeporting allows the Navy to continuously perform missions in areas of strategic importance. The Navy acknowledges that some of the benefits of overseas homeporting are difficult to quantify but that this deployment model is integral to furthering U.S. interests and projecting influence across the globe. Some of these benefits are described here: Regional partnership building: The Navy participates in numerous multilateral missions, drills, and training exercises with allies and partners around the globe to help strengthen relations and enhance partner capabilities and capacity. Having ships homeported overseas provides more opportunities for this regional partnership building, according to Navy officials. For example, the Navy’s 5th Fleet, headquartered in Bahrain, led the largest international mine countermeasures exercise to date in the Persian Gulf during the autumn of 2014. The exercise involved navies from 44 countries including the four U.S. Navy mine countermeasures ships homeported in Bahrain. According to Navy officials, ships homeported overseas can more frequently and readily get under way to conduct joint missions and exercises with host nation and neighboring navies than can ships homeported in the United States. Deterrent effect: Navy leaders cite the benefit of U.S. ships “flying the flag” in overseas ports. Navy officials told us that the continuous presence of U.S. ships in overseas homeports provides reassurance to allies and signals the United States’ commitment to global engagement, adding that U.S. naval presence provides a deterrent to existing and potential threats to the United States and its allies. For example, Navy officials added that the security against aggression that U.S. ships provide to European allies is of tangible value to these countries. Maintenance flexibility: Navy officials responsible for scheduling maintenance overseas, including those from 5th Fleet, 6th Fleet, and U.S. Pacific Fleet, cited the flexibility, capacity, and diversity of the types of maintenance that can be performed on overseas-homeported ships since they are not subject to certain legal restrictions and limitations on maintenance that apply to U.S.-homeported ships. These statutory provisions require U.S.-homeported ships to be maintained primarily at U.S. shipyards, with only voyage repairs allowable in overseas shipyards. Reduced crisis response time: Navy officials state that ships operating forward can more quickly and effectively respond to crises and contingencies. Ships homeported overseas can assist when a surge of force is needed to respond to an emerging crisis, as do U.S.- homeported ships in that area of operations while deployed. For example, ships homeported in Japan were able to provide timely humanitarian assistance to the Philippines as part of Operation Damayan following the destruction wrought by Typhoon Haiyan in 2013 (see fig. 3). Navy officials cite the importance of having forward presence distributed globally to more effectively conduct missions by reducing transit time. For example, transit from the United States to areas like the Persian Gulf or South China Sea can take weeks, whereas ships homeported in Bahrain or Japan are already present and can access these areas in a matter of hours or days. Meeting presence requirements with current force structure: Navy officials stated that overseas homeporting allows the Navy to meet rising forward-presence requirements from the combatant commanders with the available force structure. For example, officials stated that the Navy would need many more ships deployed from the United States to provide the same level of presence that overseas- homeported ships are currently providing. The Navy uses at least three metrics to assess a ship’s ability to provide forward presence: (1) how long the ship is in the operational area, (2) how much the ship is available for tasking, and (3) the amount of time the ship is actually under way. Navy officials cite the importance of measuring presence and operational availability in concert with deployed days under way. For example, they emphasized that there are intangible benefits gained by having a U.S. ship in an overseas port even if it is not operationally available. Presence is the number of days a ship spends in an area of operations—excluding depot maintenance periods—divided by 365. Ships homeported overseas are always physically in an area of operations (i.e., in the 4th, 5th, 6th, or 7th Fleet areas of operations); therefore, the Navy calculates that they provide as much as four times more presence than U.S.-homeported ships, which must travel long stretches of ocean before entering one of the overseas areas of operations and then return to the United States after a multimonth deployment. Operational availability is the number of days a ship is available for operational tasking in a year. Operational availability measures the amount of time that a ship can get under way and execute a mission as required. For example, a ship can be considered operationally available even if it is in maintenance, if it is able to get under way and execute a mission in a short period of time. The Navy calculates that ships homeported overseas provide over three times more operational availability than U.S.-homeported ships. Deployed underway time is the number of days a ship spends away from port, referred to as underway days, deployed in the 4th, 5th, 6th, or 7th Fleet areas of operations. This metric tracks the number of days that a ship is out of port, at sea, and performing a mission in these areas of operations. Our analysis of the number of deployed underway days provided by ships homeported in the United States and overseas from fiscal years 2003 through 2012 estimated that the average ship homeported overseas spent about 42 additional deployed days under way, compared to the average ship that was homeported in the United States (see fig. 4). The Navy faces certain challenges associated with homeporting ships overseas. For example, unforeseen host-nation policy changes can affect renegotiation of international agreements, which may restrict base usage, or possibly remove the Navy presence entirely. This occurred in 1991, when a long-standing agreement between the Philippines and the United States ended, followed by the closing of Clark Air Base and Subic Bay Naval Base, which at that time served as the 7th Fleet’s primary logistics and repair hub and was home to over 12,000 Navy personnel and dependents. Through status-of-forces agreements, host nations may negotiate the size and scope of the naval footprint, and seek to place parameters on how those ships can be employed. These agreements are periodically renegotiated, and changes can affect Navy and U.S. policymaker flexibility. Finally, Navy officials explained that ships homeported overseas have difficulty identifying appropriate training ranges for certain exercises and noted that utilizing foreign ports presents unique threat and security challenges compared to U.S. homeports. Homeporting a ship overseas saves transit time to and from an area of operations and allows it be in this area longer. However, our analysis shows that the primary reason for the greater number of deployed underway days provided by overseas-homeported ships results from the Navy’s decision to truncate training and maintenance periods on these ships in order to maximize their operational availability. Ships homeported overseas do not operate within the traditional fleet response plan cycles that apply to U.S.-based ships. Since the ships are in permanent deployment status during their time homeported overseas, they do not have designated ramp-up and ramp-down maintenance and training periods built into their operational schedules. Because the Navy expects these ships to be operationally available for the maximum amount of time, their intermediate and depot-level maintenance is instead executed through more frequent, shorter maintenance periods, or deferred until after the ship returns to a U.S. homeport, according to Navy officials. These officials explained that U.S.-homeported ships typically operate under the Navy’s fleet response plan, which, by contrast, provides for designated maintenance and training periods that prepare ships for deployment to areas of operations. These ships deploy for a notional period of 6 months (which in the past several years has frequently been extended to 8 to 10 months) and then return to their U.S. homeports to undergo postdeployment depot maintenance and leave and training periods for the crew. Our analysis of the operational cycles of ships homeported in the United States and those homeported in Yokosuka, Japan, and Rota, Spain, found that, based on their notional operational cycles alone, Navy ships homeported overseas provide more deployed time than ships homeported in the United States primarily because the Navy reduces their training and maintenance periods (see fig. 5). For example, our analysis of the Navy’s plans for U.S.-based cruisers and destroyers shows that the Navy plans for them to spend 41 percent of their time deployed or available for deployment and 60 percent of their time in dedicated training and maintenance periods. In contrast, the Navy plans for its Japan-based cruisers and destroyers to spend 67 percent of their time deployed, 33 percent of their time in maintenance, and do not include a dedicated training period. The operational benefits the Navy describes that result from homeporting ships overseas also result in costs to the Navy and DOD more broadly. Our analysis of Navy operations and support cost data—personnel, operations, and sustainment costs from fiscal years 2004 through 2013 for surface and amphibious ships—found that annual per ship operations and support costs for all ships homeported overseas are about 15 percent, or approximately $9 million, higher than for ships homeported in the United States, with some variance by ship class. For example, destroyers homeported overseas incur about 17 percent higher average annual operations and support costs per ship, which would mean about $98 million per year in additional costs for the 12 destroyers that are expected to be homeported overseas by the end of fiscal year 2015 (see table 1). We completed statistical analyses of the differences in the cost components that make up overall operations and support costs— operations costs, sustainment costs, and personnel costs. Specifically, we conducted a multivariate statistical analysis to analyze how ships that were and were not homeported overseas compared to each other on various outcomes. Our analysis showed that there are statistically meaningful associations between higher operational tempo while a ship is homeported overseas and additional operations and support costs. See appendix V for an expanded discussion of these differences and our methodology for analyzing them. Specifically, our analysis allowed us to estimate the following: Operations costs: The Navy spends an estimated $3.2 million more on average for each additional 50 deployed days under way (across all ships we analyzed). Ships that were homeported overseas for 2 consecutive years incurred $18.7 million more in operations costs, on average, compared to ships that were homeported in the United States over the same period. Sustainment costs: Each additional 50 deployed days under way in a given year was associated with an estimated $0.7 million more in sustainment spending the following year (across all ships we analyzed). We also found that the Navy spent about $5.8 million more on sustainment in the year after the average ship returned to the United States after being homeported overseas than the average U.S.-homeported ship that was never homeported overseas (these costs would be incurred outside of those presented in table 1). This is consistent with the Navy’s practice of conducting more sustainment spending and depot maintenance when a ship returns from an overseas homeport to a U.S. homeport. Personnel costs: Overseas-homeported ships incurred an estimated $1.3 million more per year in personnel costs, on average, than ships homeported in the United States due to higher housing allowances, cost of living adjustments, and permanent change of station costs. To better understand differences in personnel costs, we analyzed specific personnel costs associated with homeporting ships overseas, such as overseas housing allowances and cost of living adjustments. We found that when we factored overseas housing allowances and cost of living adjustments, the total compensation for sailors at overseas locations is greater than the compensation they would have received at homeports in the United States. These additional costs, as well as the generally higher costs of moving and housing sailors and their families at overseas locations, contribute to the higher overall operations and support costs for overseas-homeported ships presented in table 1. Moreover, these differences will likely be larger than they currently are once four destroyers are moved from Norfolk, Virginia (three ships) and Mayport, Florida (one ship) to Rota, Spain, by the end of 2015. For example, the Navy estimates that the increased housing allowances and cost of living adjustments for Rota-based sailors will be approximately $18 million per year, or an 89 percent increase in compensation costs based on the previous homeports of Norfolk, Virginia, and Mayport, Florida. Further, Navy 5th and 7th Fleet officials explained that permanent change of station costs are also higher for personnel stationed overseas. For example, the costs of shipping household goods to Bahrain or Japan are higher than the costs for a comparable move between locations in the United States. Additionally, due to hardship conditions in Bahrain, sailors there rotate more frequently than sailors homeported in the United States and other overseas locations. Further, unaccompanied sailors in Bahrain have the option to move their families anywhere in the United States for the duration of their 1-year tour, potentially doubling the number of moves associated with Bahrain-based assignments. In addition to operations and support costs, the Navy seeks to provide consistent shore installation services and support, which for ships homeported overseas can require shore support investments. While we recognize that U.S.-homeported ships require infrastructure and base- operating investments in the United States, we were unable to systematically compare the infrastructure and base operating costs of homeporting a ship in the United States with homeporting a ship overseas as we did with operations and support costs due to a lack of available data. Specifically, the Navy does not track infrastructure cost data on an individual ship basis to allow for an accurate comparison as U.S. and overseas bases support homeported as well as other transiting ships. However, we found that the costs for operating and maintaining facilities at four of the overseas homeports in our review totaled nearly $1.2 billion over the past 5 fiscal years (see table 2). Navy Installations Command officials stated that it is usually more expensive to operate installations overseas due to higher port-services fees and utilities costs. These officials added that when a ship is moved overseas from a U.S. homeport, the U.S. homeport may experience a lower operating cost with fewer ships, but in many cases savings do not materialize. For example, if childcare and recreational facilities on U.S. bases support the entire installation population, these facilities may not show a decrease in costs if they continue to provide the same level of services before and after ships are moved overseas. Navy installations officials told us that they do not track such potential cost changes at U.S. locations associated with moving ships overseas since infrastructure cost data are not organized on an individual ship basis. In general, we found that where required support infrastructure is unavailable, the Navy has funded extensive overseas military construction projects to support decisions to homeport ships overseas. Major construction projects to upgrade, expand, or build new facilities and infrastructure at overseas homeports—primarily to support ships homeported there—totaled over $470 million in fiscal years 2009 through 2013. In addition, the Navy plans to spend more than $274 million at these locations over the next 4 years. For example, in Bahrain, since 2009 construction totaling nearly $483 million is planned or has been previously obligated and has been funded solely by the United States without host-nation contributions, according to Navy officials. Recent Navy decisions to move ships from U.S. homeports to overseas homeports provides insight into the infrastructure investments and base operating costs overseas homeporting requires. For example, infrastructure investments and base operating costs needed to support the recent move of three destroyers from Norfolk, Virginia, and one from Mayport, Florida, to Rota, Spain, required several infrastructure investments in order to provide the level of support these ships had when they were in U.S. homeports. While Naval Station Rota had some preexisting infrastructure that would support the destroyers, new investments and expansions are planned, such as office space renovations, and warehouse storage facilities. In addition, the Navy estimates that the shore support requirements for the four destroyers homeported in Rota, Spain, will result in approximately 50 new civilian employees, 25 local national contractors assigned to various support positions, and 35 additional uniformed military personnel. Similar infrastructure investments and base operating costs have occurred in Bahrain as a result of the Navy decision to relocate patrol coastal and mine countermeasures ships from the United States to Bahrain in 2014. These decisions required investments related to sailor and dependent support facilities and other spending related to supporting ship maintenance and management. For example, upgrades and repairs for a dilapidated quay, additional on-base housing for single sailors, and new ship maintenance facilities. In addition to Navy-funded military construction projects, other DOD entities have planned or obligated funds as a result of Navy decisions to homeport ships overseas. For example, in Rota, Spain, the Department of Defense Education Activity plans to upgrade and build new school facilities to support the additional dependent students of sailors who will be relocated to Spain with the four destroyers. These upgrades and new facilities are projected to cost DOD approximately $18 million, in addition to recurring annual operations and maintenance costs. DOD school facilities did not support the dependents of sailors aboard these destroyers when they were homeported in Norfolk, Virginia, and Mayport, Florida. The decision to relocate ships from the United States to overseas homeport locations also results in economic losses in the United States. Navy and Joint Staff guidance direct the Navy to assess the operational and resource implications of potential homeporting changes and do not require the Navy to consider U.S.-based economic losses when making homeporting decisions. Navy officials stated that they recognize there are economic implications to moving ships overseas; however, they emphasized that the Navy’s decision process focuses on meeting operational requirements and the associated resource needs, and does not estimate the U.S.-based economic impacts of moving ships overseas. We analyzed recent homeporting decisions—to relocate three destroyers from Norfolk, Virginia, to Rota, Spain; one destroyer from Mayport, Florida, to Rota, Spain; and two destroyers from San Diego, California, to Yokosuka, Japan, from 2014 through 2017—in order to estimate some of the potential U.S.-based economic losses resulting from these moves. We found that these decisions will result in the removal of approximately 1,800 sailors and 2,400 dependents from these local economies. Previous decisions of similar size and scope have prompted Navy officials to state that such relocations will result in significant losses to local economies, and the Congressional Research Service has reported that similar losses in numbers of crew and dependents have resulted in thousands of net job losses and significant declines in local economic activity. Conversely, when announcing the plan in October 2011 to homeport four U.S. Navy destroyers in Rota, the Prime Minister of Spain announced that (1) this initiative would have a positive socioeconomic impact on Spain, particularly in the Bay of Cadiz area near Rota; (2) homeporting four ships in Rota will require investing in the Rota naval base’s infrastructure and contracting for services, thus generating approximately a thousand new jobs, both directly and indirectly; and (3) the effect on Spain’s defense industry will also be positive, since the United States will be bringing additional maintenance workload to Spanish shipyards. Navy 6th Fleet and U.S. Pacific Fleet officials also stated that overseas homeporting provides a benefit to host-nation contractors and economies by increasing the amount and complexity of maintenance required by U.S. Navy ships while they are homeported overseas. Foreign shipyards gain additional maintenance workload when overseas- homeported ships are maintained abroad. This results in fewer ship maintenance labor hours being worked in the United States, affecting U.S.-based economic activity in general and economic activity at shipyards in particular. For example, we analyzed the projected workload transfer associated with recent decisions to relocate four destroyers to Rota, Spain, and two additional destroyers to Yokosuka, Japan, and found that these decisions will result in an estimated decline in the United States of about 170 full-time-equivalent maintenance workers and $23 million per year in reduced maintenance expenditures, based on the expected annual amount of maintenance to be performed in Spain and Japan. We found that high operational tempo for ships homeported overseas limits crew training when compared to ships homeported in the United States. Navy officials told us that U.S.-based crews are completely qualified and certified prior to deploying from their U.S. homeports, with few exceptions. In contrast, the high operational tempo of ships homeported overseas has resulted in a “train on the margins” approach. According to Navy officials, “training on the margins” means that there is little to no dedicated training time set aside for the ships, so that crews train while under way or in the limited time between underway periods. Officials told us that the training periods for destroyers based in Spain overlap with maintenance periods and that the high operational tempo of these ships means that training has to be planned and coordinated with precision to help ensure that crews are properly trained. In Japan, there are no dedicated training periods built into these ships’ operational schedules. As a result, these crews do not have all needed training and certifications. Over the course of this review, we found that between 9 percent and 17 percent of the warfare certifications for crews homeported in Japan had expired. Over three-quarters of the expired certifications in January 2015, including air warfare and electronic warfare, had been expired for 5 months or more. Navy officials told us that while these sailors may be technically proficient in duties that they regularly perform as part of routine missions while deployed overseas, they may not be adequately trained to perform other duties as required. For example, fleet officials told us that some expired certifications—like visit/board/search/seizure—are ancillary, while others—like air warfare— are more critical to the overseas missions conducted by these ships. Our analysis also found the material condition of overseas-homeported ships has been lower than U.S.-homeported ships since 2012 and has worsened at a slightly faster rate over the past 5 years. The Navy uses casualty reports to provide information on the material condition of ships to determine current readiness. For example, casualty report data provide information on individual pieces of equipment or systems that are degraded or out of service, the lack of which will affect a ship’s ability to support required mission areas. We analyzed monthly casualty report data from January 2009 through July 2014 to estimate trends for overseas- and U.S.-homeported ships separately. We found a statistically significant increase in casualty reports for both overseas- homeported ships and U.S.-homeported ships during this period, indicating declining material condition across the fleet. Furthermore, we found that the number of casualty reports is increasing at a slightly faster rate for overseas-homeported ships compared to U.S.-homeported ships (about 1 additional casualty report a year). For example, while overseas- homeported ships had lower daily average numbers of casualty reports per ship from 2009 through 2012, over the past 2 years overseas- homeported ships have had more casualties than U.S.-homeported ships, indicating that these ships may have lower material condition when compared to U.S.-homeported ships and a worsening trend in overall ship readiness (see fig. 6). Our analysis showed that casualty reports have nearly doubled for both overseas-homeported ships and U.S.-homeported ships over the past 5 years. To further analyze these observed differences over time, we conducted a multivariate statistical analysis that held constant certain factors that varied across ships and over time (see app. VI). Based on this analysis, we estimated that overseas-homeported ships had, on average, about 25 (+/-11.6) casualty reports and U.S.-homeported ships had about 20 (+/-1.7). However, these numbers of casualty reports for U.S.- and overseas-homeported ships are not statistically distinguishable from one another. The casualty reports over the past 5 years comprise mostly category 2 casualty reports. We found that category-2 casualties— those that indicate that a deficiency exists in mission-essential equipment that causes a minor degradation in a ship’s primary mission or a major degradation or total loss of a secondary mission—are much more prevalent than more-serious category 3 and 4 casualties. For example, in 2014, we found that the average number of casualty reports for all ships was about 27, and category 3 and 4 reports accounted for about 1.0 of these. Navy officials acknowledged the increasing amount of casualty reports on Navy ships and a worsening trend in material ship condition. They stated that casualties require unscheduled maintenance and have a negative impact on fleet operations since there is an associated capability or capacity loss. Additionally, officials noted that two factors may have contributed to this increase, including (1) a cultural shift in the Navy emphasizing the timely identification and reporting of casualties and (2) adoption of an automated system for reporting casualties beginning in 2010, which may have made it easier to report casualties. In addition, the ships homeported overseas get lower scores when inspected than U.S.-homeported ships. In addition to analyzing the reports of equipment casualties reported by the ships themselves, we also reviewed surface and amphibious ships’ inspection reports conducted in fiscal years 2007 through 2014. The Navy uses material inspection reports from the Board of Inspection and Survey (INSURV), the Navy’s ship-inspection entity, to determine the condition of ships. Ships undergo INSURV inspections about once every 6 years. The data gathered include inspection results for structural components, individual pieces of equipment, and broad systems, as well as assessments of a ship’s warfighting capabilities. The Navy uses INSURV data to make life- cycle decisions on whether to retain or decommission Navy ships. INSURV assigns ships an overall inspection score—the INSURV Figure of Merit—which is a single-number representation of the ship’s overall material condition and represents a ranking of this condition relative to other ships. These scores are based on inspection of a ship’s functional areas (e.g., propulsion, information systems, weapons) and performance on various operational demonstrations (e.g., steering, full power ahead, gunnery firing). We found that ships homeported overseas have lower overall Figure of Merit scores and are rated lower in 62 percent of the functional areas and demonstrations. For example, ships homeported overseas had lower scores in functional areas, such as information systems and operations, and demonstrations, such as steering and anchoring. For a detailed presentation of the differences between Figure of Merit, functional area, and demonstration scores for ships homeported in the United States and overseas, see appendix VII. The Navy has not identified or mitigated the risks its increasing reliance on overseas homeporting poses to its force over the long term. We found that, due to the high pace of operations the Navy uses for overseas- homeported ships, some of these ships have had consistently deferred maintenance that has resulted in long-term degraded material condition and increased maintenance costs, and could shorten the ships’ service lives. The Navy is implementing a revised operational schedule for U.S.- based ships that is intended to lengthen time between deployments, citing the need for a sustainable schedule. However, the Navy has not determined how—or whether—it will apply a more sustainable schedule to all ships homeported overseas. Additionally, although the Navy’s decision processes for moving individual ships overseas identifies actions and resources needed, the Navy does not assess risks such moves pose to costs, readiness, or expected service life of ships that it can expect based on its historical experience of increased operational tempo for ships homeported overseas. We found that some ships homeported overseas had consistently deferred maintenance, which causes long-term degraded material condition and increases depot maintenance costs, and could shorten these ships’ service lives. Overseas-homeported ships are maintained differently than those homeported in the United States, which has led to maintenance deferrals and higher maintenance costs. Maintenance officials told us that the focus for ships homeported overseas is on mission readiness, so overseas-homeported ships place priority on the maintenance of combat systems, for example, while systems with the potential to reduce ship service life—such as fuel and ballast tanks that require extended in-port periods to properly maintain—are subject to maintenance deferrals in order to allow the ship to sustain a high operational tempo. These officials added that if such systems are left unmaintained, corrosion of these tanks and other lower-priority ship components can fester to a critical point where more costly replacement or overhaul is ultimately required. Deferring this maintenance may yield benefits like greater operational availability in the short term, but it may lead to higher depot-level maintenance costs or service-life implications in the longer term. This is consistent with what we found in September 2012 that deferring maintenance can affect ship readiness and increase the costs of later repairs. For example, we found that the Navy had calculated that deferring maintenance on ballast tanks to the next major maintenance period will increase costs approximately 2.6 times. The systematic deferral of maintenance that occurs on some overseas- homeported ships can also lead to situations where it becomes cost- prohibitive to keep a ship in service, which could result in retiring a ship before it reaches its expected service life. To better understand the extent of deferred maintenance on surface and amphibious ships, we analyzed the average ratio of executed to required labor days for maintenance on ships homeported overseas and in the United States. We found that, while cruisers and destroyers homeported overseas have their required maintenance executed at a higher rate than their U.S.-homeported counterparts, the amphibious ships homeported overseas have maintenance executed at a rate that is both much lower than what is required and much lower than what is executed on U.S.-homeported amphibious ships. Navy officials said that the results of our analysis are consistent with the historical high operational tempo and utilization of amphibious ships while they are homeported overseas. A July 2014 Navy report to Congress stated that high operational tempo causes unplanned wear on equipment, which can reduce the expected service life of ships. Propulsion, electrical generation, and combat systems (e.g., radars and sonars) are used more extensively when a ship is under way, and rough sea states can induce more stress on a ship and its systems. The report adds that recovering this service life requires longer and more costly maintenance periods, which strain the maintenance base and compress time available for operations and training. Other Navy reports, such as the February 2010 Admiral Balisle surface ship readiness report, highlight the negative effects of high operational tempo, namely the reduction in expected service life for given ship classes, and a July 2011 Center for Naval Analyses study found that increases in operational tempo require increases in depot-level maintenance. Moreover, the Navy Surface Maintenance Engineering Planning Program, which oversees maintenance requirements for surface and amphibious ships and monitors life-cycle repairs, has found that the current maintenance strategy for amphibious ships homeported overseas will jeopardize their attainment of expected service lives. Specifically, the program found that the primary shortfall of the current strategy is that it does not include scheduled dry-docking periods necessary to conduct large scale tank and void maintenance while homeported in Sasebo, Japan. This, along with other contributing factors such as the ships’ high operational tempo, has led to overall degraded material condition of amphibious ships homeported there. For example, Navy officials stated that maintenance on the USS Essex, an amphibious assault ship, had been systematically deferred while the ship was homeported in Japan from June 2000 through February 2012, causing the ship to require the costliest depot maintenance work in surface Navy history when it returned to the United States (see fig. 7). During this depot maintenance period, the Essex required over twice the amount of maintenance work the Navy expected to perform. According to the Navy Surface Maintenance Engineering Planning Program documentation, the Navy used 364,280 labor days on the Essex compared to the 177,206 labor days that were planned for this depot availability. Given the Navy’s and our prior findings on the detrimental effect of high operational tempo and maintenance deferrals on ship service life— particularly with respect to the Navy’s fleet of amphibious warfare ships— we worked with the Congressional Budget Office to determine the impact of potential decreases in the service lives of overseas-homeported ships on the amphibious fleet inventory. The Congressional Budget Office completes an annual assessment of the Navy’s 30-year shipbuilding plan and uses an internal model to show the annual inventories of selected categories of ships under the Navy’s plan and how they align with the Navy’s goals for those categories of ships. We asked the Congressional Budget Office to use its model to deduct 6 years from the service lives of the Amphibious Ready Group (one amphibious assault ship, two dock landing ships, and one amphibious transport dock ship) homeported in Sasebo, Japan, in order to illustrate the effects of these potential losses in service life on the amphibious fleet inventory. We deducted 6 years of service life based on discussions with Navy fleet and headquarters officials with the goal of choosing an appropriate time frame to illustrate the potential effects of reducing ship surface lives. For example, the upper time-frame limit we considered was based on the Navy’s prior proposal to retire an amphibious ship homeported overseas 16.5 years prior to the end of its expected service life. Navy officials agreed that 6 years is a reasonable time frame for illustrative purposes. We recognize that this is one potential outcome if the Navy chooses not to make the significant investments in depot maintenance that would be required to mitigate the effects on the service lives of ships returning from overseas homeports. According to the Navy, a minimum force of 33 amphibious ships represents the limit of acceptable risk in meeting amphibious assault force requirements. Figure 8 shows the results of the Congressional Budget Office analysis and that, if the overseas- homeported amphibious ships do not achieve their expected service lives, the Navy would not meet its goal for amphibious ship inventory beginning in 2035, and would worsen the gap projected by the Navy. The Navy has taken steps to mitigate the risks of high operational tempo on U.S.-homeported ships by developing the optimized fleet response plan, which seeks to instill predictable operational schedules conducive to ensuring ships are able to adequately address their training and maintenance requirements. However, the Navy has not determined how—or whether—it will apply the optimized fleet response plan to all ships homeported overseas. The Navy recognizes that the current high operational tempo and long deployments of its U.S.-homeported ships are unsustainable over the long term, placing strain on sailors and their families, and constraining the ability to complete the required maintenance that is necessary for ships to reach their expected service lives. For example, the Navy lengthened deployments in direct response to world events, such as operations in Iraq and Afghanistan over the past decade and the crisis in Syria in 2013. In November 2014, the Navy issued a new policy establishing responsibility for the execution of the optimized fleet response plan, noting in the policy that changes in the global landscape have demonstrated the need for an optimized process to ensure continuous availability of manned, maintained, equipped, and trained Navy forces capable of surging forward to respond to combatant commander forward- presence requests while also maintaining long-term sustainability of the force. The Navy’s optimized fleet response plan seeks to provide a more sustainable force-generation model for Navy ships, as it reduces deployment lengths and injects more predictability for maintenance and training into ship schedules. According to the policy, this framework establishes a readiness-generation cycle that operationally and administratively aligns forces while aligning and stabilizing manning, maintenance and modernization, logistics, inspections and evaluations, and training. According to Navy officials, adherence to this new force- generation model is necessary in order to protect the long-term readiness and sustainability of the force. As a result, it is implementing, beginning in 2014, a revised operational schedule, referred to as the optimized fleet response plan, which is based on a 36-month cycle, with 7-month deployments for U.S.-homeported ships and designated periods for crew training and ship maintenance (see fig. 9). While the Navy has recognized the challenges the high pace of operations poses to the U.S.-based fleet and has begun implementing the optimized fleet response plan for carrier strike groups deployed from U.S. homeports, according to Pacific Fleet and Fleet Forces Command officials, it has not determined how—or whether—it will apply the optimized fleet response plan or a similar sustainable operational schedule to all ships homeported overseas. As discussed earlier, we found that the high pace of operations the Navy uses for overseas- homeported ships limits their dedicated training and maintenance periods, which has resulted in difficulty keeping crews fully trained and ships maintained. In addition, we found that casualty reports for both U.S.- and overseas-homeported ships have doubled over the past 5 years, with the material condition of overseas-homeported ships having decreased slightly faster than U.S.-homeported ships. Navy officials told us they are considering changes to the operational schedules of overseas- homeported ships but, as of February 2015, have not finalized and implemented any formal changes. In March 2015, Fleet Forces Command approved an optimized fleet response plan for the four destroyers homeported in Rota, Spain, to help resolve potential training and maintenance concerns. This schedule, however, applies to only 4 of the 40 surface and amphibious ships the Navy plans to homeport overseas by the end of fiscal year 2015. Further, Navy officials told us that ships homeported overseas are expected to continue their high levels of utilization and expressed concerns about the service’s ability to adhere to a more disciplined operational schedule in light of ever-increasing demands for naval forces from the combatant commanders. Navy officials also cited instances when requests for forces from combatant commanders, and other emergent needs, have resulted in DOD-directed extensions of deployments and activations of ships that were not scheduled for deployment. Without an operational schedule that balances presence demands and long-term sustainability for ships homeported overseas, the Navy risks continuing the pattern of deferred ship maintenance that leads to higher maintenance costs over the long term and threatens achievement of full ship service lives. The Navy has not assessed the costs and risks its increasing reliance on overseas homeporting poses to its force over the long term. Office of the Chief of Naval Operations Instruction 3111.17 details the Navy’s multistep process for assessing potential homeport decisions; this process produces the annual Strategic Laydown and Dispersal Plan (strategic laydown plan) which projects ship homeports 10 years into the future. During development of the plan, the Navy draws on policy, planning, programming, budget, and strategic documents, such as the Navy force- structure assessment and the 30-year shipbuilding plan, to recommend assigning ships to specific homeports. The strategic laydown process involves a range of stakeholders, including representatives from the Navy staff, Fleet Forces Command, Pacific Fleet, Naval component commanders, and Navy Installations Command. These stakeholders evaluate potential homeporting decisions across a range of criteria, including enhancing the overall operational availability and efficiency of Navy forces, aligning capability with combatant commanders’ needs, and maximizing the use of existing infrastructure. However, officials explained that the strategic laydown process primarily focuses on short-term requirements, such as the need for pier space, housing, and maintenance facilities, and related near-term resource needs. We found that the Navy does not assess the long-term effect on operations and support costs or the risks posed to readiness and expected ship service life in light of historical execution trends and high operational tempo of ships that are homeported overseas. Additionally, senior Navy officials explained that they would benefit from a more thorough understanding of the risks and operational implications associated with their increasing reliance on overseas homeporting to meet combatant commander presence demands. Further exacerbating the strain on its fleet, the Navy reported in July 2014 that it intends to increase the number of ships homeported overseas to respond to increasing combatant commander demands for forward naval presence. Federal standards for internal control state that decision makers should comprehensively identify risks associated with achieving program objectives, analyze them to determine their potential effect, and decide how to manage the risk and identify mitigating actions. According to the standards, this is an ongoing process, since operating conditions continually change. Without a comprehensive assessment that identifies and assesses long- term costs, readiness, and force-structure effects on the Navy’s surface and amphibious fleet from its increasing reliance on overseas homeporting, the Navy lacks information needed to make any necessary adjustments to its overseas force structure or informed homeporting decisions in the future. Having such an assessment would help decision makers to identify and mitigate risks posed by increased long-term operations and support costs; deferred maintenance and truncated training periods; and degraded material condition of the ships, increased maintenance requirements, and reduced ship service life. Today’s fleet of surface combatants and amphibious warfare ships provides core capabilities that enable the Navy to fulfill a wide array of missions—all through forward presence. With combatant commanders’ demand for forward presence at historically high levels and growing, the Navy has chosen to make several near-term decisions, including extending deployments and assigning more surface and amphibious ships to overseas homeports, to meet presence demands with its existing force structure. It is also in the process of considering various homeporting options for its new class of destroyers, the DDG 1000. While homeporting ships overseas provides considerable additional naval presence in a forward area of operations and other near-term benefits— when compared with homeporting ships in the United States—it increases costs and decreases crew and ship readiness in the near term and degrades the material condition of the ships over the long term, possibly threatening their ability to reach their intended service lives, particularly in the amphibious fleet. To address concerns, the Navy has developed the optimized fleet response plan, citing the need for a schedule that is sustainable over the long term, with more predictability for maintenance and training and improved quality of life for sailors. The Navy is implementing this revised operational schedule for U.S.-based ships and approved in March 2015 a revised schedule for the four destroyers homeported in Rota, Spain; however, it has not determined how—or whether—it will apply a more sustainable schedule to its 36 surface and amphibious ships homeported overseas outside of Rota, Spain. The Navy also has not fully identified and mitigated risks to its force structure associated with its increasing reliance on overseas homeporting. The Navy’s process for determining where to homeport ships focuses on the short-term resource needs of these decisions, but it does not assess long-term costs or risks to readiness and ship service life that can result from the high operational tempo of ships homeported overseas. If the Navy does not have an operational schedule that balances presence demands and long-term sustainability for ships homeported overseas and has not conducted a comprehensive assessment of the risks that overseas homeporting poses to its surface and amphibious ship force structure, it risks incurring higher operations, support, and infrastructure costs, reducing ship service lives, and potentially exacerbating strains on its fleet and shipbuilding budget over the long term. Further, if the Navy does not include such risk assessments when making future force- structure decisions, it risks returning to a more costly and less sustainable operational schedule as it adjusts its presence overseas. To balance combatant commanders’ demands for forward presence with the Navy’s needs to sustain a ready force over the long term and identify and mitigate risks consistent with Federal Standards for Internal Control, we recommend that the Secretary of Defense direct the Secretary of the Navy to take the following two actions: to fully implement its optimized fleet response plan, develop and implement a sustainable operational schedule for all ships homeported overseas; and develop a comprehensive assessment of the long-term costs and risks to the Navy’s surface and amphibious fleet associated with its increasing reliance on overseas homeporting to meet presence requirements, make any necessary adjustments to its overseas presence based on this assessment, and reassess these risks when making future overseas homeporting decisions and developing future strategic laydown plans. In written comments on a draft of this report, DOD concurred with our two recommendations. In its comments, DOD stated that it concurred with the overall findings of the report and noted that the decision to accept risks, such as deferred maintenance and increased consumption of service life, was based on the operational decision to provide increased presence to meet combatant commander requirements. DOD’s comments are summarized below and reprinted in their entirety in appendix VIII. DOD also provided technical comments, which we have incorporated as appropriate. DOD concurred with our recommendation to develop and implement a sustainable operational schedule for ships homeported overseas. In its comments, DOD stated that Fleet Forces Command in March 2015 approved an optimized fleet response plan for the four destroyers homeported in Rota, Spain. We modified the report to note that the Navy had approved a revised operational schedule for 4 of the 40 surface and amphibious ships the Navy plans to homeport overseas by the end of fiscal year 2015. DOD stated that the formal review of optimized fleet response plans for the remaining ships homeported overseas will be scheduled for a future date. DOD also concurred with our recommendation to develop a comprehensive assessment of the long-term costs and risks to the Navy’s surface and amphibious fleet associated with its increasing reliance on overseas homeporting. DOD stated that the Navy will conduct an assessment of the long-term costs and risk of overseas homeporting and incorporate that into future homeporting decision processes. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, and the Secretary of the Navy. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3489 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IX. The Navy has used rotational crewing—the practice of using more than one crew to operate a single ship—for over 40 years on its ballistic- missile submarines, but did not begin using this crewing concept in the surface fleet until the mid-1990s and has limited its use to a small number of ships and ship types. Specifically: Mine countermeasures ships began using rotational crewing in the 1990s in Japan and the Persian Gulf, and patrol coastal ships began using rotational crewing in 2003 in the Persian Gulf. These ship classes discontinued the use of rotational crewing in 2013 with fleet managers stating that having permanent crews led to improved material condition of the ships. The Navy is using rotational crewing on its new class of surface ship, the littoral combat ship. In March 2013, the Navy deployed its first littoral combat ship—USS Freedom—to Singapore for 10 months for the first-ever overseas-based operational deployment of the ship class. The USS Freedom Blue and Gold crews executed a crew turnover midway through the deployment in the port of Sembawang in Singapore (see fig. 10). The program is rotating three crews between every two ships, one of which will be operating forward, beginning with the deployment of USS Fort Worth to Singapore in November 2014. The Navy plans to rotationally crew littoral combat ships in Bahrain by 2018 in addition to Singapore. Rotational crewing experiments have been conducted on Navy destroyers in the Pacific Fleet in 2002 and the Atlantic Fleet in 2005. Rotational crewing has not been used on the Navy’s cruisers, amphibious warfare ships, and aircraft carriers. Table 3 summarizes the Navy’s use of rotational crewing over the past 50 years, to include specific ship types. To determine the operational benefits, costs, and readiness effects, if any, of homeporting ships in the United States and overseas, we selected surface combatants and amphibious warfare ships from the following ship classes for inclusion in our review: guided-missile cruisers (CG 47 class), guided-missile destroyers (DDG 51 class), littoral combat ships (LCS class), mine countermeasures ships (MCM 1 class), patrol coastal ships (PC 1 class), amphibious assault ships (LHA 1 and LHD 1 classes), amphibious transport dock ships (LPD 4 and LPD 17 classes), dock landing ships (LSD 41 and LSD 49 classes), and amphibious command ships (LCC 19 class). These ships represent over half of the Navy fleet and provide a variety of capabilities, sizes, missions, and histories of overseas homeporting. We compared the operational benefits, costs, and readiness effects of the different homeporting assignments for these ship classes using a variety of factors—including operational tempo, ship operations and support costs, casualty reports, readiness inspection scores, and maintenance execution rates. Specifically, Navy officials provided the following data from authoritative Navy sources: Navy Visibility and Management of Operating and Support Costs— operations and support costs per ship in constant fiscal year 2014 dollars, fiscal years 2004 through 2013; Navy Energy Usage Reporting System—deployed underway days per ship, fiscal years 2003 through 2012; Commander, Navy Installations Command—family housing, operation and maintenance, and military construction costs by overseas homeport location, fiscal years 2009 through 2018 (programmed); Fleet Forces Command—daily numbers of casualty reports per ship, January 2009 through July 2014; Board of Inspection and Survey—material inspection data per ship, fiscal years 2007 through 2014; and Office of the Chief of Naval Operations—maintenance execution rates, life of each ship. We selected the time frames for each of the data series above after assessing their availability and reliability to maximize the amount of data available for us to make meaningful comparisons. We assessed the reliability of each of the data sources. The Navy provided information based on our questions regarding data reliability, including information on an overview of the data, data-collection processes and procedures, data quality controls, and overall perceptions of data quality. The Navy provided documentation of how the systems are structured and what written procedures are in place to help ensure that the appropriate information is collected and properly categorized. Additionally, we interviewed Navy officials to obtain further clarification on data reliability, discuss how the data were collected and reported, and explain how we planned to use the data. After assessing the data, we determined that they were sufficiently reliable for the purposes of reporting the operational benefits, costs, and readiness effects of homeporting ships in the United States and overseas. For our comparative analyses, we focused on comparisons between cruisers, destroyers, and amphibious warfare ships (amphibious assault ships, amphibious transport dock ships, dock landing ships, and amphibious command ships) homeported in the United States and those homeported overseas because these historically have been the ship classes most commonly homeported overseas and, therefore, the Navy has the most robust data available for them. We did not include mine countermeasures ships and patrol coastal ships in our comparative analysis because these ship classes have had relatively little recent experience deploying from U.S. homeports over the past 5 years, according to Navy officials, and limited comparative data were available. To understand the effects of overseas homeporting on infrastructure investments and base operating costs, we examined Navy documentation, such as leadership briefings on several recent decisions to move ships to overseas homeports from 2009 through 2014 where officials stated additional infrastructure was required. These moves included decisions to homeport destroyers in Rota, Spain, and patrol coastal and mine countermeasures ships in Bahrain. We also analyzed cost data from 2009 through 2014, which includes these ship moves, for family housing, operation and maintenance, and military construction at overseas homeports. We assessed these data by reviewing Navy documentation and discussing with Navy officials data-collection processes and procedures and determined that they were reliable for the purposes of reporting the infrastructure investments and operating costs for overseas-homeported ships. We also obtained and analyzed Navy policies and procedures for determining surface force readiness and ship operational cycles. We also analyzed the economic effects of homeporting ships overseas; specifically, the decreases in maintenance labor hours in the United States that results from maintenance work being performed in foreign shipyards while Navy ships are homeported overseas. To do so, we obtained the projected maintenance workload for the large surface combatants—destroyers moving from U.S. homeports to Rota, Spain (four ships) and Yokosuka, Japan (two ships)—from the Office of the Chief of Naval Operations for the approximately 7- to 10-year period these ships are expected to be homeported overseas. Rota, Spain, and Yokosuka, Japan, represent the only overseas homeports that the Navy plans to relocate ships to in the next several years. We converted this number of maintenance labor hours into full-time equivalents. For this analysis, we assumed 2,080 hours of work per full-time equivalent, recognizing that ship repair industry workers receive vacation and holidays but also work high levels of overtime, according to Navy officials. We also applied the fiscal year 2014 labor rates associated with shipyards in each port that the destroyers were leaving in the United States—Norfolk, Virginia; Mayport, Florida; and San Diego, California—to determine the annual economic losses in U.S. shipyards in terms of maintenance expenditures and full-time equivalents. We calculated maintenance losses based on revenue transfers from labor and did not include material cost-related transfers because Navy officials explained that some portion of the material could be purchased in the United States. We interviewed officials from the Naval Sea Systems Command; Commander, Naval Surface Force, U.S. Pacific Fleet; Commander, Naval Surface Force, U.S. Atlantic Fleet; Fleet Forces Command; U.S. Pacific Fleet; 5th Fleet; 6th Fleet; and 7th Fleet to discuss these data, our analyses, and their observations on the costs, readiness effects, and operational benefits of homeporting ships overseas. To assess the extent to which the Navy has identified and taken steps to mitigate any risks from homeporting ships overseas, we analyzed (1) key Navy and Department of Defense (DOD) guidance and policies for assigning ships to homeports in the United States and overseas and (2) the Navy’s required actions for evaluating, planning, and implementing changes to overseas force structure. We interviewed Navy and State Department officials to discuss these documents and determine whether decision-making processes are in place and are being followed and what factors, data, and lessons learned the Navy considers in making these decisions. We also examined Navy force-structure requirements and the 2014 Navy Strategic Laydown and Dispersal Plan to understand the basing construct for Navy ships, as well as any planned changes to the laydown. We also analyzed previous Navy reports that studied the effect of high operational tempo, different deployment approaches, and deferred maintenance on the overall material condition of surface ships and on a ship’s service life. To illustrate the effect of potential decreases in ship service life on the amphibious fleet inventory, we worked with the Congressional Budget Office, which completes an annual assessment of the Navy’s 30-year shipbuilding plan and uses an internal model to show the annual inventories of selected categories of ships under the Navy’s plan and how they align with the Navy’s goals for those categories of ships. The Congressional Budget Office published results of this model in December 2014 (see the upper panel of fig. 8). We asked the Congressional Budget Office to use the model to deduct 6 years from the service lives of the Amphibious Ready Group (one amphibious assault ship, two dock landing ships, and one amphibious transport dock ship) homeported in Sasebo, Japan, in order to determine the effects of these potential losses in service life on the amphibious fleet inventory. The Congressional Budget Office used its model to conduct this analysis and provided us with the outputs found in the lower panel of figure 8. We summarized the results, and Congressional Budget Office officials concurred that our representation accurately depicts the predicted effects of reduced service life on the amphibious fleet inventory. We deducted 6 years of service life based on our discussions with Navy fleet and headquarters officials regarding what constituted a reasonable reduction to a ship’s service life. For example, the upper time-frame limit we considered was based on the Navy’s prior proposal to retire an amphibious ship homeported overseas 16.5 years prior to the end of its expected service life. We recognize that this is one potential outcome if the Navy chose not to make the significant investments in depot maintenance required to mitigate effects to ship service life for ships returning from overseas homeports. We chose the Sasebo-based ships because this is the primary homeport for amphibious ships located outside of the United States. Finally, we also reviewed the Navy’s plan to implement a revised operational schedule—referred to as the optimized fleet response plan—and interviewed Navy officials to discuss this plan, its purpose, expected benefits, and impact on ships’ time allocated to maintenance, training, deployment, and operational availability. We compared the Navy’s plans to criteria for risk assessment in federal standards for internal control. We interviewed officials, and where appropriate obtained documentation, at the following locations: Office of the Secretary of Defense Policy Cost Assessment and Program Evaluation Joint Staff Office of the Chief of Naval Operations Global Force Management Strategy and Plans Logistics U.S. Fleet Forces Command U.S. Pacific Fleet Commander, Naval Surface Force, U.S. Pacific Fleet Commander, Naval Surface Force, U.S. Atlantic Fleet U.S. 5th Fleet U.S. 6th Fleet U.S. 7th Fleet Commander, Navy Installations Command Navy Region Europe, Africa, Southwest Asia, Detachment Bahrain Naval Sea Systems Command Navy Surface Warfare Center, Corona Surface Maintenance Engineering Planning Program Board of Inspection and Survey Commander, Naval Regional Maintenance Center U.S. State Department Congressional Budget Office RAND Corporation We conducted this performance audit from June 2014 to May 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The Navy’s process for assigning and changing ship homeports is illustrated in figure 11 below, with particular emphasis on moving a ship’s homeport from the United States to an overseas homeport. The Navy has historically assigned new ships entering its fleet a U.S. homeport. Based on strategic needs and priorities, it may change a ship’s homeport from the United States to one overseas. By fiscal year 2017, the Navy plans to have 41 ships homeported overseas. The Navy’s Strategic Laydown and Dispersal Plan (strategic laydown plan) is intended to provide strategic rationale and guidance for subsequent, required actions to approve and implement a homeport change. The Navy’s recommendations for homeporting are based on 13 criteria, ranging from compliance with environmental laws to a consideration of planned military construction projects. The Navy updates its strategic laydown plan annually and briefs the results of its plan to Congress each year. From the strategic laydown plan, the lead fleet commander (either the United States Fleet Forces Commander or the United States Pacific Fleet Commander) provides a requirements letter to his or her respective command to initiate the early planning process for a homeport change. This includes the vetting of near-term needs to support the homeport change (i.e., what will be required in terms of manpower, logistics, budgeting, etc.) prior to recommending a new homeport by means of an Organization Change Request—the Navy’s official means for changing homeport designation. The fleet commander then submits its Organization Change Request to the Chief of Naval Operations, who must approve it before final approval from the Secretary of the Navy. The Office of the Secretary of the Navy then submits the homeport change proposal in the form of an Overseas Force Structure Change to the Joint Staff and Office of the Secretary of Defense. According to Office of the Secretary of Defense officials, the Office of the Secretary of Defense must ensure resourcing requirements associated with the proposed Overseas Force Structure Change are clearly articulated and identify whether funding has been budgeted or programmed. The Joint Staff reviews the proposal to ensure it has a number of required elements, including cost estimates for the homeport change, prior coordination with the State Department on potential host- nation sensitivities, and an assessment of the impact on personnel and their families. The combatant command that would be homeporting the ship in its area of operations must also conduct an assessment of political-military considerations, force structure, and infrastructure and short-term resource implications of the requested Overseas Force Structure Change to inform the Joint Staff and Office of the Secretary of Defense of the relative values, benefits, and costs of the proposal. The Joint Staff and Office of the Secretary of Defense review the final proposal and coordinate with the State Department prior to submitting the Overseas Force Structure Change for ultimate Secretary of Defense review and approval. Following approval by the Secretary of Defense, the State Department notifies and works with the host nation on timing and the official announcement of the homeport change, and the Department of Defense generates military orders to move the ship from a U.S. homeport to one overseas. To compare costs and deployed days under way for ships that were homeported overseas and in the United States, we conducted multivariate statistical analyses that held constant certain other factors that also might have explained any differences in these outcomes between the two groups of ships. Appendix III describes the data we analyzed in more detail, and table 4 below provides the mean outcomes we analyzed by fiscal year and type of homeport. Data were available for varying periods across ships and variables, as specified in the tables of results below. We limited our analysis to amphibious ships, cruisers, and destroyers, due to smaller amounts of data available for other ship classes when deployed overseas versus in the United States. Across all fiscal years, deployed days under way and costs are higher, on average, for ships homeported overseas than ships homeported in the United States. The use of overseas homeporting has increased over time, from 6 ships in fiscal year 2003 to 17 ships in fiscal year 2013. In this appendix, we describe the statistical methods we used and the results of our analysis for each outcome. Our use of statistical methods provides limited assurance that our results reflect the influence of overseas homeporting, rather than other related factors. This improves upon simple comparisons of the raw data, as in table 4. However, we did not design the analysis to account for all relevant factors, and therefore our results are not conclusive causal estimates. Operational tempo is potentially a primary mechanism by which overseas homeporting may affect costs. Navy officials told us that ships generally are under way for longer periods when homeported overseas. Higher operational tempo increases the proportion of time spent in operations and training compared to time spent in depot maintenance. This, in turn, may increase operational costs and reduce opportunities for sustainment spending. We analyzed this scenario by comparing ships’ deployed days under way in a given year from fiscal year 2003 and 2012 to their deployed days under way in the prior year, separately for overseas- and U.S.- homeported ships. This allowed us to examine how the Navy rotates ships in and out of periods of higher maintenance or operations, as well as whether this rotation varied according to whether ships were homeported overseas or in the United States. We fit the following statistical models to our data, in order to more formally analyze these associations: Daysit = δ Overseasit + μ + τ + eit (Model 1.1) Daysit = β Daysi(t-1) + μ + τ + eit (Model 1.2) Daysit = β1 Daysi(t-1) + β2 Daysi(t-1) * Overseasi(t-1) + δ Overseasi(t-1) + μ + τ + eit (Model 1.3) Daysit = β1 Daysi(t-1) + β2 Daysi(t-1) * Overseasi(t-1) + δ Overseasi(t-1) + (Model 1.4) α1 Mandaysi(t-1) + α2 Mandaysi(t-2) + μ + τ + eit For ship i and fiscal year t, Days measured the number of deployed days under way, Overseas indicated being homeported overseas, Mandays measured the ratio of executed to required mandays, μ and τ were vectors of ship and fiscal year fixed effects, respectively, and e was random error. Our estimation process applied the “within transformation,” which expressed the observations for each ship as deviations from its over-time mean. This eliminated the need to explicitly estimate ship fixed effects, μ, while still estimating the difference between overseas and U.S.- homeported ships, δ, consistent with common statistical practice for this type of model. The fixed effects held constant all ship characteristics that did not change over time, such as class and year commissioned. The fiscal year fixed effects in τ held constant all changes over time observed among all ships, such as labor and material prices, trends in military operations, and policy changes that applied uniformly across ships. In model 1.4, we included additional controls for the percentage of required mandays that were executed, measured concurrently and prior to when we measured homeport type. Navy officials said that they considered a ship’s maintenance history when deciding whether and when to homeport a ship overseas. Controlling for prior executed maintenance allowed us to compare outcomes among ships having similar maintenance histories. An explicit covariate was necessary, because the ratio could vary within ships over time and therefore was not absorbed by ship or year fixed effects. Table 5 provides estimates of the models’ key parameters, which we derived using least-squares methods with asymptotic robustness corrections for potentially heteroskedastic and nonindependent errors within ships. Based on model 1.1, we estimated that a ship homeported overseas in the current year spent about 42.1 additional deployed days under way, compared to the average ship that was not homeported overseas, with a 95 percent confidence interval of implying a difference distinguishable from zero at the 0.05 significance level. Specifically, we estimated that ships homeported overseas were deployed for 110.7 days , on average, compared to 68.6 days for U.S.- homeported ships. This is a moderately large difference, given that the middle 50 percent of ships in our analysis ranged from 0 to 136 deployed days under way and the median ship was under way for 66 days (across all years in our data). We found that ships tended to be under way for fewer days in the current year if they were under way for more days in the prior year. For each additional 50 days that the average ship was under way in the prior year, we estimated that the ship was under way for an average of 21.5 [17.7, 25.3] fewer days in the current year (based on model 1.2). This pattern is consistent with the Navy’s practice of rotating ships in and out of operations and depot maintenance. However, we found that overseas-homeported ships appeared to have a different pattern of rotation. Model 1.3 implied that the average U.S.- homeported ship could expect to spend about 23.6 fewer days [20.0. 27.1] under way this year for each additional 50 days it was under way in the prior year. In contrast, for the average overseas-homeported ship, there was no statistically distinguishable relationship between days under way in the prior and current year. In other words, we could not detect a systematic pattern of rotating ships between periods of operations and maintenance for overseas-homeported ships, though this result may reflect our inability to detect such an effect with a modest amount of data. The results remained similar when holding constant the proportion of required mandays executed. We used a similar approach to compare sustainment costs between overseas- and U.S.-homeported ships. As discussed above, overseas homeporting is associated with more deployed days under way, and more deployed days under way can reduce opportunities for intensive maintenance. Consequently, we assessed whether sustainment spending in a current year decreased with more deployed days under way in that year, and whether it increased with more deployed days under way in the prior year. Such a pattern would be consistent with the Navy’s practice of rotating ships in and out of maintenance periods. In addition, we assessed how sustainment spending varied, depending on the use of overseas homeporting in the current and prior year. We carried out this analysis by fitting the following statistical models: Sustainit = β1 Daysit + β2 Daysi(t-1) + μ + τ + eit (Model 2.1) Sustainit = δ1 Overseasit + δ2 Overseasi(t-1) + δ3 Overseasit * Overseasi(t-1) + (Model 2.2) μ + τ + eit Sustainit = δ1 Overseasit + δ2 Overseasi(t-1) + δ3 Overseasit * Overseasi(t-1) + (Model 2.3) α Mandaysi(t-2) + μ + τ + eit Model 2.1 expressed sustainment spending in the current year, Sustainit, as a function of deployed days under way in that year and in the prior year, Daysit and Daysi(t-1). We included fixed effects for ships and fiscal years, μ and τ, for the same reasons and using the same methods as in our models of deployed days under way. Model 2.2 included indicators for all possible combinations of homeport type in the current and prior fiscal year, denoted Overseasit and Overseasi(t-1), with ships that were homeported overseas in neither year serving as the omitted reference group. Since homeport type is causally prior to deployed days under way, we did not control for both variables simultaneously, in order to avoid posttreatment control bias. Lastly, model 2.3 included a control for the ratio of executed to required mandays for the same reasons as in our models of deployed days under way. We again measured this ratio in the fiscal year prior to the earliest measurement of homeport type (a 2-year lag). Table 6 provides estimates of these models’ parameters, using the same estimation methods as we used to fit models of deployed days underway. Our results were consistent with a similar pattern of rotating in and out of operational and maintenance periods when analyzing sustainment costs. Based on model 2.1, we estimated that for each additional 50 days that the average ship spent under way in the current year, the Navy could expect to spend about $1.5 million less on sustainment in that year (50 days multiplied by an estimated marginal effect of -$30,600). Days under way are periods when ships cannot enter depot maintenance, which would prevent the Navy from spending large amounts on sustainment. Accordingly, we estimated that an additional 50 days under way in the prior year was associated with $0.7 million more spending on sustainment in the current year. The data suggest that the Navy performs maintenance in roughly 2-year cycles. Ships rotate in and out of higher operational tempo, and the Navy concentrates sustainment spending on specific periods. Given this pattern, overseas homeporting should be associated with more sustainment spending in the year when the ship returns to U.S.- homeported status and has more opportunities for depot maintenance. Accordingly, based on model 2.2, we found that Navy spent about $5.8 million more on sustainment in the year after the average ship returned to a U.S. homeport, compared to the average ship that was never homeported overseas. (This difference is distinguishable from zero at the 0.11 level of significance, however.) The results remained similar when holding constant the proportion of required mandays executed. The Navy’s pattern of rotating ships in and out of maintenance periods suggests that overseas homeporting should have the opposite associations with operational costs as it did with sustainment costs. More deployed days under way in a current year should be associated with higher operational costs in that year. However, operational costs may be lower in the following year, when ships may spend more time in maintenance. Since overseas deployments are associated with more deployed days under way, they may have analogous associations with operating costs. We assessed this scenario by estimating identical statistical models as those we fit to the data on sustainment costs, except that we substituted operational costs as the outcome variable. All other model assumptions remained the same. Table 7 provides estimates of these models’ parameters. Our analysis of operational costs found results consistent with those on deployed days under way and sustainment costs. As expected, higher operational tempo in the current year was associated with more operational spending in that year, with the Navy spending an additional $3.2 million , on average, for each additional 50 days under way based on model 3.1. The same 50-day change in deployed days under way in the prior year was associated with a $0.5 million decrease in operational spending in the current year. This pattern is the opposite of what we observed with sustainment spending and is consistent with rotating ships in and out of maintenance periods. Model 3.2 suggests that homeporting ships overseas across 2 consecutive years was associated with higher operational spending. Ships that were homeported overseas for 2 consecutive years had $18.7 million more in operational costs, on average, compared to ships that were not homeported overseas during the same period. The average ship experienced a $12.6 million decline in operational spending during the first year it returned to U.S. homeport status, compared to the average ship that was not homeported overseas. Curiously, ships in the first year of being homeported overseas, after being homeported in the United States during the prior year, had no different operational costs on average than ships that remained homeported in the United States in both years. The results remained similar when holding constant the proportion of required mandays executed, although the standard error of the estimated difference between overseas- and U.S.-homeported ships in the current year was somewhat larger. Personnel costs are more likely to have a straightforward association with overseas homeporting. Unlike sustainment and operational costs, which are somewhat inversely related and linked to operational tempo, personnel costs are not as directly tied to cycles of operations and maintenance. As we discuss in the report, overseas homeporting can involve additional costs related to relocating sailors and paying higher living allowances and cost of living salary adjustments than the Navy would have paid to sailors homeported in the United States. These costs are more directly related to the use of overseas homeports, rather than being indirectly related through operational tempo. As a result, we can more directly compare personnel costs between ships that were homeported overseas and in the United States, without accounting for operational tempo. To confirm our assumption that operational tempo should not be as strongly associated with personnel costs, particularly from the prior year, we first estimated the following model: = β1 Daysit + β2 Daysi(t-1) + μ + τ + eit (Model 4.1) The model expressed personnel costs as a function of deployed days under way in the current and prior years. The model included ship and year fixed effects and was fit using the same methods as in the models above. The first column of table 8 provides estimates of the model’s parameters. Our analysis from model 4.1 found that an additional 50 days under way in the current year was associated with an average of $0.16 million [0.08, 0.25] additional personnel spending in the same year—a small difference, compared to the analogous $1.5 million and $3.2 million increases for sustainment and operational costs. The prior year’s days under way were not meaningfully associated with the current year’s personnel spending. As a result, we estimated the difference in personnel costs between overseas- and U.S.-homeported ships measured in the current year, omitting the interactions with deployed days under way and the 1-year lag used in the models above. Our models took the following form: Personnelit = δ Overseasit + μ + τ + eit (Model 4.2) Personnelit = δ Overseasit + α Mandaysi(t-1) + μ + τ + eit (Model 4.3) Parameter estimates for models 4.2 and 4.3 appear in table 8. Based on model 4.2, we estimated that ships homeported overseas had about $1.3 million higher personnel costs, on average, than ships that were homeported in the United States. The results remained similar when holding constant the proportion of required mandays executed. Our statistical analysis described the associations among homeport type, deployed days under way, and various types of cost, holding constant factors such as ship type, age, and common trends in military operations and price levels. In addition, we estimated the statistical precision of these associations. Our analysis found that overseas homeporting was associated with higher operational tempo, in the form of more deployed days under way, as well as higher sustainment, operational, and personnel costs. Despite its ability to account for certain alternative explanations and quantify uncertainty, our analysis has several limitations that affect the interpretation and use of its findings. We did not design our analysis to credibly isolate the causal relationship between homeport type and the outcomes of interest. Rather, we applied statistical methods to account for specific factors in the data available, in order to rule out a limited number of alternative explanations for the observed differences. The variation in homeport type over time within ships allowed us to use ship and fiscal year fixed effects, which can be powerful methods to control for many unobserved, stable factors without explicitly measuring them. Nevertheless, the validity of our findings is limited by the lack of available data on other factors that could vary over time within ships. These factors could be systematically associated with homeport type and the outcomes of interest, such as variation over time in the type of operations conducted by overseas- versus U.S.-homeported ships. Our results are biased to the extent that these factors exist. Lastly, the modest amount of data available limits the precision of our estimates. Although we were able to estimate statistically meaningful differences between homeport types in some cases, as described above, a maximum of 11 fiscal years and 1,111 ship-year observations gave us limited data with which to estimate the relationships of interest. As the Navy continues to accumulate data over time, the precision of these estimates should increase accordingly. Our results are preliminary and should be interpreted cautiously, consistent with estimated sampling variances, until they are replicated with additional data. The Navy uses casualty reports (CASREP) to provide information on the material condition of ships to determine current readiness. CASREPs reflect equipment malfunctions that impact affect a ship’s ability to support required mission areas and suggest a deficiency in mission-essential equipment. To compare the average number of daily CASREPs for ships that were homeported overseas and in the United States, we conducted two analyses. First, we conducted a time-series regression analysis to estimate the trends for ships that were homeported overseas and in the United States. Next, we conducted a multivariate statistical analysis that estimated the difference in the average number of daily CASREPs between the two types of ships while holding constant certain other factors that might have explained the difference. We analyzed Navy CASREP data for destroyer, amphibious, and cruiser ship types from January 2009 through July 2014. We included all category 2, 3, and 4 CASREPs in our analysis. For each ship and month, we determined whether a ship was homeported overseas or in the United States and computed separate monthly averages for each type of homeport. Across all months in our data the average number of daily CASREPs per ship was lower for ships homeported overseas than for those homeported in the United States (20.3 vs. 21.9). Table 9 provides the average daily number of CASREPS per ship by month and type of homeport. In this appendix, we describe the statistical methods we used and the results of our analysis for the average daily number of CASREPs per ship. Our use of statistical methods provides limited assurance that our results reflect the influence of overseas homeporting, rather than other related factors. This improves upon simple comparisons of the raw data, as in table 9. However, we did not design the analysis to account for all relevant factors, and therefore our results are not conclusive causal estimates. First, we fit time-series regression models with autoregressive errors (AR lag of 1) to the monthly data from ships homeported overseas and in the United States to account for the positive autocorrelation. We used these models to estimate the trend for all ships and for each deployment status separately. The purpose of this analysis of the CASREP data was to analyze changes in the daily averages from month to month to describe the trends from January 2009 through July 2014. Table 10 provides estimates of the model’s key parameters. Based on these models, we estimated that there is a significant upward trend for both overseas- and U.S.-homeported ships. The trend for ships homeported overseas is increasing at a slightly and statistically significant higher rate than ships homeported in the United States (about 1 additional report per year). Specifically, the estimated trend for the average daily number of casualty reports per ship is increasing at a rate of about 3.7 per year (0.3062*12 months) for overseas-homeported ships and about 2.4 per year (0.2014*12 months) for U.S.-homeported ships. Next, we fit the following statistical model to our data: Casrepsit = δ Overseasit + μ + τ + eit For ship i and month t, Casreps measured the number of deployed days underway, Overseas indicated being homeported overseas, μ + τ were vectors of ship and monthly fixed effects, respectively, and e was random error. The fixed effects held constant all ship characteristics that did not change over time, such as class, and year commissioned. The monthly fixed effects in τ held constant all changes over time observed among all ships. Table 11 provides estimates of the model’s key parameters, which we derived using least squared methods with asymptotic robustness correction for potentially nonindependent errors with ships and for heteroskedasticity. Based on the model, we did not identify a statistically significant association between higher numbers of casualty reports and a ship being homeported overseas. However, we estimated that ships homeported overseas had, on average, about 25 casualty reports (+/-11.6) and ships homeported in the United States had about 20 casualty reports (+/-1.7). The differences between these estimates are not statistically significant at the 95 percent confidence level. Our statistical analysis described the associations among homeport type, the average number of daily CASREPs per ship holding constant factors such as ship type, age, and common trends in military operations. In addition, we estimated the statistical precision of these associations. Our analysis did not identify a statistically significant association between overseas homeporting and a higher number of daily CASREPs. Despite its ability to account for certain alternative explanations and quantify uncertainty, our analysis has certain limitations that affect the interpretation and use of its findings. The variation in homeport type over time within ships allowed us to use ship and fiscal year fixed effects, which can be powerful methods to control for many unobserved factors without explicitly measuring them. Nevertheless, the validity of our findings is limited by the lack of available data on other factors that could vary over time within ships. Our results are biased to the extent that these factors exist. Our results are preliminary and should be interpreted cautiously, consistent with estimated sampling variances, until they are replicated with additional data. Figures 12–14 provide a detailed presentation of the differences between Board of Inspection and Survey (INSURV) Figure of Merit, functional area, and demonstration scores for the most recent material inspections from fiscal years 2007 through 2014 for ships homeported in the United States and overseas. INSURV assigns ships an overall inspection score, as well as scores in functional areas and demonstrations: Figure of Merit score: INSURV assigns ships an overall inspection score—the INSURV Figure of Merit—which is a single-number representation of the ship’s overall material condition and represents a ranking of this condition relative to other ships. Functional area scores: These scores are based on inspection of a ship’s systems (e.g., propulsion, information systems, weapons). Demonstration scores: These scores are based on inspection of a ship’s performance on various operational demonstrations (e.g., steering, full power ahead, gunnery firing). We compared cruisers, destroyers, and amphibious ships; we excluded mine countermeasures ships and patrol coastal ships since these ship classes have had limited recent experience deploying from U.S. homeports according to Navy officials. Because of the relatively small number of ships that were inspected during this period and, in particular, the small sample of ships homeported overseas, we did not conduct a statistical analysis of these data using the methods we used to analyze costs and ship conditions. Instead, we calculated simple descriptive statistics to characterize differences between ships homeported overseas and in the United States. Figure 12 shows that the average INSURV Figure of Merit scores for overseas-homeported cruisers, destroyers, and amphibious ships are lower than those of U.S.-homeported ships. Figure 13 shows that overseas-homeported cruisers, destroyers, and amphibious ships are lower in 11 of 19 functional area scores compared to U.S.-homeported ships. Figure 14 shows that overseas-homeported cruisers, destroyers, and amphibious ships are lower in 7 of 10 demonstration scores compared to U.S.-homeported ships. In addition to the contact named above, Suzanne Wren, Assistant Director; Jim Ashley; Steven Banovac; Joanne Landesman; Amie Lesser; Carol Petersen; Michael Silver; Grant Sutton; Jeff Tessin; Chris Watson; and Michael Willems made key contributions to this report. | Forward presence supports the Navy's goals of ensuring sea control, projecting U.S. power, and providing maritime security. To meet these goals and combatant commanders' growing demand for forward presence, the Navy has doubled the number of ships assigned to overseas homeports since 2006, to a total of 40 by the end of 2015, and plans to increase this number further in the future. House Report 113-446 included a provision that GAO analyze the Navy's decision-making process for determining when to homeport ships overseas and identify the relative costs and benefits of various approaches. This report addresses (1) the operational benefits, costs, and readiness effects associated with assigning ships to U.S. or overseas homeports and (2) the extent to which the Navy has identified and mitigated risks from homeporting ships overseas. GAO analyzed Navy policies and 5 to 10 years of historical cost, operational tempo, and readiness data and interviewed fleet officials. Homeporting ships overseas considerably increases the forward presence— U.S. naval forces in overseas operating areas—that the Navy's existing fleet provides and has other near-term benefits such as rapid crisis response, but incurs higher operations and support costs when compared to U.S.-homeported ships. GAO found that casualty reports—incidents of degraded or out-of-service equipment—have doubled over the past 5 years and that the material condition of overseas-homeported ships has decreased slightly faster than that of U.S.-homeported ships (see figure below). In addition, the Navy has spent hundreds of millions of dollars on overseas infrastructure and base operating costs since 2009, while moving large numbers of sailors, dependents, and ship repair work overseas. GAO also found that the high pace of operations the Navy uses for overseas-homeported ships limits dedicated training and maintenance periods, which has resulted in difficulty keeping crews fully trained and ships maintained. The Navy has not identified or mitigated the risks its increasing reliance on overseas homeporting poses to its force over the long term. GAO found that some ships homeported overseas have had consistently deferred maintenance that has resulted in long-term degraded material condition and increased maintenance costs, and could shorten a ship's service life. The Navy began implementing a revised operational schedule in 2014 for U.S.-based ships that lengthens time between deployments, citing the need for a sustainable schedule. However, the Navy has not determined how—or whether—it will apply a more sustainable schedule to all ships homeported overseas. Although the Navy's decision process for moving individual ships overseas identifies actions and resources needed, it does not assess risks that such moves pose to costs, readiness, or expected service lives of ships that the Navy can expect based on its historical experience operating ships from overseas homeports. Without a sustainable operational schedule and a comprehensive risk assessment on overseas homeporting, the Navy lacks information needed to make informed homeporting decisions and it will be difficult for the Navy to identify and mitigate the risks its homeporting decisions pose to its budget, readiness, and ship service lives over the long term. GAO recommends that the Navy develop and implement a sustainable operational schedule for all ships homeported overseas and conduct a comprehensive assessment of the risks associated with overseas homeporting. The Department of Defense concurred with GAO's recommendations. |
The U.S. Border Patrol, within the Department of Homeland Security’s (DHS) U.S. Customs and Border Protection (CBP), is responsible for patrolling 8,000 miles of the land and coastal borders of the United States to detect and prevent the illegal entry of aliens and contraband, including terrorists, terrorist weapons, and weapons of mass destruction. As of October 2006, the Border Patrol had 12,349 agents stationed in 20 sectors along the southwest, northern, and coastal borders. In May 2006, the President called for comprehensive immigration reform that included strengthening control of the country’s borders by, among other things, adding 6,000 new agents to the Border Patrol by the end of December 2008. This would increase the total number of agents from 12,349 to 18,319, an unprecedented 48 percent increase over the next 2 years. As shown in figure 1, this increase is nearly equivalent to the number of agents gained over the past 10 years. In addition, legislation has been proposed in Congress that would authorize an additional 10,000 agents, potentially increasing the size of the Border Patrol to about 28,000 agents by the end of 2012. FLETC is an interagency training provider responsible for basic, advanced, and specialized training for approximately 82 federal agencies, including CBP’s Border Patrol. Under a memorandum of understanding, FLETC hosts the Border Patrol’s training academy in Artesia, New Mexico, and shares the cost of providing training with the Border Patrol. For example, FLETC provides the facilities, some instructors (e.g., retired Border Patrol agents), and services (e.g., laundry and infirmary) that are paid for out of FLETC’s annual appropriations. CBP’s Office of Training and Development designs the training curriculum (in conjunction with the Border Patrol and with input from FLETC) for the academy, administers the Border Patrol Academy, and provides permanent instructors and staff. Basic training for new Border Patrol agents consists of three components: (1) basic training at the academy, (2) postacademy classroom training administered by the academy but conducted in the sectors, and (3) field training conducted on the job in the sectors. The academy portion of the training is currently an 81-day program consisting of 663 curriculum hours in six subject areas: Spanish, law/operations, physical training, driving, firearms, and general training. After graduating from the academy, new Border Patrol agents are required to attend classroom instruction at their respective sectors in Spanish and law/operations 1 day a week for a total of 20 weeks. Finally, new agents are generally assigned to senior agents in a sector’s field training unit for additional on-the-job training intended to reinforce new agents’ skills in safely, effectively, and ethically performing their duties under actual field conditions. The Border Patrol’s basic training program exhibits attributes of an effective training program. GAO’s training assessment guide suggests the kinds of documentation to look for that indicate that a training program has a particular attribute in place, such as incorporating measures of effectiveness into its course designs. As shown in table 1, the Border Patrol was able to document that its training program had key indicators in place for the applicable attributes of an effective training program. In addition, the Border Patrol is pursuing accreditation of its training program from the Federal Law Enforcement Training Accreditation organization. The core training curriculum used at the Border Patrol Academy has not changed since September 11, but the Border Patrol added new material on responding to terrorism and practical field exercises. For example, the Border Patrol added an antiterrorism course that covers, among other things, what actions agents should take if they encounter what they believe to be a weapon of mass destruction or an improvised explosive device. The Border Patrol also incorporated practical field exercises that simulate a variety of situations that agents may encounter, such as arresting an individual who is armed with a weapon, as shown in figure 2. With regard to capacity, Border Patrol officials told us they are confident that the academy can accommodate the large influx of new trainees anticipated over the next 2 years. In fiscal year 2006, the average cost to train a new Border Patrol agent at the academy was about $14,700. This cost represents the amounts expended by both the Border Patrol and FLETC. (See table 2.) The Border Patrol paid about $6,600 for the trainee’s meals and lodging, and a portion of the cost of instructors, and FLETC paid about $8,100 for tuition, a portion of the cost of instructors, and miscellaneous expenses such as support services, supplies, and utilities. The $14,700 cost figure does not include the costs associated with instructors conducting postacademy and field training in the sectors. For fiscal year 2007, the average cost to train a new agent will increase to about $16,200. This is primarily due to an increase in the number of instructors hired, which increased CBP’s instructor costs from about $2,800 to $6,100 per student. The Border Patrol’s average cost per trainee at the academy is consistent with that of training programs that cover similar subjects and prepare officers for operations in similar geographic areas. For example, the estimated average cost per trainee for a BIA police officer was about $15,300; an Arizona state police officer, $15,600; and a Texas state trooper, $14,700. However, differences in the emphasis of some subject areas over others dictated by jurisdiction and mission make a direct comparison difficult. For example, while both the Border Patrol and the Texas Department of Public Safety require Spanish instruction, the Border Patrol requires 214 hours of instruction, compared with 50 hours for a Texas state trooper. Similarly, the Border Patrol does not provide instruction in investigative techniques, while BIA, Arizona, and Texas require 139, 50, and 165 hours of such instruction, respectively. Table 3 shows a comparison of Border Patrol’s basic training program with other federal and nonfederal law enforcement basic training programs. The Border Patrol is considering several alternatives to improve the efficiency of basic training delivery and to return agents to the sectors more quickly. For example, in October 2007 the Border Patrol plans to implement a proficiency test for Spanish that should allow those who pass the test to shorten their time at the academy by about 30 days. According to Border Patrol officials, this could benefit about half of all trainees, because about half of all recruits already speak Spanish. The Border Patrol also plans to convert postacademy classroom training to computer-based training beginning in October 2007, allowing agents to complete the 1-day- a-week training at their duty stations rather than having to travel to the sector headquarters for this training. As a result, fewer senior agents will be required to serve as instructors for postacademy training. Finally, the Border Patrol is considering what other training it can shift from the academy to postacademy and field training conducted in the sectors, which could further reduce the amount of time trainees spend at the academy. While these strategies may improve the efficiency of training at the academy, officials expressed concern about the sectors’ ability provide adequate supervision and continued training once the new agents arrive at the sectors. Some Border Patrol officials are concerned with having enough experienced agents available in the sectors to serve as first-line supervisors and field training officers for these new agents. According to the Chief of the Border Patrol, agencywide the average experience level of Border Patrol agents is about 4 or 5 years of service. However, in certain southwest border sectors the average experience level is only about 18 months. Moreover, the supervisor-to-agent ratio is higher than the agency would like in some southwest sectors. Border Patrol officials told us that a 5-to-1 agent-to-supervisor ratio is desirable to ensure proper supervision of new agents, although the desired ratio in certain work units with more experienced agents would be higher. Our analysis of Border Patrol data showed that as of October 2006, the overall agent-to-supervisor ratios for southwest sectors, where the Border Patrol assigns all new agents, ranged from about 7 to 1 up to 11 to 1. These ratios include some work units with a higher percentage of experienced agents that do not require the same level of supervision as new agents. To augment the supervision of new agents, the Border Patrol is considering using retired Border Patrol agents to act as mentors for new agents. Nevertheless, given the large numbers of new agents the Border Patrol plans to assign to the southwest border over the next 2 years, along with the planned reassignment of experienced agents from the southwest border to the northern border, it will be a challenge for the agency to achieve the desired 5-to-1 ratio for new agents in all work units in those sectors receiving the largest numbers of new agents. In addition to concerns about having a sufficient number of experienced agents to serve as supervisors and field training officers, the Border Patrol does not have a uniform field training program that establishes uniform standards and practices that each sector’s field training should follow. As a result, Border Patrol officials are not confident that all new trainees currently receive consistent postacademy field training. Moreover, the addition of new training expectations may complicate this situation. The Border Patrol is in the process of developing a uniform field training program that it plans to implement beginning in fiscal year 2008. While Border Patrol officials are confident that the academy can accommodate the large influx of new trainees anticipated over the next 2 years, the larger challenge will be the sectors’ capacity to provide adequate supervision and training. The rapid addition of new agents along the southwest border, coupled with the planned transfer of more experienced agents to the northern border, will likely reduce the overall experience level of agents assigned to the southwest border. In turn, the Border Patrol will be faced with relying on a higher proportion of less seasoned agents to supervise these new agents. In addition, the possible shifting of some training from the academy to the sectors could increase demand for experienced agents to serve as field training officers. Moreover, without a standardized field training program, training has not been consistent from sector to sector, a fact that has implications for the sectors’ ability to add new training requirements and possibly consequences for how well agents will perform their duties. To ensure that these new agents become proficient in the safe, effective, and ethical performance of their duties, it will be extremely important that new agents have the appropriate level of supervision and that the Border Patrol have a sufficient number of field training officers and a standardized field training program. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other members of the subommittee may have at this time. For further information about this testimony, please contact me at (202) 512-8816 or by e-mail at [email protected]. Key contributors to this testimony were Michael Dino, Assistant Director; Mark Abraham; E. Jerry Seigler; and Julie Silvers. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | In May 2006, the President called for comprehensive immigration reform that included strengthening control of the country's borders by, among other things, adding 6,000 new agents to the U.S. Border Patrol by the end of December 2008. This unprecedented 48 percent increase over 2 years raises concerns about the ability of the Border Patrol's basic training program to train these new agents. This testimony is based on a recent report for the ranking member of this subcommittee on the content, quality, and cost of the Border Patrol's basic training program for new agents and addresses (1) the extent to which the Border Patrol's basic training program exhibits the attributes of an effective training program and the changes to the program since September 11, 2001; (2) the cost to train a new agent and how this compares to the costs of other similar law enforcement basic training programs; and (3) any plans the Border Patrol has developed or considered to improve the efficiency of its basic training program. To address these issues, GAO reviewed relevant documents; observed classroom training and exercises at the Border Patrol Academy in Artesia, New Mexico; assessed the methodologies of training cost estimates; and interviewed Border Patrol officials. The Border Patrol's basic training program exhibits attributes of an effective training program. GAO's training assessment guide suggests the kinds of documentation to look for that indicate that a training program has a particular attribute in place. The Border Patrol's training program included all of the applicable key attributes of an effective training program. The core curriculum used at the Border Patrol Academy has not changed since September 11, but the Border Patrol added new material on responding to terrorism and practical field exercises. Border Patrol officials are confident that the academy can accommodate the large influx of new trainees anticipated over the next 2 years. In fiscal year 2006, the average cost to train a new Border Patrol agent at the academy was about $14,700. While differences in programs make a direct comparison difficult, it appears that the Border Patrol's average cost per trainee at the academy is consistent with that of training programs that cover similar subjects and prepare officers for operations in similar geographic areas. For example, the estimated average cost per trainee for a Bureau of Indian Affairs police officer was about $15,300; an Arizona state police officer, $15,600; and a Texas state trooper, $14,700. The Border Patrol is considering several alternatives to improve the efficiency of basic training delivery at the academy and to return agents to the field more quickly. For example, in October 2007 the Border Patrol plans to implement a proficiency test for Spanish that should allow those who pass the test to shorten their time at the academy by about 30 days. The Border Patrol is also considering what training it can shift from the academy to postacademy training conducted in the field, which could further reduce the amount of time trainees spend at the academy. However, Border Patrol officials have expressed concerns with having a sufficient number of experienced agents available to serve as first-line supervisors and field training officers. The Border Patrol also currently lacks uniform standards and practices for field training, and shifting additional training responsibilities to the field could complicate this situation. |
The Department of Education administers four major student financial aid programs under title IV of HEA: FFELP, the William D. Ford Direct Loan Program (FDLP), the Federal Pell Grant Program, and the Federal Campus-Based Programs. These programs together will make available an estimated $47 billion to about 8 million individuals during the 1998-99 academic year—about 80 percent of it in student loans. Schools are responsible for obtaining and evaluating the financial aid history of students to ensure that students are eligible for aid. During our review, we identified 10 tasks inherent to administering federal student aid programs through NSLDS or other methods. These tasks are related to four general processes and functions operational at the time of our survey that the Department made available to schools through NSLDS to help them administer the student financial aid programs more effectively. (See table 1.) Once the school determines that a student is eligible, financial aid funds are disbursed to the student according to program requirements. To support—as well as monitor—these student loan programs, the Department has developed a number of automated processing systems, including NSLDS. The budget for these systems is expected to be about $378 million for fiscal year 1999. (See app. III for descriptions of the major student financial aid systems.) Prior to NSLDS, the Department relied on a system—commonly referred to as the guaranty agency tape dump—to collect selected information from guaranty agencies on each federal student loan. The tape dump, developed in the late 1970s, was initially intended to be used by the Department primarily as an annual source of data for analysis of program trends. According to the Department, it did not expect that every guaranty agency would have historically collected all the data requested because each agency’s system was designed to meet the needs of that individual guaranty agency. The tape dump, according to the Department, was not designed to be used, for example, to prevent awarding loans to ineligible borrowers. Under 1986 HEA amendments, the Secretary of Education was authorized to replace the tape dump and develop a computer system that would make national student loan data accessible to guaranty agencies; however, the Department could not require guaranty agencies to use the database before approving new loans. As a result, planning for the development of the new NSLDS was delayed for several years, when the Department was allowed, under the Omnibus Budget Reconciliation Act of 1989, to require guaranty agencies to use the system in determining student eligibility. The scope of the database expanded when 1992 HEA amendments required the Department to integrate a national student loan database with other financial aid data systems. The 1992 amendments also stated that the Secretary of Education, in establishing a national database, should give priority to providing information on student enrollment and status, current loan holders, and servicers. In response to these legislative mandates, in January 1993, the Department awarded a 5-year, $39 million contract to develop and maintain NSLDS. As of March 1998, the costs for developing, implementing, and maintaining the system have totaled $96.5 million. According to the Department, NSLDS contained about 118 million loan and grant records as of February 1998. These records were provided by guaranty agencies for the FFELP loans they guaranteed, by the contractor that services FDLP loans for the Department, and by schools for Pell grants and campus-based aid they awarded. As figure 1 illustrates, a significant portion of data stored in NSLDS—about 70 percent—related to FFELP loans as of March 1998. The Department’s student financial aid data systems have suffered from data quality problems. For example, in 1996, the Department’s Office of Inspector General (OIG) found in its review of the September 30, 1992, tape dump that the number of FFELP loans in repayment was overstated by approximately 5.9 million loans. OIG also found that a significant number of loans that were incorrectly recorded in the tape dump remained incorrect in NSLDS, affecting the reliability of the new system. As we reported in 1997, poor quality and unreliable FFELP loan data remain in the Department’s systems, and inaccurate loan data were being entered into NSLDS. As a result, the Department cannot obtain complete, accurate, and reliable FFELP data, which, according to its OIG, hinders the Department’s effort to monitor borrowers and properly award aid to those who are eligible. The Department acknowledges that its student financial aid data systems have suffered from data quality problems and has initiated a number of actions to address data accuracy and integrity issues. Regardless of its weaknesses, NSLDS is the most comprehensive departmental database on federal student loans that schools, lenders, and guaranty agencies can use. The Department has stated that it expected NSLDS to significantly reduce schools’ and students’ administrative burden of applying for and accounting for financial aid. With the exception of mid-year transfer students, the Department has not required schools to obtain paper financial aid transcripts since the 1996-97 award year. The Department also envisioned that NSLDS would simplify and enhance the process of updating SSCR information for schools. Prior to NSLDS, schools, for their FFELP loans, received SSCR rosters from every guaranty agency that guaranteed their student loans and had to manually verify and resubmit the rosters to the guaranty agencies. In addition, the Department believes that NSLDS has led to considerable improvements in identifying ineligible student aid recipients. It estimates that since the 1994-95 academic year, for example, NSLDS’ improved default matching capabilities may have prevented over $1 billion from being awarded to ineligible students. Our survey results indicate that a significant proportion—42 percent—of the schools participating in federal student financial aid programs were not using NSLDS’ on-line and batch processing functions, which first became available in November 1994. In addition, of the schools that were using these functions, most were not routinely using them for many of the tasks they were capable of performing. Based on our survey results, we estimate that 58 percent of the 6,181 schools participating in student financial aid programs used NSLDS’ on-line or batch processing functions. (See fig. 2.) Of the schools that were not using these functions, they either had the ability to use it and simply had not done so (19 percent) or did not have the ability to use the system (23 percent). When we asked schools about their use of NSLDS to accomplish the 10 tasks we identified as inherent to program administration, we found that schools were not routinely using NSLDS for most of them. As shown in figure 3, more than half of the schools rarely or never performed 7 of the 10 tasks using NSLDS. The only task that a majority of schools routinely used NSLDS to accomplish was providing or updating SSCR information, which since February 1997, the Department has required schools—or third-party servicers on their behalf—to perform on the system. Specifically, our survey data show that 69 percent of the schools always or most of the time use NSLDS for SSCR processing. An additional 11 percent occasionally use NSLDS for SSCR processing, and another 5 percent rarely use the system for this task. Of the remaining schools—those that never use NSLDS for SSCR processing—13 percent process SSCRs through the Clearinghouse or other third-party servicers; the last 2 percent appear not to be meeting the requirement. The schools’ next most common uses of NSLDS’ on-line and batch processing functions were for correcting or updating student information (33 percent) and determining prior loan defaults (30 percent). However, 43 and 47 percent of schools responded that they rarely or never use NSLDS for these two tasks, respectively. The reason schools most frequently gave for rarely or never using NSLDS to perform any of the 10 tasks was that they use the Department’s Student Aid Reports (SAR) or Institutional Student Information Records (ISIR).Schools can identify loan status and determine student eligibility from information contained in SAR or ISIR, including prior defaults, types of loans, default dates, and outstanding balances. Other reasons schools often gave are that they used the Clearinghouse for SSCR processing, they did not know how to use NSLDS, and that they had experienced problems using the system. When we asked schools that were using NSLDS’ on-line and batch processing functions whether they experienced problems, such as transmitting or receiving data, or whether they encountered inaccuracies in NSLDS data, many reported that they rarely or never experienced problems or encountered inaccuracies in the data fields we specified. Many schools also responded that they are satisfied with the support they received from training and customer service. Some schools, however, responded that they experienced problems more frequently with certain functions, including correcting and updating SSCR information or understanding error messages. Some schools said they occasionally found inaccuracies in data fields critical to correctly identifying students—such as Social Security numbers, last names, and date of birth—and other critical data fields, including enrollment status. While school responses indicate that these problems may not be widespread, they suggest that NSLDS does not yet offer the level of data accuracy expected by the Department. In general, schools’ experiences with most aspects of using NSLDS have been essentially problem free. (See fig. 4.) For example, 85 percent of schools that use NSLDS rarely or never experienced problems identifying multiple entries in the system of the same loans or grants. However, some schools did experience problems with some aspects of the system. For example, about 23 percent always or most of the time had a problem correcting or updating SSCR information, a critical tool for effectively administering student financial aid. As we reported in 1997, some FDLP student loan borrowers have not started to repay their student loans after they are no longer enrolled in school. Reasons given were schools’ failing to report enrollment changes to the Department or the Department’s failing to accurately or promptly record the reported enrollment changes. Failure to record a borrower’s enrollment changes or status may result in borrowers not promptly repaying their student loans or in the loans becoming delinquent, increasing the likelihood of defaulting. Although less than 10 percent of the schools found inaccuracies in NSLDS data fields always or most of the time, 7 to 29 percent of the schools occasionally found inaccuracies in these fields. (See fig. 5.) As we reported in 1997, recording a student’s correct Social Security number, which the Department considers its common student identifier, is critical for ensuring that aid is awarded to the correct individual and for identifying an individual’s data records. NSLDS as well as other Department information systems also use combinations of unique elements—such as a student’s date of birth and the first two to three letters of the first or last name—to identify, access, and update a specific student’s record. Therefore, the Department’s information systems depend on these data fields to be as accurate as possible. School responses indicate that inaccuracies in the data fields do not appear to be widespread, but they suggest that NSLDS does not yet offer the level of data accuracy expected by the Department. The Department depends on guaranty agencies, loan servicers, and other entities to provide many of these data and has initiated efforts to address these problems. In preparing schools for NSLDS’ implementation, the Department sent training materials to each school, made training sessions available to them, and established a customer service center to respond to questions and otherwise assist schools. Seventy-nine percent of schools using NSLDS said that they or their servicers received training or training materials from the Department. As figure 6 shows, 44 percent of the schools that received training or training materials were satisfied with the training, about 30 percent were neither satisfied nor dissatisfied, and 27 percent were dissatisfied. About 80 percent of schools that use the system responded that they requested assistance or information from the NSLDS Customer Service Center. As figure 7 shows, more than two-thirds of the schools that received assistance responded that they were satisfied with the assistance provided by the NSLDS Customer Service Center. Schools using NSLDS’ on-line and batch processing functions had mixed views about whether these capabilities led to improvements in their ability to administer federal student financial aid programs. Although some schools identified several areas where NSLDS had improved their program administration, other schools thought NSLDS did not lead to improvements or make a noticeable difference in other areas. For example, half or more of the schools agreed or strongly agreed that NSLDS had improved the availability of student data, made student data easier to access, and reduced the amount of paper handled in administering financial aid programs. (See table 2.) However, a significant percentage of schools disagreed or strongly disagreed that NSLDS had reduced the staff required to administer student financial aid programs (49 percent) or reduced the time required to administer student financial aid (39 percent). Our survey results suggest that schools have a variety of reasons for not using NSLDS’ on-line and batch processing functions. Twenty-three percent of all schools lacked the ability to access the system, and 19 percent of all schools had the ability to do so but did not. We estimate that—at the time of our survey—more than 1,000 schools lacked the ability to access the system; of these, a number planned to obtain access within 8 months. However, most had no plans to obtain access to NSLDS, had plans to obtain access but did not know when, or were unsure whether they would ever obtain access. Most of these schools were using the Clearinghouse or other third-party servicers to perform tasks, but several hundred schools appeared not to be accessing NSLDS either directly from their campus or through the Clearinghouse or other third-party servicer. Since these schools did not have plans to obtain access, they may not be meeting a requirement to have on-line access to NSLDS from their campuses as of January 1998. While the schools that did not use NSLDS’ on-line and batch processing functions—either because they chose not to (19 percent) or did not have the ability to (23 percent)—had a variety of reasons for not using or having NSLDS, these reasons generally fell into one of three categories: use of alternative methods, such as the Clearinghouse, for obtaining and processing SSCR information; limitations in resources, personnel, or skills, such as lack of training; and lack of confidence in data reliability. (See fig. 8.) The Department has efforts under way to increase schools’ use of NSLDS. While a small percentage of schools have not complied with requirements for SSCR processing and on-line access, the Department recognizes that to encourage schools to use NSLDS beyond these requirements, it must promote the system and ensure the accuracy of the system’s data. Therefore, the Department plans to provide additional NSLDS training to users at sites throughout the country and review and correct any inaccurate data in NSLDS. Although these actions were not developed specifically in response to the concerns schools had cited in our survey, they address many of the issues schools raised. Schools are required to use NSLDS for SSCR processing. They may do so directly from their campuses or through the Clearinghouse or other third-party servicers. Our survey shows that 5 percent of all schools are not meeting this requirement. The Department has independently identified schools that have not complied with the requirement and taken a number of actions to increase compliance. For example, it has assessed fines ranging from $1,000 to $7,500 against 19 schools. As of January 1998, schools are also required to have on-line access to NSLDS for their financial aid staff. The Department has estimated that 2 percent of all participating schools have not registered for on-line access. The contractor responsible for operating NSLDS is contacting these schools at the Department’s instruction to attempt to get them to register. The Department plans to offer more training to increase participation among those schools that do not access NSLDS. According to Department officials, the Department already offers a variety of training opportunities and has no plans to alter the types of training it offers but will increase the number of training sessions. In February 1998, the Department began offering a series of workshops aimed at helping schools automate their financial aid offices. These workshops include components on using NSLDS. More recently, the Department began offering computer-based training sessions solely on how to use NSLDS. The Department expects that between August and October 1998, it will have offered 39 NSLDS sessions—each accommodating 40 participants—at its 11 regional training centers. If there is demand and sufficient funding, the Department plans to offer more training sessions in spring 1999. For school personnel who cannot travel to a training site, the officials said schools can use a self-paced computer program included with the NSLDS users’ manual. To ensure the overall accuracy of NSLDS data, the Department has initiated “serious and aggressive” data integrity efforts to review and correct any inaccurate or incomplete data, according to Department officials. These efforts include providing detailed technical instructions to data originators and providers (schools, lenders, and guaranty agencies); focusing on correcting inaccurate data; and addressing the issue of data quality in its annual performance plan. The Department gave the major data providers detailed technical instructions that specify their responsibilities and the data they are required to provide. According to Department officials, data providers must correct data problems as quickly as possible, especially since they are the ones that usually identify the problems. Correcting data problems may require system changes or major data entry and research. The Department provides technical update bulletins on an as-needed basis, training sessions, and on-site technical reviews. Further, the Department tracks whether providers have corrected the data problems and sends monthly management reports to all providers. If a significant problem occurs when two or more data providers have conflicting information each believes is correct, the dispute must be formally adjudicated within the Department. According to Department officials, to increase both voluntary use of and school satisfaction with NSLDS, schools must have confidence in the system’s data. The Department’s strategy focuses on increasing the accuracy of loan data as well as strengthening relationships with the financial aid community. For example, the Department’s data improvement efforts focus on deleting duplicate loans and loans with a “zero balance” (that is, loans that have been paid in full); identifying loans not in NSLDS that should be; resolving differences between NSLDS and lender databases; and conducting outreach efforts, such as holding regular workshops with other data providers. The Department is now taking these measures to address problems with FFELP and Perkins loan data. Department officials said that problems with FDLP data have been largely corrected. To further demonstrate its commitment to improving the reliability of data on its financial aid programs, the Department has addressed the issue of data integrity in its long-range strategic and annual performance plans prepared in response to the Government Performance and Results Act of 1993. For example, in its fiscal year 1999 performance plan—its first annual plan—the Department acknowledges that its student financial aid delivery system has suffered from data quality problems that are severe enough to cause it to fail to receive an unqualified audit opinion. In its June 15, 1998, audit report, the Department’s OIG reported that, in its opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Department as of September 30, 1997. However, the reliability of data in NSLDS is still a material internal control weakness. Specifically, the audit report states that the Department’s ability to continue to prepare auditable loan estimates for its financial statements depends on establishing a reliable store of up-to-date historical loan data. The audit report notes that because of questionable data in NSLDS, the estimated liability for loan guarantees was based on data received from 10 large guaranty agencies, as opposed to NSLDS. According to the Department’s performance plan, steps are being taken to improve the efficiency and quality of its student aid data. These include improving data accuracy by receiving individual student loan data directly from lenders rather than through guaranty agencies and by expanding efforts to verify the data reported to NSLDS and preparing a system architecture for the delivery of federal student aid by December 1998 that will help integrate the multiple student aid databases with NSLDS based on student-level data to improve the availability and quality of information on student aid applicants and recipients. The Department of Education provided written comments on a draft of this report in a letter from the Assistant Secretary for Postsecondary Education, dated August 14, 1998. Overall, the Department felt that the draft report was not balanced or written fairly and that it did not accurately portray the full extent of schools’ use of NSLDS. The comments expressed three specific concerns: (1) inappropriate emphasis placed on negative aspects of the survey results, (2) numerically distorted survey results, and (3) outdated audit report information in the background section that had no relation to the scope of the audit. In addressing the Department’s comments, we revised the report, as appropriate, to clarify that our review focused on schools’ use of NSLDS’ on-line and batch processing functions rather than all school uses of NSLDS. To address the specific concerns about our presentation of survey results, we made other revisions, where appropriate, to better ensure that our results were presented objectively and fairly. However, we continue to focus the reader’s attention on those responses that show the extent to which schools were encountering shortcomings in using NSLDS’ on-line and batch processing functions. Finally, to address the concern about our use of previous audit reports, we added information on more recent activities, such as the Department’s efforts to improve the quality of NSLDS data. However, we retained a discussion of previous audit reports because we believe it is needed to establish the historical context and significance for creating NSLDS. Department officials discussed these and other concerns and provided other comments in meetings with our staff on July 31 and August 7, 1998. (See app. IV for a discussion of these comments and our responses and a reprint of the Assistant Secretary’s August 14, 1998, letter.) We are sending copies of this report to the Secretary of Education, appropriate congressional committees, and other interested parties. We also will make copies available to others on request. If you have any questions about this report, please contact me at (202) 512-7104. Major contributors to this report are listed in appendix V. This appendix contains schools’ responses to our survey. All numbers are percentages, except for those in questions 2, 4, 7, 14, 27, 31, and 33. Percentages shown are based on the number of respondents answering each question. Percentages may not always add to 100 percent due to rounding. To address our objectives, we (1) surveyed a random sample of schools that participate in financial aid programs, (2) reviewed pertinent documents, and (3) spoke with Department of Education officials and members of the higher education community. To obtain information on schools’ use of NSLDS, including problems encountered and benefits derived, we surveyed a random sample of postsecondary colleges and universities that participated in federal student financial aid programs as of August 1997. During the development of the survey instrument, Department officials informed us that all schools use NSLDS because data they receive on SARs and ISIRs are generated from the system; therefore, we focused our survey questions on the use of NSLDS’ on-line and batch processing functions. In addition, we reviewed NSLDS documents obtained from the Department and prior GAO reports. To identify measures undertaken by the Department to ensure schools’ use of the system, we interviewed officials from the Department as well as staff from Raytheon/E-Systems, the contractor responsible for developing and maintaining NSLDS. We discussed NSLDS’ current operation, including the functions available for school use, the number of schools that have access to NSLDS, methods by which information is transmitted into NSLDS, and how users gain access to this information. To aid in designing our survey instrument, we also contacted members of the higher education community. We interviewed officials from the American Association of State Colleges and Universities, the American Council on Education, the Coalition of Higher Education Assistance Organizations, the National Association of Independent Colleges and Universities, the National Association of Student Financial Aid Administrators, and the National Student Loan Clearinghouse. We conducted our study between May 1997 and July 1998 in accordance with generally accepted government auditing standards. To determine the extent of schools’ use of NSLDS’ on-line and batch processing functions, we developed a survey instrument and sent it to a randomly selected sample of postsecondary schools. The survey covered a variety of topics, including descriptive background data on each school, types of access to NSLDS, and actual experiences using NSLDS’ on-line and batch processing functions. For example, we asked schools to identify themselves as public or private and to provide the size of their student body. We also asked the schools that reported having access to NSLDS whether they used the system themselves or through a third-party servicer. In addition, we asked schools to provide information on their use of various features of NSLDS, including benefits derived and problems encountered. To determine the purposes for which schools use NSLDS, we reviewed NSLDS manuals and pretested our instrument with 12 schools. We drew our sample of 600 postsecondary schools from 6,181 schools listed in the Department’s automated Postsecondary Education Participants System (PEPS) as of August 1997. We mailed our instrument to the 600 schools in November 1997. We did a follow-up mailing in December 1997 and again in January 1998. Of the 600 schools, we determined that 11 were ineligible for our survey—because they no longer participated in federal student aid programs, were high schools rather than postsecondary schools, or had closed—resulting in an adjusted sample of 589 schools. Of these, 490 schools returned completed, usable survey instruments, which yielded a school response rate of 83 percent. Our analyses are based on the 490 responses from 83 percent of the eligible schools sampled. All data are self-reported, and we did not independently verify their accuracy. We included in our survey four of the six NSLDS processes and functions available to schools (listed in the Department’s NSLDS users’ manual, NSLDS: The Paperless Link): prescreening for eligibility, borrower tracking, SSCR data, and financial aid transcripts. We did not include the remaining two functions—overpayment data and report selection—because the first was not available at the time of our review and the latter duplicated the four processes and functions included in our survey. Prescreening for eligibility: The prescreening function allows schools to receive data on prior student financial aid recipients, enabling schools to determine the eligibility of financial aid applicants before funds are awarded and thereby reduce defaults. Borrower tracking: This on-line NSLDS function is generally used by loan servicers and guaranty agencies attempting to locate a borrower who has defaulted on a student loan. NSLDS provides data on other organizations (such as schools and lenders) associated with the borrower, which servicers and agencies can contact to obtain the borrower’s current address. SSCR: Schools are required to use this function to confirm and report the enrollment status of students who receive federal loans. Financial aid transcript: NSLDS’ financial aid transcript function summarizes all previous title IV financial aid a student has received. Histories are received on students currently attending or transferring to an institution. Financial aid transcripts are reviewed by a financial aid administrator to determine current levels of aid, whether there is any information that would prevent awarding aid for the first time, or to continue aid to an enrolled or enrolling student. Overpayment: NSLDS’ overpayment function—added since our survey—will enable schools to notify NSLDS that a student owes a refund of an overpayment on a Pell grant, State Student Incentives Grant, or SEOG grant, as well as a Perkins Loan. An overpayment notification to NSLDS notifies the entire student financial aid community because the actual overpayment data appear on all financial aid transcripts that are requested through NSLDS and through prescreenings of ISIRs and SARs. Report selection: Reports and extracts are produced by NSLDS on both a regularly scheduled and on-request basis. Schools may query the system regarding the existence of reports, extracts, or both and may gain access to them via an on-line display or a file deposited to their wide area network mailbox. During the pretest, we identified 10 tasks inherent to administering federal student aid programs. Schools can perform these tasks by using NSLDS’ on-line and batch processing functions directly or using other methods. We also identified operations during which schools might encounter problems using the system and data fields in which they might encounter inaccuracies. In the survey, we asked users of the system to identify the tasks for which they used NSLDS and any problems they had encountered, including what kinds of inaccuracies, if any, they had found in the data. For the purposes of this survey, we defined use of NSLDS as accessing it through on-line or batch processing functions designed to perform specific tasks. To focus on the direct use of these functional capabilities by school personnel, we instructed school officials completing the survey instrument not to consider their use of student eligibility information reports generated from the NSLDS database and sent by the Department to be a use of the system. Similarly, if schools only used the Clearinghouse for processing SSCR reports and did not use any of the system’s other functional capabilities, we did not consider those schools to be NSLDS users. We directed our survey to the officials at the selected schools whom we determined to be the most knowledgeable about NSLDS use and federal student financial aid programs. To identify the appropriate respondent at each sample school, we sent a letter to the Director of Financial Aid, which both alerted the school to our survey and requested that the school return a postcard with the name and address of the appropriate recipient, if different from the financial aid office. All sample surveys are subject to sampling errors, that is, the extent to which the results differ from what would be obtained if the whole population had received the survey instrument. Since the whole population does not receive the instrument in a sample survey, the true size of this difference cannot be known. However, it can be estimated from the responses to the survey. Using the number of respondents and the amount of variability in the data, we were able to estimate sampling errors for our survey. (See table II.1.) Margin of error (percent) In addition to sampling errors, surveys are subject to other types of systematic error or bias that can affect results. Bias can affect both response rates and the way respondents answer particular questions. We cannot assess the magnitude of the effect of bias, if any, on our survey results. Rather, possibilities of bias can only be identified and accounted for when interpreting results. One possible source of bias in our survey is inherent in all self-ratings and self-reports. Bias inherent in self-rating and self-reporting may impact survey results because integrity of the data depends upon respondents providing honest and accurate answers to survey questions. The results of this report are affected by the extent to which respondents accurately reported their school’s use or non-use of NSLDS. We took several steps to minimize the impact of nonsampling errors. First, we examined responses for extreme values and inconsistencies. In a few cases, respondents had reported numbers incorrectly, and in these cases, we corrected the data or, if correction was not possible, we rejected the data known to be in error. There are six major student financial aid systems that provide various types of information on student loans. The Campus-Based Programs System supports all data tracking and reporting functions associated with campus-based programs. This system uploads and edits data received from participating schools; calculates tentative and final school awards, notifying schools of their award levels; allocates funds; and reconciles school accounts. This system contains no student-level information; it uses only summary data by school. Central Processing System The Central Processing System supports student financial aid applications and the determination of Pell grant eligibility; matches other databases for applicant eligibility; makes corrections to the records; and produces statistical analysis tables, student data rosters, and tapes for schools and state agencies. The Direct Loan Servicing System services FDLP loans while the borrower is in school, in deferment status, or in repayment. The National Student Loan Data System performs prescreening of student financial aid program applications, performs student status confirmation reporting, and tracks borrowers. The system contains information regarding loans made, insured, or guaranteed under title IV and selected Pell grant information. Its purposes are to (1) ensure that accurate and complete data on student loan indebtedness and institutional lending practices are available, (2) screen applications to identify prior loan defaults and grant overawards, (3) provide a database to research and identify trends and patterns, (4) support audits and program reviews, and (5) calculate default rates. This system receives, evaluates, and processes student payment data and serves as the basis for obligations to schools. This system maintains data on school participation in student financial aid programs (such as eligibility, certification, address, and program participation); supports institutional reviewers and related activities; acts as the official source of information regarding schools and their associated school codes for all Department of Education systems; and supports the annual default rate calculation process for FFELP and FDLP. On July 31 and August 7, 1998, we met with Department of Education officials to obtain their comments on a draft of this report. In general, the Department commented that the survey results show NSLDS in a favorable light and that it is used universally for important operational purposes and without significant difficulty. The Department believes the report should convey such results. Our meetings were supplemented by an August 14, 1998, letter from the Assistant Secretary for Postsecondary Education, which appears at the end of this appendix. Our responses to the comments raised in this letter are provided in the body of the report. Summaries of the comments Department officials provided during our meetings and our responses to these comments follow. 1. The Department said all schools use NSLDS, and that we were incorrect in reporting that almost half of the schools do not use NSLDS at all. In addition to accessing NSLDS through the on-line and batch processing functions, they said all schools (1) routinely use NSLDS for prescreening because the SAR or ISIR data they receive for this purpose are generated by NSLDS and (2) must submit SSCR data to NSLDS regardless of whether they do so themselves or use a servicer, such as the Clearinghouse. When such a servicer provides this service, it submits SSCR data to NSLDS in lieu of the schools doing so directly. Department officials said we failed to point out in our discussion of the 23 percent of schools that do not access the system at all that (1) this is due to limitations or constraints the schools face that are beyond the Department’s control and (2) schools use servicers or a third party to access NSLDS in order to meet SSCR processing requirements or receive ISIRs. The officials believe that the report should have stated that all schools use NSLDS (including those that access NSLDS indirectly) and schools do not need to use batch or on-line functions (except SSCR) if they are satisfied that the information provided by SARs or ISIRs in prescreening meets their needs. GAO’s Response: We recognize that all schools use SAR and ISIR data generated by NSLDS and that in this way, all schools use NSLDS. Our review focused on schools’ use of NSLDS’ on-line and batch processing functions, and we have revised the report to further clarify this focus. As pointed out elsewhere in our report, the topic of NSLDS use was discussed extensively during our study design—with schools, Department officials, and others in the education community. To help school representatives in completing the survey, we explained on page 1 of the instrument that we defined “access” as on-line and batch processing functions (see app. I). With regard to the number of schools we identified that were not accessing NSLDS at all, we have revised the report to clarify that these are schools that do not use the on-line or batch functions either themselves or through a servicer. As figure 8 shows, limitations and constraints at schools were among the more frequently cited reasons given by schools for not having this access. Figure 8 also shows that using servicers and the Clearinghouse for SSCR processing were frequently given as reasons for schools not using NSLDS’ on-line and batch processing functions. We did not independently obtain evidence on the extent of the Department’s ability to influence these factors and did not draw conclusions about the Department’s role. Our report, however, discusses how the surveyed schools are meeting the SSCR reporting requirement. With regard to the Department’s comment that schools may not need on-line and batch processing functions when SAR or ISIR data meet their needs, we did not ask schools for details about their use of these or any other sources of financial aid data for determining student eligibility. It was our intent to find out from schools the extent of their use of NSLDS’ on-line or batch processing capabilities to perform a variety of tasks, such as borrower tracking or updating student information. We did not draw conclusions about the reported level of schools’ use of these capabilities. 2. The Department said that favorable responses we received to the survey instrument were not adequately reported. Department officials believe that there were numerous instances throughout our draft report where we deemphasized favorable results that reflect the majority of schools and emphasized corresponding unfavorable results. They cited as an example a statement in the draft that about one-fourth of schools had problems using NSLDS to correct or update SSCR information, and 20 to 30 percent of schools encountered occasional or frequent inaccuracies in certain data fields. They believe a more accurate portrayal of the survey results would be to state that 75 percent of the schools did not have any problems using NSLDS for SSCR processing and that 70 to 80 percent rarely or never encountered data inaccuracies. GAO’s Response: Overall, we believe our draft report reasonably presented the results of our analysis. However, we made minor revisions, where appropriate, to further clarify our objectives and ensure the fairest possible presentation of our results. For example, in our discussion of schools’ views of the training and training materials they received, we added a statement that the Department mailed training materials to every school. However, we decided to continue to focus the reader’s attention on those responses that show the extent to which schools encountered shortcomings in using NSLDS’ on-line and batch processing functions because we believe it is important to note potential problem areas so the source of the problems may be explored and improvements to the program or operation can be identified. 3. Department officials said that the tone and balance of the draft were not true to the schools’ survey answers. For example, they said we cite a number of previous reports and studies illustrating data problems that they believe are outdated and are not relevant to the objectives of our review. If we feel strongly that these studies should be cited, the officials said we should also report more recent statistics on default matching, as well as numerous increases in the functional uses of NSLDS that have been developed. In addition, they believe the draft did not adequately address the work undertaken or under way to improve the quality of NSLDS data. GAO’s Response: Our purpose in discussing prior GAO and OIG audit reports is to provide general background information, establish a historical context and significance for creating NSLDS, and discuss the basis for congressional interest in our review. As Department officials suggested, we have included more recent statistics on the Department’s use of NSLDS for conducting student loan default matches and expanded our discussion about its efforts to improve the quality of student financial aid data. 4. Department officials said that the draft report did not fully discuss the purposes and advantages of NSLDS, and that our treatment of original NSLDS goals needed clarification. They believe that it is important for us to distinguish between the original purpose of NSLDS and current efforts to expand its functionality. They suggested that the report should note that NSLDS was set up as a research database and that the Department is expanding its use to help improve the accuracy and availability of student aid data. More importantly, they said these improvements will ensure better accountability for student financial aid monies. GAO’s Response: The report identifies the three main goals of NSLDS as they were presented and distributed to schools in the NSLDS users’ guide. Our study focused on schools’ use of NSLDS’ on-line and batch processing functions; we did not review the full spectrum of NSLDS’ purposes and functions. The Department’s explanation of these new functions is informative, and it appears that the Department is enhancing NSLDS to take advantage of many of its expanded capabilities. But many of these new functions were either not available to schools at the time we administered our survey instrument, were not related to on-line and batch processing functions, or were not designed to be used by schools. 5. Department officials were concerned about the development and timing of the survey instrument we administered. They said that it is not clear which school official completed the survey and that this is important because different offices in a school may use NSLDS for different purposes. Also, since the instrument was administered in late 1997, they believe some of the results may now be outdated and inaccurate. Finally, they believe that the report should note that the instrument was administered at a time when NSLDS was only 3 years old and that some portion of schools were not using it as a result of the time lags that occur in getting all schools to adapt to and welcome its use. GAO’s Response: We made a concerted effort to direct the survey instrument to those school officials who were most knowledgeable about their school’s use of NSLDS’ on-line and batch processing functions. As discussed in appendix II, before we mailed the survey instrument, we sent a postcard to the student financial aid administrator of each school in our sample asking him or her to provide the name, title, and complete address of the school official who was best suited to complete the survey. About half of the schools provided this information; for those that did not, we mailed the survey to the director of student financial aid. In a letter accompanying the survey instrument, we further requested schools to ensure that those persons most knowledgeable about using NSLDS be involved in responding to the survey instrument. The purpose of the survey was to record schools’ use of NSLDS at the time the survey was administered in November 1997, and this is noted in the report. We recognize that not all schools had access to NSLDS when they completed the survey instrument; as our results showed, many schools were still in the process of obtaining access. We would expect that, at this writing, more schools would be accessing NSLDS’ on-line and batch processing functions, but the report is intended to assess schools’ use of NSLDS’ on-line and batch processing capabilities and document the extent of this use at a point in time. We do not, nor did we intend to, draw any conclusions as to whether the level of school use is sufficient or indicative of the long-term utility of NSLDS as an administrative tool for federal student aid programs. In addition to those named above, the following individuals made important contributions to this report: Paula Denman and Joan A. Denomme, Senior Evaluators; Carolyn S. Blocker and Edward H. Tuchman, Evaluators; and Deborah L. Edwards and Wayne M. Dow, Senior Social Science Analysts. The Results Act: Observations on the Department of Education’s Fiscal Year 1999 Annual Performance Plan (GAO/HEHS-98-172R, June 8, 1998). Department of Education: Information Needs Are at the Core of Management Challenges Facing the Department (GAO/T-HEHS-98-124, Mar. 24, 1998). Student Financial Aid Information: Systems Architecture Needed to Improve Programs’ Efficiency (GAO/AIMD-97-122, July 29, 1997). Department of Education: Multiple, Nonintegrated Systems Hamper Management of Student Financial Aid Programs (GAO/T-HEHS/AIMD-97-132, May 15, 1997). Reporting of Student Loan Enrollment Status (GAO/HEHS-97-44R, Feb. 6, 1997). High Risk Series: Student Financial Aid (GAO/HR-97-11, Feb. 1997). Department of Education: Status of Actions to Improve the Management of Student Financial Aid (GAO/HEHS-96-143, July 12, 1996). Student Financial Aid: Data Not Fully Utilized to Identify Inappropriately Awarded Loans and Grants (GAO/T-HEHS-95-199, July 12, 1995). Student Financial Aid: Data Not Fully Utilized to Identify Inappropriately Awarded Loans and Grants (GAO/HEHS-95-89, July 11, 1995). Federal Family Education Loan Information System: Weak Computer Controls Increase Risk of Unauthorized Access to Sensitive Data (GAO/AIMD-95-117, June 12, 1995). High Risk Series: Student Financial Aid (GAO/HR-95-10, Feb. 1995). Department of Education: Management Commitment Needed to Improve Information Resources Management (GAO/IMTEC-92-17, Apr. 20, 1992). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 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 reviewed schools' use of the National Student Loan Data System (NSLDS), focusing on: (1) the extent to and purposes for which schools are using NSLDS; (2) problems these schools are having and the benefits they are getting from using the system; (3) why some schools are not using NSLDS; and (4) the extent to which the Department of Education is taking or plans to take steps to ensure that schools are fully using NSLDS. GAO noted that: (1) postsecondary schools participating in federal student financial aid programs are making limited use of NSLDS' online and batch processing functions; (2) GAO estimated that almost half of the schools are not using these system capabilities at all--3 years after they first became available; (3) those that are using these functions are not routinely using them for many of the tasks they are capable of performing; (4) the one use made by the majority of schools is to provide and update student financial data on the student status confirmation report, which the Department now requires all schools to perform; (5) GAO estimated that over half of the schools rarely or never performed 7 of the 10 tasks that GAO identified for its survey using NSLDS' online and batch processing functions; (6) in general, schools' experiences using NSLDS have been relatively problem free; however, some schools did experience problems with some aspects of the system; (7) schools using NSLDS' online and batch processing functions had mixed views on whether they led to improvements in their program administration; (8) schools that did not use NSLDS' online and batch processing functions cited a variety of reasons for not doing so; (9) the most frequent reasons cited by these schools included relying on alternative methods to obtain or submit data needed to administer student aid programs; (10) of the schools that did not use the systems' online and batch processing functions, many did not have plans to obtain access to NSLDS, had plans to obtain access to the system but did not know when, or were unsure when they would obtain access to the system in the future; (11) in an effort to increase schools' use of NSLDS, the Department has provided training assistance to schools and has worked to ensure the accuracy of the system's data; (12) the Department recently expanded its NSLDS customer service center and will offer NSLDS training to users at its 11 regional training centers; (13) in addition, to demonstrate its commitment to improving the reliability of data on its postsecondary education programs, the Department has addressed the issue of data integrity in its long-range strategic and annual performance plans prepared in response to the Government Performance and Results Act of 1993; (14) as part of this commitment, the Department has initiated efforts to identify and correct inaccurate data in NSLDS, and to strengthen its working relationships with other data providers, such as guaranty agencies. |
Congress, in its deliberations on creating a new department, should pay special attention to strategy, criteria and priorities for reorganization critical to the nation’s efforts to protect the nation from terrorism. In recent testimony before the Congress, GAO urged that the proposal for establishing DHS should not be considered a substitute for, nor should it supplant, the timely issuance of a national homeland security strategy. Based on our prior work, GAO believes that the consolidation of some homeland security functions makes sense and will, if properly organized and implemented, over time lead to more efficient, effective, and coordinated programs; better intelligence sharing; and a more robust protection of our people, borders, and critical infrastructure. At the same time, the proposed cabinet department, even with its multiple missions, will still be just one of many players with important roles and responsibilities for ensuring homeland security. At the federal level, homeland security missions will require the involvement of the Central Intelligence Agency (CIA), Federal Bureau of Investigation (FBI), the U.S. Marshals Service, the Department of Defense (DOD), and a myriad of other agencies. In addition, state and local governments, including law enforcement and first responder personnel, and the private sector also have critical roles to play. If anything, the multiplicity of players only reinforces the recommendations that GAO has made in the past regarding the urgent need for a comprehensive threat, risk, and vulnerability assessment and a national homeland security strategy that can provide direction and utility at all levels of government and across all sectors of the country. We are pleased that the Administration has just released the national homeland security strategy and GAO stands ready to work with the Congress and the Administration to ensure that a sound and strong strategy can be effectively implemented to protect the country against terrorism. Although GAO has not had time to thoroughly analyze the strategy yet, we previously suggested that certain key elements be incorporated in the homeland security strategy. We have indicated that a national homeland security strategy should: 1) clearly define and establish the need for homeland security and its operational components, 2) clarify the appropriate roles and responsibilities of federal, state, and local entities and build a framework for partnerships for coordination, communication, and collaboration, and 3) create specific expectations for performance and accountability, including establishing goals and performance indicators. In addition, GAO has said the national strategy development and implementation should include 1) a regular update of a national-level threat and risk assessment effort, 2) formulate realistic budget and resource plans to eliminate gaps, avoid duplicate effort, avoid “hitchhiker” spending, and protect against federal funds being used to substitute for funding that would have occurred anyway, 3) coordinate the strategy for combating terrorism with efforts to prevent, detect, and respond to computer-based attacks, 4) coordinate agency implementation by reviewing agency and interagency programs to accomplish the national strategy, and 5) carefully choose the most appropriate policy tools of government to best implement the national strategy and achieve national goals. Based on our preliminary review, some of these elements have been addressed in the national strategy. In the past, the absence of a broad- based homeland security definition or the ad hoc creation of a definition by individual government departments suggest that a consistent and transparent definition be applied to help create a more integrated approach and unified purpose. The President’s national homeland security strategy does provide for a proposed definition of homeland security, which should help the government to more effectively administer, fund and coordinate activities both inside and outside a new department and to ensure that all parties are focused on the same goals and objectives, results and outcomes. It is critically important that the Congress and the Administration agree on a definition since it serves as the foundation for a number of key organizational, operational and funding decisions. Finally, I would also note that, in the past, we have suggested that a central focal point such as OHS be established statutorily in order to coordinate and oversee homeland security policy within a national framework. Today, we re-emphasize the need for OHS to be established statutorily in order to effectively coordinate activities beyond the scope of the proposed DHS and to assure reasonable congressional oversight. Often it has taken years for the consolidated functions in new departments to effectively build on their combined strengths, and it is not uncommon for these structures to remain as management challenges for decades. It is instructive to note that the 1947 legislation creating DOD was further changed by the Congress in 1949, 1953, 1958, and 1986 in order to improve the department’s structural effectiveness. Despite these and other changes made by DOD, GAO has consistently reported over the years that the department -- more than 50 years after the reorganization -- continues to face a number of serious management challenges. In fact, DOD has 8 of 24 government wide high-risk areas based on GAO’s latest list, including the governmentwide high-risk areas of human capital and computer security. This note of caution is not intended to dissuade the Congress from seeking logical and important consolidations in government agencies and programs in order to improve homeland security missions. Rather, it is meant to suggest that reorganizations of government agencies frequently encounter start-up problems and unanticipated consequences that result from the consolidations are unlikely to fully overcome obstacles and challenges, and may require additional modifications in the future to effectively achieve our collective goals for defending the country against terrorism. The Congress faces a challenging and complex job in its consideration of DHS. On the one hand, there exists a certain urgency to move rapidly in order to remedy known problems relating to intelligence and information sharing and leveraging like activities that have in the past and even today prevent the United States from exercising as strong a homeland defense as emerging and potential threats warrant. Simultaneously, that same urgency of purpose would suggest that the Congress be extremely careful and deliberate in how it creates a new department for defending the country against terrorism. The urge to “do it quickly” must be balanced by an equal need to “do it right.” This is necessary to ensure a consensus on identified problems and needs, and to be sure that the solutions our government legislates and implements can effectively remedy the problems we face in a timely manner. It is clear that fixing the wrong problems, or even worse, fixing the right problems poorly, could cause more harm than good in our efforts to defend our country against terrorism. GAO has previously recommended that reorganizations should emphasize an integrated approach; that reorganization plans should be designed to achieve specific, identifiable goals; and that careful attention to fundamental public sector management practices and principles, such as strong financial, technology, and human capital management, are critical to the successful implementation of government reorganizations. Similarly, GAO has also suggested that reorganizations may be warranted based on the significance of the problems requiring resolution, as well as the extent and level of coordination and interaction necessary with other entities in order to resolve problems or achieve overall objectives. GAO, based on its own work as well as a review of other applicable studies of approaches to the organization and structure of entities, has concluded that the Congress should consider utilizing specific criteria as a guide to creating and implementing the new department. Specifically, GAO has developed a framework that will help the Congress and the Administration create and implement a strong and effective new cabinet department by establishing criteria to be considered for constructing the department itself, determining which agencies should be included and excluded, and leveraging numerous key management and policy elements that, after completion of the revised organizational structure, will be critical to the department’s success. Figure 1 depicts the proposed framework: With respect to criteria that the Congress should consider for constructing the department itself, the following questions about the overall purpose and structure of the organization should be evaluated: Definition: Is there a clear and consistently applied definition of homeland security that will be used as a basis for organizing and managing the new department? Statutory Basis: Are the authorities of the new department clear and complete in how they articulate roles and responsibilities and do they sufficiently describe the department’s relationship with other parties? Clear Mission: What will the primary missions of the new DHS be and how will it define success? Performance-based Organization: Does the new department have the structure (e.g., Chief Operating Officer (COO), etc.) and statutory authorities (e.g., human capital, sourcing) necessary to meet performance expectations, be held accountable for results, and leverage effective management approaches for achieving its mission on a national basis? Congress should also consider several very specific criteria in its evaluation of whether individual agencies or programs should be included or excluded from the proposed department. Those criteria include the following: Mission Relevancy: Is homeland security a major part of the agency or program mission? Is it the primary mission of the agency or program? Similar Goals and Objectives: Does the agency or program being considered for the new department share primary goals and objectives with the other agencies or programs being consolidated? Leverage Effectiveness: Does the agency or program being considered for the new department create synergy and help to leverage the effectiveness of other agencies and programs or the new department as a whole? In other words, is the whole greater than the sum of the parts? Gains Through Consolidation: Does the agency or program being considered for the new department improve the efficiency and effectiveness of homeland security missions through eliminating duplications and overlaps, closing gaps, and aligning or merging common roles and responsibilities? Integrated Information Sharing/Coordination: Does the agency or program being considered for the new department contribute to or leverage the ability of the new department to enhance the sharing of critical information or otherwise improve the coordination of missions and activities related to homeland security? Compatible Cultures: Can the organizational culture of the agency or program being considered for the new department effectively meld with the other entities that will be consolidated? Field structures and approaches to achieving missions vary considerably between agencies. Impact on Excluded Agencies: What is the impact on departments losing components to DHS? What is the impact on agencies with homeland security missions left out of DHS? In addition to the above criteria that the Congress should consider when evaluating what to include and exclude from the proposed DHS, there are certain critical success factors the new department should emphasize in its initial implementation phase. Over the years, GAO has made observations and recommendations about many of these success factors, based on effective management of people, technology, financial, and other issues, especially in its biannual Performance and Accountability Series on major government departments. These factors include the following: Strategic Planning: Leading results-oriented organizations focus on the process of strategic planning that includes involvement of stakeholders, assessment of internal and external environments, and an alignment of activities, core processes and resources to support mission-related outcomes. Organizational Alignment: The organization of the new department should be aligned to be consistent with the goals and objectives established in the strategic plan. Communications: Effective communication strategies are key to any major consolidation or transformation effort. Building Partnerships: One of the key challenges of this new department will be the development and maintenance of homeland security partners at all levels of the government and the private sector, both in the United States and overseas. Performance Management: An effective performance management system fosters institutional, unit and individual accountability. Human Capital Strategy: The new department must ensure that its homeland security missions are not adversely impacted by the government’s pending human capital crisis, and that it can recruit, retain, and reward a talented and motivated workforce, which has required core competencies, to achieve its mission and objectives. The people factor is a critical element in any major consolidation or transformation. Information Management and Technology: The new department should leverage state-of-the art enabling technology to enhance its ability to transform capabilities and capacities to share and act upon timely, quality information about terrorist threats. Knowledge Management: The new department must ensure it makes maximum use of the collective body of knowledge that will be brought together in the consolidation. Financial Management: The new department has a stewardship obligation to prevent fraud, waste and abuse; to use tax dollars appropriately; and to ensure financial accountability to the President, the Congress, and the American people. Acquisition Management: Anticipated as one of the largest federal departments, the proposed DHS will potentially have some of the most extensive acquisition government needs. Early attention to strong systems and controls for acquisition and related business processes will be critical both to ensuring success and maintaining integrity and accountability. Risk Management: The new department must be able to maintain and enhance current states of homeland security readiness while transitioning and transforming itself into a more effective and efficient structural unit. The proposed DHS will also need to immediately improve the government’s overall ability to perform risk management activities that can help to prevent, defend against, and respond to terrorist acts. Change Management: Assembling a new organization out of separate pieces and reorienting all of its processes and assets to deliver the desired results while managing related risks will take an organized, systematic approach to change. The new department will require both an executive and operational capability to encourage and manage change. The President’s proposal for the new department indicates that DHS, in addition to its homeland security responsibilities, will also be responsible for carrying out all other functions of the agencies and programs that are transferred to it. In fact, quite a number of the agencies proposed to be transferred to DHS have multiple functions. Agencies or programs that balance multiple missions present the Congress with significant issues that must be evaluated in order to determine how best to achieve all of the goals and objectives for which the entity was created. While we have not found any missions that would appear to be in fundamental conflict with the department’s primary mission of homeland security, as presented in the President’s proposal, the Congress will need to consider whether many of the non-homeland security missions of those agencies transferred to DHS will receive adequate funding, attention, visibility, and support when subsumed into a department that will be under tremendous pressure to succeed in its primary mission. As important and vital as the homeland security mission is to our nation’s future, the other non-homeland security missions transferred to DHS for the most part are not small or trivial responsibilities. Rather, they represent extremely important functions executed by the federal government that, absent sufficient attention, could have serious implications for their effective delivery and consequences for sectors of our economy, health and safety, research programs and other significant government functions. Some of these responsibilities include: maritime safety and drug interdiction by the Coast Guard, collection of commercial tariffs by the Customs Service, public health research by the Department of Health and Human advanced energy and environmental research by the Lawrence Livermore and Environmental Measurements labs, responding to floods and other natural disasters by the Federal Emergency Management Agency (FEMA), and authority over processing visas by the State Department’s consular officers. These examples reveal that many non-homeland security missions could be integrated into a cabinet department overwhelmingly dedicated to protecting the nation from terrorism. Congress may wish to consider whether the new department, as proposed, will dedicate sufficient management capacity and accountability to ensure the execution of non- homeland security missions, as well as consider potential alternatives to the current framework for handling these important functions. One alternative might be to create a special accountability track that ensures that non-homeland security functions are well supported and executed in DHS, including milestones for monitoring performance. Conversely, the Congress might separate out some of these functions. In doing so, the Congress will still need to hold agencies accountable for the homeland security missions that are not incorporated in the new department. In making these decisions, Congress should consider the criteria presented earlier in my testimony, especially those related to agency transitions, such as mission relevancy, similar goals and objectives, leveraging effectiveness, and creating gains through consolidation. There are clearly advantages and disadvantages to all of the decisions about placing agencies or programs with multiple missions in DHS and Congress must carefully weigh numerous important factors related to performance and accountability in crafting the legislation. For example, we have indicated in recent testimony that DHS could serve to improve biomedical research and development coordination because of the current fragmented state of disparate activities. Yet, we remain concerned that the proposed transfer of control and priority setting for research from the organizations where the research would be conducted could be disruptive to dual purpose programs, which have important synergies for public health programs that need to be maintained. Similarly, we have testified that the President’s proposal, in tasking the new department with developing national policy for and coordinating the federal government’s research and development efforts for responding to chemical, biological, radiological, and nuclear weapons threats, also transfers some of the civilian research programs of the Department of Energy. Again, there may be implications for research synergy. Congress may also craft compromises that strengthen homeland security while reducing concerns of program disruption or unanticipated consequences. One such example is seen in recent deliberations about the appropriate location for visa processing. Congressional debate has focused on two of our criteria, mission relevancy and gains through consolidation. The visa function attempts to facilitate legitimate travel while at the same time denying entry to the United States of certain individuals, including potential terrorists. Some have argued that the mission of the visa function is primarily related to homeland security and that therefore the function should be located within the proposed department. Others have advocated that the Department of State (State) should retain the visa function because they believe that there would be no gains from consolidation. They point out that State has an established field structure and that it may be impractical to create a similar field structure in the proposed department. The compromise position of several committees has been to transfer responsibility for visa policy to the proposed department, while retaining the cadre of overseas visa officers within State. As part of these deliberations, the Congress should consider not only the mission and role that agencies fulfill today, but the mission and role that they should fulfill in the coming years. Thus, while it may be accurate that large portions of the missions engaged in by the Coast Guard or FEMA today do not relate primarily to homeland security, it is wholly appropriate for Congress to determine whether the future missions of such agencies should focus principally on homeland security. Such decisions, of course, would require the Congress to determine the best approach for carrying out a range of the government’s missions and operations, in order to see that non-homeland security activities of these departments are still achieved. In fact, given the key trends identified in GAO’s recent strategic plan for supporting the Congress and our long range fiscal challenges, it is appropriate to ask three key questions: (1) what should the federal government do in the 21st century? (2) how should the federal government do business in the 21st century? and (3) who should do the federal government’s business in the 21st century? These questions are relevant for DHS and every other federal agency and activity. As the proposal to create DHS demonstrates, the terrorist events of last fall have provided an impetus for the government to look at the larger picture of how it provides homeland security and how it can best accomplish associated missions. Yet, even for those agencies that are not being integrated into DHS, there remains a very real need and possibly a unique opportunity to rethink approaches and priorities to enable them to better target their resources to address our most urgent needs. In some cases, the new emphasis on homeland security has prompted attention to long- standing problems that have suddenly become more pressing. For example, we’ve mentioned in previous testimony the overlapping and duplicative food safety programs in the federal government. While such overlap and duplication has been responsible for poor coordination and inefficient allocation of resources, these issues assume a new, and potentially more foreboding, meaning after September 11th given the threat from bio-terrorism. In another example, we have recommended combining the Department of Justice’s Office of Domestic Preparedness with FEMA to improve coordination. A consolidated approach to many of these issues can facilitate a concerted and effective response to new threats and mission performance. Similarly, we have conducted a number of reviews of State’s visa function over the years and, based on our work, we believe that there are a number of areas in which the visa function can be strengthened. For example, the U.S. government needs to ensure that there are sufficient staff at overseas posts with the right training and experience to make good decisions about who should and who should not receive a visa. In addition, we are currently looking at ways that the visa function can be strengthened as a screen against potential terrorists and we expect to make recommendations later this fiscal year. These recommendations will apply regardless of decisions about the respective roles of the State Department and the proposed Department of Homeland Security regarding visa functions. The ultimate effectiveness of the new department will be dependent on successfully addressing implementation and transition issues. Picking the right leadership for these critical positions in the new department will be crucial to its success. If you don’t have the right leadership team in key policy, operational and management positions, the department will be at risk. In addition providing the new department with some reasoned and reasonable human capital, management and budget flexibilities combined with appropriate safeguards to protect the Congress’ constitutional authorities and to prevent abuse can also help contribute to a successful transition. Both the Congress and the Executive Branch have critical roles to play in achieving desired outcomes for the American people. Among the most important elements for effectively implementing the new cabinet department will be close adherence to the key success factors. Strategic planning, building partnerships, human capital strategies, financial management and other critical factors will make the difference between a department that can quickly rise to the challenge of its mission and one that might otherwise become mired in major problems and obstacles that hamper efforts to protect the nation from terrorism. The quality and continuity of the new department’s leadership is critical to building and sustaining the long-term effectiveness of DHS and homeland security goals and objectives. The experiences of organizations that have undertaken transformational change efforts along the lines that will be necessary for the new department to be fully effective suggest that this process can take up to 5 to 10 years to provide meaningful and sustainable results. Given the scope and nature of challenges facing the new department, the critical question is how can we ensure that the essential transformation and management issues receive the sustained, top-level attention that they require. The nation can ill-afford to have the secretary or deputy secretary being side-tracked by administrative and operational details -- the mission of the department requires their undivided attention. As a result, it is important for the Congress to give serious consideration to creating a deputy secretary for management/chief operating officer (COO) position within the department to provide the sustained management attention essential for addressing key infrastructure and stewardship issues while helping to facilitate the transition and transformation process. Recent legislative language adopted by the House Committee on Government Reform suggests elevating the undersecretary for management to a deputy secretary, equivalent to the deputy position provided for in the Administration’s proposal. We believe that is an important first step to ensuring that transformation and management issues receive the top-level attention they require. Raising the organizational profile of transformation and management issues is important to ensure that the individual has the authority needed to successfully lead department-wide initiatives. We are not convinced that an under secretary for management, on par with the other under secretaries, would necessarily have sufficient authority. To provide further leadership and accountability for management, Congress may wish to consider several points: First, Congress should consider making the deputy secretary for management/COO a term appointment of up to 7 years, subject to Senate confirmation. A term appointment would provide continuity that spans the tenure of the political leadership and thereby help to ensure that long-term stewardship issues are addressed and change management initiatives are successfully completed. Second, to further clarify accountability, the COO should be subject to a clearly defined, results-oriented performance contract with appropriate incentive, reward and accountability mechanisms. The COO would be selected without regard to political affiliation based on (1) demonstrated leadership skills in managing large and complex organizations, and (2) experience achieving results in connection with “good government” responsibilities and initiatives. Requiring that both the performance contract and the subsequent performance evaluation be made available to the Congress would provide additional accountability and transparency. In addition to providing top-level leadership and accountability, the department will need to develop employee performance management systems that can serve as a key tool for aligning institutional, unit, and employee performance; achieving results; accelerating change; managing the organization on a day-to-day basis; and facilitating communication throughout the year so that discussions about individual and organizational performance are integrated and ongoing. A cascading set of results- oriented performance agreements is one mechanism in a performance management system that creates a “line of sight” showing how individual employees can contribute to overall organizational goals. Further accountability can be achieved by ensuring that all relevant management laws are applied to the new department (e.g, Government Performance and Results Act (GPRA), Chief Financial Officers Act, Clinger- Cohen Act, etc.). These laws provide a foundation for the management structure of the new department and a basis for ensuring appropriate transparency and accountability. The President’s proposal includes a set of human capital and management flexibilities for the new department. GAO believes that its reasonable for certain flexibilities to be granted to the new department in such areas as human capital, provided that they are accompanied by adequate transparency and accountability safeguards designed to prevent abuse. Human capital and management flexibility will help the new department to reorganize, realign and transform itself to achieve its important missions. Appropriate safeguards can help to prevent abuse of federal employees and provide adequate monitoring mechanisms to gauge performance. For instance, the Congress may wish to provide the new department with “early out” and “buy out” authority in order to help quickly realign the component entities and provide for future flexibility. DHS might consider new scientific and technical personnel tracks to encourage recruitment, retention and rewarding of individuals with critical knowledge, or Congress may wish to provide the new department with some limited term appointment authority. These and other suggested flexibilities for DHS should be viewed in the context of how similar flexibilities have been exercised by other agencies with similar missions, such as the Transportation Security Administration (TSA), the DOD, the FBI, and the CIA. Congress should also note that, as GAO has indicated in the past, agencies are already accorded in law significant flexibilities, especially with respect to human capital issues, but for a variety of reasons they do not always take advantage of them. DHS should use the these existing flexibilities and be given others in areas where Congress has done so with other agencies (e.g., TSA, Internal Revenue Service, DOD). In requesting human capital flexibilities, questions have been raised about whether they would result in eroding merit principles, veterans’ preferences, whistleblower protections, collective bargaining and other basic civil service provisions. Recent testimony to the Congress by Governor Ridge has clarified the Administration’s commitment to these provisions. The final legislation should clearly reflect the applicability of these tenets to the new department. Other flexibilities, such as ones for acquisitions and contracting, are included in the President’s proposal. Careful analysis is needed to determine the need for additional flexibilities. Congress may want to consider not expressly providing certain flexibilities in the initial legislation, but rather providing a mechanism for expedited consideration of flexibilities should the new department request them in the future. For example, the Congress might wish to agree on rules specifying procedures for consideration of proposed changes, time limits on debate, or requirements that any amendments to future legislation be strictly related to DHS. This would not be the blanket grant of authority envisioned in the original Freedom to Manage proposal, but it would permit both the executive branch and the Congress to feel confident that proposed changes would receive timely consideration. The Administration has suggested that it needs a special grant of budget flexibility for the Department of Homeland Security. GAO believes that Congress should be careful to distinguish between those flexibilities that will solely enhance the operations of DHS and those that might simultaneously raise other concerns, including concerns about the constitutional responsibilities and prerogatives of the legislative branch. For instance, the President’s proposal permits the Secretary to allocate funds as he sees fit, without regard to the original purpose of the appropriations. Moreover, there must be a system to identify homeland security funds across the wide range of existing budget accounts and program activities. This is necessary not only for the budget resolution and appropriations process, but also for tracking budget execution and for accountability to Congress. The Congress, through its appropriations subcommittees, has proven quite adept at creating and granting the kind of flexibility it sees as appropriate to any given agency. Congress gives agencies flexibility over the timing of spending by varying the period of fund availability: agencies may receive one-year, multi-year and no-year funds. Congress has granted agencies varying degrees of transfer or reprogramming authority. These flexibilities are generally provided as part of the appropriations process and consider the balance between accountability and flexibility to ensure that Congress is a partner in the spending of taxpayer funds. Over the longer term the creation of the new Department may also be an opportune time to review the account structure of the Department’s component entities. Should the orientation of budget accounts be shifted toward the strategic goals defined in plans? Such a reorientation might facilitate the process of linking resource allocation to results consistent with GPRA. Efforts designed to rationalize the number of budget accounts within the new department can serve to provide flexibility while ensuring accountability. The creation of the Department of Homeland Security will be one of the largest reorganizations ever undertaken and the difficulty of this task should not be underestimated. Under the President’s proposal, 22 existing agencies and programs and 170,000 people would be integrated into the new department in order to strengthen the country’s defense against terrorism. With an estimated budget authority of the component parts of the new department of $37.45 billion, successfully transitioning the government in an endeavor of this scale will take considerable time and money. Careful and thorough planning will be critical to the successful creation of the new department. While national needs suggest a rapid reorganization of homeland security functions, the transition of agencies and programs into the new department is likely to take time to achieve. At the same time, the need for speed to get the new department up and running must be balanced with the need to maintain readiness for new and existing threats during the transition period. Moreover, the organizational transition of the various components will simply be the starting point – as implementation challenges beyond the first year should be expected in building a fully integrated department. As I stated earlier, it could take 5 to 10 years to fully implement this reorganization in an effective and sustainable manner. A comprehensive transition plan needs to be developed. The transition plan should establish a time table for the orderly migration of each component agency or program to the new department, identify key objectives to be achieved during the first year following the transfer, and describe the strategy for achieving an orderly transition and sustaining mission performance. More detailed implementation plans also will be necessary to address business system, processes, and resource issues. The President has taken an important first step by establishing a transition office within the Office of Management and Budget. Congress has an important oversight role to play in helping to ensure the effective implementation of the new department. In addition to the transition plans, Congress should consider requiring DHS to submit regular progress reports on implementation from the department and should also conduct periodic oversight hearings to assess progress and performance. In this regard, GAO stands ready to assist the Congress in conducting its oversight role. Increased cost must also be considered with regard to the President’s proposal. It is likely that over time consolidation of functions within DHS may reduce costs below what otherwise would have been the case if these functions continued to operate separately. This, however, is unlikely to happen quickly. Moreover, we should expect that any reorganization would incur start up costs as well as require some funding for redundant activities to maintain continuity of effort during the transition period. The Congressional Budget Office (CBO) has estimated that the costs of implementing the new department would be about $3 billion over the next five years with an annual estimate of $150 million in FY2003 and $225 million thereafter. However, there are other transition costs that CBO acknowledges are not included in their estimates beyond the cost to hire, house, and equip key personnel. The CBO estimate assumes continuation of the existing multi-pay and retirement systems--however unlikely-- and does not address the potential need to cross-train existing personnel. Although the purchase of new computer equipment, supplies and compatible information management systems are included, no estimates are provided for the cost to correct existing computer system deficiencies nor the resources to support some system redundancy for a period of time. Finally, CBO did not attempt to price the relocation of personnel to a central location. The Administration has argued that CBO’s estimates are inflated. In fact, CBO estimates that 1 percent of the total annual spending will be for administrative costs, but that a proportionate share of the costs to currently administer these agencies will be transferred. Depending on the decision to co-locate personnel and the flexibilities ultimately provided to the Administration in legislation--in particular a broad grant of transfer authority and the ability to staff through non-reimbursable agreements with other agencies-- these estimates may well change. More important than a precise cost estimate of the transition, however, is the recognition that there will be short-term transition costs and that these costs need to be made transparent. To fully recognize the transition costs, in fact, Congress should consider appropriating for them separately. In summary, I have discussed the reorganization of homeland security functions and some critical factors for success. However, the single most important element of a successful reorganization is the sustained commitment of top leaders to modern, effective and credible human capital strategies and to setting clear goals and appropriate accountability mechanisms. Top leadership involvement and clear lines of accountability for making management improvements are critical to overcoming an organization’s natural resistance to change, marshalling the resources needed to improve management, and building and maintaining organization-wide commitment to new ways of doing business. Organizational cultures will not be transformed, and new visions and ways of doing business will not take root without strong and sustained leadership. Strong and visionary leadership will be vital to creating a unified, focused organization, as opposed to a group of separate units under a single roof. Modern human capital strategies, including implementing a credible, effective and equitable performance management system that links institutional, unit, team and individual performance measurement and reward systems to the department’s strategic plan, core values and desired outcomes will be critical to success. Mr. Chairman, this concludes my written testimony. I would be pleased to respond to any questions that you or members of the Select Committee may have at this time. Homeland Security: New Department Could Improve Coordination but Transforming Control of Public Health Programs Raises Concerns (GAO- 02-954T, July 16, 2002). Homeland Security: New Department Could Improve Biomedical R&D Coordination but May Disrupt Dual-Purpose Efforts (GAO-02-924T, July 9, 2002). Homeland Security: Title III of the Homeland Security Act of 2002 (GAO- 02-927T, July 9, 2002) Homeland Security: Intergovernmental Coordination and Partnerships Will Be Critical to Success (GAO-02-899T, July 1, 2002). Homeland Security: New Department Could Improve Coordination but May Complicate Priority Setting (GAO-02-893T, June 28, 2002). Homeland Security: New Department Could Improve Coordination But May Complicate Public Health Priority Setting (GAO-02-883T, June 25, 2002). Homeland Security: Proposal for Cabinet Agency Has Merit, But Implementation Will be Pivotal to Success (GAO-02-886T, June 25, 2002). Homeland Security: Key Elements to Unify Efforts Are Underway but Uncertainty Remains (GAO-02-610, June 7, 2002). National Preparedness: Integrating New and Existing Technology and Information Sharing into an Effective Homeland Security Strategy (GAO-02-811T, June 7, 2002). Homeland Security: Responsibility And Accountability For Achieving National Goals (GAO-02-627T, April 11, 2002). National Preparedness: Integration of Federal, State, Local, and Private Sector Efforts Is Critical to an Effective National Strategy for Homeland Security (GAO-02-621T, April 11, 2002). Homeland Security: Progress Made; More Direction and Partnership Sought (GAO-02-490T, March 12, 2002). Homeland Security: Challenges and Strategies in Addressing Short- and Long-Term National Needs (GAO-02-160T, November 7, 2001). Homeland Security: A Risk Management Approach Can Guide Preparedness Efforts (GAO-02-208T, October 31, 2001). Homeland Security: Need to Consider VA’s Role in Strengthening Federal Preparedness (GAO-02-145T, October 15, 2001). Homeland Security: Key Elements of a Risk Management Approach (GAO-02-150T, October 12, 2001). Homeland Security: A Framework for Addressing the Nation’s Issues (GAO-01-1158T, September 21, 2001). Combating Terrorism: Intergovernmental Cooperation in the Development of a National Strategy to Enhance State and Local Preparedness (GAO-02-550T, April 2, 2002). Combating Terrorism: Enhancing Partnerships Through a National Preparedness Strategy (GAO-02-549T, March 28, 2002). Combating Terrorism: Critical Components of a National Strategy to Enhance State and Local Preparedness (GAO-02-548T, March 25, 2002). Combating Terrorism: Intergovernmental Partnership in a National Strategy to Enhance State and Local Preparedness (GAO-02-547T, March 22, 2002). Combating Terrorism: Key Aspects of a National Strategy to Enhance State and Local Preparedness (GAO-02-473T, March 1, 2002). Combating Terrorism: Considerations For Investing Resources in Chemical and Biological Preparedness (GAO-01-162T, October 17, 2001). Combating Terrorism: Selected Challenges and Related Recommendations (GAO-01-822, September 20, 2001). Combating Terrorism: Actions Needed to Improve DOD’s Antiterrorism Program Implementation and Management (GAO-01-909, September 19, 2001). Combating Terrorism: Comments on H.R. 525 to Create a President’s Council on Domestic Preparedness (GAO-01-555T, May 9, 2001). Combating Terrorism: Observations on Options to Improve the Federal Response (GAO-01-660T, April 24, 2001). Combating Terrorism: Comments on Counterterrorism Leadership and National Strategy (GAO-01-556T, March 27, 2001). Combating Terrorism: FEMA Continues to Make Progress in Coordinating Preparedness and Response (GAO-01-15, March 20, 2001). Combating Terrorism: Federal Response Teams Provide Varied Capabilities: Opportunities Remain to Improve Coordination (GAO-01- 14, November 30, 2000). Combating Terrorism: Issues in Managing Counterterrorist Programs (GAO/T-NSIAD-00-145, April 6, 2000). Combating Terrorism: Need to Eliminate Duplicate Federal Weapons of Mass Destruction Training (GAO/NSIAD-00-64, March 21, 2000). Combating Terrorism: Observations on the Threat of Chemical and Biological Terrorism (GAO/T-NSIAD-00-50, October 20, 1999). Combating Terrorism: Need for Comprehensive Threat and Risk Assessments of Chemical and Biological Attack (GAO/NSIAD-99-163, September 7, 1999). Combating Terrorism: Observations on Growth in Federal Programs (GAO/T-NSIAD-99-181, June 9, 1999). Combating Terrorism: Analysis of Potential Emergency Response Equipment and Sustainment Costs (GAO/NSIAD-99-151, June 9, 1999). Combating Terrorism: Use of National Guard Response Teams Is Unclear (GAO/NSIAD-99-110, May 21, 1999). Combating Terrorism: Issues to Be Resolved to Improve Counterterrorism Operations (GAO/NSIAD-99-135, May 13, 1999). Combating Terrorism: Observations on Federal Spending to Combat Terrorism (GAO/T-NSIAD/GGD-99-107, March 11, 1999). Combating Terrorism: Opportunities to Improve Domestic Preparedness Program Focus and Efficiency (GAO/NSIAD-99-3, November 12, 1998). Combating Terrorism: Observations on the Nunn-Lugar-Domenici Domestic Preparedness Program (GAO/T-NSIAD-99-16, October 2, 1998). Combating Terrorism: Threat and Risk Assessments Can Help Prioritize and Target Program Investments (GAO/NSIAD-98-74, April 9, 1998). Combating Terrorism: Spending on Governmentwide Programs Requires Better Management and Coordination (GAO/NSIAD-98-39, December 1, 1997). Bioterrorism: The Centers for Disease Control and Prevention’s Role in Public Health Protection (GAO-02-235T, November 15, 2001). Bioterrorism: Public Health and Medical Preparedness (GAO-02-141T, October 10, 2001). Bioterrorism: Review of Public Health and Medical Preparedness (GAO- 02-149T, October 10, 2001). Food Safety and Security: Fundamental Changes Needed to Ensure Safe Food (GAO-02-47T, October 10, 2001). Bioterrorism: Coordination and Preparedness (GAO-02-129T, October 5, 2001). Bioterrorism: Federal Research and Preparedness Activities (GAO-01- 915, September 28, 2001). Chemical and Biological Defense: Improved Risk Assessments and Inventory Management Are Needed (GAO-01-667, September 28, 2001). West Nile Virus Outbreak: Lessons for Public Health Preparedness (GAO/HEHS-00-180, September 11, 2000). Need for Comprehensive Threat and Risk Assessments of Chemical and Biological Attacks (GAO/NSIAD-99-163, September 7, 1999). Chemical and Biological Defense: Program Planning and Evaluation Should Follow Results Act Framework (GAO/NSIAD-99-159, August 16, 1999). Combating Terrorism: Observations on Biological Terrorism and Public Health Initiatives (GAO/T-NSIAD-99-112, March 16, 1999). Aviation Security: Vulnerabilities in, and Alternatives for, Preboard Screening Security Operations (GAO-01-1171T, September 25, 2001). Aviation Security: Weaknesses in Airport Security and Options for Assigning Screening Responsibilities (GAO-01-1165T, September 21, 2001). Aviation Security: Terrorist Acts Illustrate Severe Weaknesses in Aviation Security (GAO-01-1166T, September 20, 2001). Aviation Security: Terrorist Acts Demonstrate Urgent Need to Improve Security at the Nation's Airports (GAO-01-1162T, September 20, 2001). Aviation Security: Long-Standing Problems Impair Airport Screeners' Performance (RCED-00-75, June 28, 2000). Aviation Security: Slow Progress in Addressing Long-Standing Screener Performance Problems (T-RCED-00-125, March 16, 2000). Aviation Security: Progress Being Made, but Long-term Attention Is Needed (T-RCED-98-190, May 14, 1998). Aviation Security: FAA's Procurement of Explosives Detection Devices (RCED-97-111R, May 1, 1997). Aviation Security: Commercially Available Advanced Explosives Detection Devices (RCED-97-119R, April 24, 1997). Aviation Security: Technology's Role in Addressing Vulnerabilities (T- RCED/NSIAD-96-262, September 19, 1996). Aviation Security: Urgent Issues Need to Be Addressed (T-RCED/NSIAD- 96-251, September 11, 1996). Aviation Security: Immediate Action Needed to Improve Security (T- RCED/NSIAD-96-237, August 1, 1996). Critical Infrastructure Protection: Significant Homeland Security Challenges Need to Be Addressed (GAO-02-918T, July 9, 2002). Critical Infrastructure Protection: Significant Challenges in Safeguarding Government and Privately Controlled Systems from Computer-Based Attacks (GAO-01-1168T, September 26, 2001). Critical Infrastructure Protection: Significant Challenges in Protecting Federal Systems and Developing Analysis and Warning Capabilities (GAO-01-1132T, September 12, 2001). Critical Infrastructure Protection: Significant Challenges in Developing Analysis, Warning, and Response Capabilities (GAO-01-1005T, July 25, 2001). Critical Infrastructure Protection: Significant Challenges in Developing Analysis, Warning, and Response Capabilities (GAO-01-769T, May 22, 2001). Critical Infrastructure Protection: Significant Challenges in Developing National Capabilities (GAO-01-323, April 25, 2001). Critical Infrastructure Protection: Challenges to Building a Comprehensive Strategy for Information Sharing and Coordination (GAO/T-AIMD-00-268, July 26, 2000). Critical Infrastructure Protection: Comments on the Proposed Cyber Security Information Act of 2000 (GAO/T-AIMD-00-229, June 22, 2000). Critical Infrastructure Protection: National Plan for Information Systems Protection (GAO/AIMD-00-90R, February 11, 2000). Critical Infrastructure Protection: Comments on the National Plan for Information Systems Protection (GAO/T-AIMD-00-72, February 1, 2000). Critical Infrastructure Protection: Fundamental Improvements Needed to Assure Security of Federal Operations (GAO/T-AIMD-00-7, October 6, 1999). Critical Infrastructure Protection: Comprehensive Strategy Can Draw on Year 2000 Experiences (GAO/AIMD-00-1, October 1, 1999). Disaster Assistance: Improvement Needed in Disaster Declaration Criteria and Eligibility Assurance Procedures (GAO-01-837, August 31, 2001). FEMA and Army Must Be Proactive in Preparing States for Emergencies (GAO-01-850, August 13, 2001). Federal Emergency Management Agency: Status of Achieving Key Outcomes and Addressing Major Management Challenges (GAO-01-832, July 9, 2001). Results-Oriented Budget Practices in Federal Agencies (GAO-01-1084SP, August 2001). Managing for Results: Federal Managers’ Views on Key Management Issues Vary Widely Across Agencies (GAO-01-592, May 2001). Determining Performance and Accountability Challenges and High Risks (GAO-01-159SP, November 2000). Managing for Results: Using the Results Act to Address Mission Fragmentation and Program Overlap (GAO/AIMD-97-156, August 29, 1997). Government Restructuring: Identifying Potential Duplication in Federal Missions and Approaches (GAO/T-AIMD-95-161, June 7, 1995). Government Reorganization: Issues and Principals (GAO/T-GGD/AIMD- 95-166, May 17, 1995). | The government faces a unique opportunity to create an organization that is extremely effective in protecting the nation's borders and citizens against terrorism. There is likely to be considerable benefit over time from restructuring some of the homeland security functions, including reducing risk and improving the economy, efficiency, and effectiveness of consolidated agencies and programs. Sorting out those programs and agencies that would most benefit from consolidation versus those in which dual missions must be balanced in order to achieve a more effective fit in the proposed Department of Homeland Security is a difficult but critical task. Moreover, the magnitude of the challenges that the new department faces will clearly require substantial time and effort, and it will take institutional continuity and additional resources to be fully effective. In the short term, issues to be resolved include the harmonization of communication systems, information technology systems, human capital systems, the physical location of people and other assets, and other factors. Given the magnitude of this task, not everything can be achieved at once, and a deliberate phasing of some operations will be necessary. The new department will need to articulate a clear overarching mission and core values, establish a short list of initial critical priorities, develop effective communication and information systems, and produce an overall implementation plan for the new national strategy and related reorganization. Effective performance and risk management systems must also be established, and threat and vulnerability assessments must be completed. |
The STOCK Act includes several provisions affecting executive and legislative branch employees. For example, the Act makes clear that executive branch employees, Members of Congress, and employees of Congress are not exempt from insider trading prohibitions under securities laws. In addition, the STOCK Act requires that certain financial disclosure forms be made available to the public via official websites, and that some financial transactions that exceed $1,000 be filed within 30 to 45 days for certain executive and legislative branch employees, as well as Members and employees of Congress. Generally, government information can be characterized as public or nonpublic and material or nonmaterial. The definition of political intelligence in the STOCK Act includes public or nonpublic and material or nonmaterial information. Political intelligence information can be collected through briefings, meetings, committee hearings, public or non-public documents, personal conversations, and other communications between an employee of a political intelligence firm and an executive branch employee, a Member of Congress, or a legislative branch employee. The following examples describe two instances where individuals used government information to make investment decisions. These examples provide context for understanding the potential use of political intelligence. There are no laws or ethics rules that specifically govern the sale of information by a political intelligence firm. However, as illustrated in figure 3 and the discussion that follows, there are laws and ethics rules that may govern the purchase and sale of material nonpublic information in the executive and legislative branches, and ethics rules that govern nonpublic information in the executive and legislative branches of government. Executive branch employees, Members of Congress, and their employees and staff are subject to ethics rules and insider trading prohibitions. The STOCK Act affirmed that executive branch employees, Members of Congress and their employees are not exempt from insider trading prohibitions and that a duty of trust and confidence is owed to the Congress, the government, and the citizens of the United States. Insider trading prohibitions stem from Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, as well as a long line of judicial decisions.existence and nature of the duty being breached and both the materiality and nonpublic nature of the information. If material nonpublic governmental information is improperly disclosed to a political intelligence professional in breach of a duty, and that professional sells the information to an investor who trades based on the information, then the government employee or Member of Congress, the political intelligence professional, and the investor could all be liable for potential insider trading violations. According to SEC officials, any party may defend against a claim of insider trading by arguing that the information lacked materiality, the information was public, there was no breach of duty, or there was no act of bad faith. With regard to the legislative branch, attorneys we interviewed for this report explained that Members of Congress may also be able to assert the Speech or Debate privilege of the U.S. Constitution as a defense to any potential charge of insider trading. Such a defense would be based on the principle that the information being shared constituted a legislative act—an integral part of the deliberative and communicative processes by which Members participate in legislative activities. To date, according to the SEC, no Members of Congress have been prosecuted for insider trading based on material nonpublic information learned in the course of their work in Congress under Section 10(b) or Rule 10b-5. SEC investigates cases of insider trading by examining the Guidance issued by the House of Representatives Committee on Ethics defines material nonpublic information as any information concerning a company, security, industry or economic sector, or real or personal property that is not available to the general public and which an investor would likely consider important in making an investment decision and is not widely disseminated to the public. Senate ethics rules also define nonpublic information as confidential or not widely disseminated to the public. Both the House and the Senate ethics committees may impose penalties other than ones allowed under securities laws. Executive branch employees are prohibited from using or allowing the use of nonpublic government information to further their own private interests or the private interests of others, and can be subject to penalties for doing so. The Office of Government Ethics (OGE) defines nonpublic information as information that the employee gains by reason of federal employment and that he or she knows or reasonably should know has not been made available to the general public. According to OGE, nonpublic government information includes, but is not limited to: information that is exempt from disclosure under the Freedom of Information Act, information that the agency has designated as confidential, or information that has not actually been disseminated to the general public and is not authorized to be made available to the public upon request. The prevalence of the sale of political intelligence is not known and is therefore difficult to quantify, as political intelligence information gathering and dissemination is often bundled with other information sources, financial compensation is usually not tied to specific sources of information or investment decisions, and consensus among political intelligence firms does not exist regarding some terms used in the STOCK Act definition of political intelligence. It is especially difficult to make a determination that a sale of nonpublic information has occurred, in part because it is not always known when information is exchanged or the timing of when nonpublic information becomes public. Nonetheless, investors do sometimes use political intelligence information and two examples that we reviewed illustrate the use of government information to gain advantage in the financial markets. According to interviewees at seven of eight political intelligence firms and all four law firms who provide political intelligence, this information is often bundled and provided to clients with other information such as research, opinions, and policy analysis. Figure 4 illustrates the possible flow of political intelligence information. For example, one firm we interviewed provided us with a product it sent to all of its subscribers which analyzed recent developments in federal health care programs. The analysis cited information from rulemaking in the executive branch, past and current legislative activities in Congress, publicly available documents, relevant trade publications, and the firm’s analysis of government actions. We were also told by five of six investors that investment decisions are most likely to be based on an overall analysis of the political climate for specific issues and not necessarily a single piece of political intelligence. For example, according to sixteen of thirty-four interviewees, investors often rely on multiple sources of information to make an investment decision. As a result, it is difficult to link the sale of political intelligence and an investment decision to a single piece of information obtained from executive or legislative branch officials. Even when a connection can be established between discrete pieces of government information and investment decisions, it is not always clear whether such information could be definitively categorized as material or nonmaterial and whether such information stemmed from public or nonpublic sources at the time of the information exchange. In addition to bundling information, the nature of compensation structures for political intelligence firms is another factor complicating efforts to determine the prevalence of the sale of political intelligence. Financial compensation is usually not tied to specific sources of information or investment decisions. Consequently, there is not a reliable, consistently used data source to measure economic activity for political intelligence. In the absence of such data, we asked firms how they track the sale of information. Interviewees at six of eight political intelligence firms and three of four law firms who provide political intelligence told us that they do not specifically track the sale of political intelligence. In addition, the compensation structure for services provided by firms varies. For example, interviewees from five of the eight political intelligence firms and two of four law firms who provide political intelligence firms do not charge investors for single pieces of information. Instead, political intelligence clients generally pay firms for an overall analysis of a topic or a particular issue. Specifically, three of eight political intelligence firms and three of four law firms who provide political intelligence told us they charge a monthly retainer for provision of their products and services, and six of eight political intelligence firms and all four law firms who provide political intelligence reported that they charge hourly as services are provided, ask clients to pay an upfront fee for specific analyses, or charge a flat rate for newsletters. Attempts to quantify the prevalence of the sale of political intelligence are further complicated by a lack of consensus on the meaning of some of the terminology in the STOCK Act definition, including “direct communication,” and someone “who is known to intend to use information to inform investment decisions.” Seven of eight political intelligence firms and three of four law firms who provide political intelligence stated that they had direct communication with executive branch officials or congressional staff when needing clarification or additional details on specific issues. Five of thirty-four interviewees said it was unclear if information shared by executive or legislative branch officials providing a legislative or regulatory update at an event such as a town hall meeting could be considered direct communication. Not knowing whether information is gathered by direct communication can make it difficult for firms to determine whether an exchange of political intelligence occurred. The phrase “who is known to intend to use information to inform investment decisions” is also unclear and difficult to interpret, because investor’s intentions are not always known. For example, an investor can make a range of decisions, including a decision to take no action, in response to receipt of information. According to five of eight political intelligence firms and all four law firms who provide political intelligence, they do not know how their clients use information they provide in their investment decision-making process or if they use it at all. Specifically, some firms provide information to their clients through mass communication such as newsletters, thus making it difficult to know the extent to which, if at all, a client used their product when making an investment decision. Similarly, representatives of trade associations were unsure how their members used political intelligence information in making investment decisions. Interviewees at four of five trade associations told us that they provide guidance and information to their members when new legislation is filed or when regulations are issued that could have an impact on their members’ investment or business decisions, but are unaware of the decisions that are made based on the information provided. Another challenge related to the definition is that firms do not always characterize their information gathering activities as political intelligence. For example, some individuals described political intelligence as policy analysis, market research, or information gathering that results from the exchange of information that could be included as a part of lobbying activities. While it is challenging to determine the prevalence of the sale of political intelligence information as a whole, we found that it is especially difficult to determine the extent to which nonpublic government information is being sold as political intelligence. This is due in part to uncertainty about when a piece of nonpublic information becomes public. It is important for a political intelligence firm to know exactly when a piece of material nonpublic information becomes public so it can pass that information along to an investor in a timely fashion, while at the same time being cautious not to violate insider trading laws. Interviewees from six of eight political intelligence firms and one of four law firms who provide political intelligence said that they have policies in place to ensure they do not knowingly sell material nonpublic information, which would be a violation of insider trading laws. As noted earlier, federal guidance defines material nonpublic and nonpublic information to include any information that is not available to the general public which would likely be considered important in making an investment decision or information that a federal employee gains that is reasonably known to be important and therefore should not be disclosed to the general public. Because of the potential risk to their reputation as well as the possible imposition of penalties, interviewees at six out of eight political intelligence firms told us that if they suspect that information is material and nonpublic, they would not sell or distribute it until after it is known to be public. According to ethics guidance from the House of Representatives, if information about the work of Congress is obtained during public briefings or hearings, it is then considered public information. Examples of material nonpublic information gained during the course of government service could include legislation and amendments prior to their public introduction. House guidance further provides that a good rule of thumb to determine whether information may be material nonpublic information is whether or not the release of that information to the public would have an effect on the price of a security or property. Nonetheless, our review of economic literature and interview responses suggests that individuals and firms value political intelligence and sometimes respond to such information through investment and business decisions. Investment decisions could narrowly include an individual investor’s decision regarding investments in the stock market or could be broader and also include business decisions made by a company, such as whether or not to expand existing operations or where to locate new operations. Some economists believe that the onset of the recession in late 2007 and subsequent events in the world economy and financial markets have increased uncertainty about the direction of U.S. economic policy. A firm’s finances can be affected by federal legislative and regulatory actions that alter its revenues or its costs. Uncertainty regarding the future direction of government policy may complicate firms’ attempts to estimate future profitability. Firms may respond to such uncertainty by delaying investment in future productive capacity (i.e., hiring or opening a new office) while awaiting resolution of policy uncertainty. Similarly, uncertainty about a firm’s profitability may also affect the price of its stock. Financial market investors may then have a comparable interest in gaining knowledge about potential government action that could affect a firm’s profitability. Three of eight political intelligence firms and two of four law firms who provide political intelligence confirmed that they have seen a rise in demand for their services in recent years, in part due to interest in policy issues such as the nation’s budget uncertainty and health care reform legislation. The asbestos liability trust fund example illustrates one instance where investors responded to government information and used this information to trade stocks. In 2005, a small group of investors used information obtained from the legislative branch about a pending announcement on the Senate floor that could affect the value of companies with asbestos- related liabilities. Investors used the information to make stock purchases in those companies before the announcement was made and the information—that the Senate would vote on a bill creating an asbestos liability trust fund—became public. In this example, investors anticipated making profitable trades by buying firms’ stocks at lower prices than would prevail once all market participants knew that firms would benefit from the creation of a liability trust fund. No charges were filed, and the Senate did not pass the bill. In another example, an FDA chemist bought, sold, and short-sold stock based on pieces of material nonpublic information, which he could access due to his position at FDA. The information allowed him to judge the direction that stock prices would change when information about a pending regulatory decision became public. The SEC investigated this case and filed a civil complaint, while the Department of Justice filed a parallel criminal case in federal court alleging violation of insider trading laws. In cases such as these, the possession of material nonpublic information provides the potential for profitable trading in anticipation of price changes once the information becomes public. When political intelligence is material and public and is disseminated through the market, its influence on prices may be evident in immediate price changes (as with the announcement of a drug approval) or may be difficult to isolate (as with a general increase in defense spending). This explains why it is difficult to determine the effects, if any, of political intelligence on financial markets. If Congress chose to require disclosure of the exchange of political intelligence information, then the benefits and costs of disclosure would have to be balanced while at the same time considering practical and legal issues. For example, interviewees discussed the potential benefit of increasing the transparency of political intelligence firms’ activities. However, the cost of administering and enforcing disclosure of government information (such as staff and information technology resources) would also need to be considered. In addition, there are a number of practical issues regarding the structure and form of disclosure that would need to be resolved. Specifically, key definitional terms such as direct communication would need to be clarified, and the required disclosure elements—such as what the elements of disclosure include, what political intelligence information needs to be disclosed, who should file, and how often—would need to be determined. There could also be legal challenges to requiring such disclosure (based on perceived restrictions on First Amendment rights). Some individuals we interviewed cited potential benefits of disclosing political intelligence activities. According to three of eight public advocacy groups, a benefit of political intelligence disclosure could be the transparency of a political intelligence firms’ activities such as the source of political intelligence (executive or legislative branch), disclosure of who (investor) purchases such information, and what information was shared. However, all three interviewees with broad public policy expertise questioned whether requiring disclosure would be a matter of promoting transparency without a compelling public purpose and were not certain what specific problem disclosure would resolve. They pointed out that the information being disclosed would most likely be public information and there are already laws in place governing the protection of nonpublic information. In addition to transparency, another potential benefit cited by SEC officials was that disclosure could potentially lead to investor protections as the nature and timing of the flow of information between a government official, a political intelligence firm, and an investor is made public through disclosure. SEC officials told us that access to information promotes investor confidence and maintains the integrity of markets. However, for political intelligence it is uncertain how helpful disclosure would be to an investor given the pace of market movements. For example, a firm’s disclosure that it shared political intelligence with a large pension fund would only be helpful to other investors if the disclosure was filed and made available almost instantaneously. Finally, according to SEC officials, disclosure could help them accomplish their mission. For example, SEC officials told us that disclosure of more information could allow enforcement staff to identify relationships or make connections between the various individuals involved in an investigation of potential insider trading. According to those officials, SEC analyzes investigative information and builds its insider trading cases by, among other things, looking for relationships between people and events that are related to a suspicious trade. SEC officials suggested that political intelligence disclosure legislation could include the name of the filer’s former employer, dates of prior employment, and the dates of contact between the filer and government source. Disclosure of political intelligence activities would also involve incurring costs for the entity processing the disclosure as well as for individuals required to disclose their activities. Congressional staff we interviewed stated that without knowing the requirements of political intelligence disclosure they could not speculate on the potential cost. However, based on their experience with administering the LDA, congressional staff said that disclosure costs most likely would include staff to administer the disclosure process, the creation and maintenance of an information technology infrastructure for disclosure, and the administrative support necessary to track registration and compliance. In addition, individuals required to disclose their activities would also likely bear the cost of compiling such information for filing. There are also practical issues regarding the requirements and potential form of disclosure that would need to be resolved. These issues include: Clarifying key terms: Although the STOCK Act defines political intelligence, some terms in the definition are unclear. Specifically, agreement does not exist on the meaning of the phrases “direct communication” and someone “who is known to intend to use information to inform investment decisions” making it difficult for firms to determine whether an exchange of political intelligence occurred, and, as a result, uncertain as to whether they would be required to register. For example, a clear description of what constitutes direct communication would be necessary to help potential filers determine whether a disclosure requirement applied to them. As a point of comparison, state lobbying laws define direct communication as, but not limited to, contact in person, on the telephone, by telegraph, by letter, or using electronic media. With regard to investment decisions, disclosure rules would also need to clarify whether disclosure is required for the range of decisions that an investor can make including internal business decisions and a decision to do nothing. Establishing who would administer and enforce registration and reporting requirements: Interviewees also raised practical issues regarding the structure and function of disclosure requirements with respect to who should administer a potential political intelligence disclosure requirement for both the executive and legislative branches. Specifically, two of eight attorneys and interviewees from two of eight advocacy groups discussed the importance of deciding which agency should administer political intelligence disclosure, and that disclosure should not be modeled after or be made to fit into the LDA as a default disclosure model. One of the two attorneys stated that political intelligence does not fit cleanly into the LDA and there is no public rulemaking in place to address uncertainties that may arise. The attorney suggested that the SEC, OGE or another executive branch agency that regularly handles disclosure should administer political intelligence disclosure. In addition, potential disclosure requirements would also need to identify which agency would be responsible for political intelligence enforcement. Identifying the elements and characteristics of disclosure: According to the STOCK Act definition of political intelligence three parties are involved in the exchange of political intelligence: the source of the information (e.g., the executive or legislative branch employee), the person or firm collecting the information, and the client that receives the information. Twelve of thirty-four interviewees said that who should file is a key element that would need to be determined. A representative from a media organization and two of eight attorneys— one from a law firm that gathers political intelligence—expressed concern regarding the number of contacts that might need to be disclosed, especially if a firm has hundreds or thousands of clients. We analyzed three federal laws that require disclosure of information to explore what elements may need to be considered in establishing political intelligence disclosure requirements. These laws were the LDA, the Federal Election Campaign Act, and the Investment Advisers Act. From our analysis we found that there are at least 24 elements that would likely need to be considered, as shown in table 1. All of the elements identified were requirements in at least one of the three models we reviewed. Table 1. Analysis of Three Federal Laws Relevant to Potential Political Intelligence Disclosure Requirements Purpose of Disclosure Requirement (establish a clear definition) What forms to file Where to file Allows or requires electronic registration or reporting Termination of registration (e.g., if filer no longer fits requirements, a request may be made to no longer file reports) Who must file Who is exempt from filing Threshold requirements (only if a threshold is met) Records maintained (e.g., a record of contributions to a government official is kept and the location is reported) Filing deadline Frequency of filing reports Information about the filer’s communications or contacts made on behalf of the client Information about the client A list of individuals who acted on behalf of the client during the reporting period (applicable if the lobbyist was engaged in political intelligence) Expenditures or income Campaign contributions (contributions paid by filer to a government official’s election) Gifts (from filer to a government official ) Training or ethics course (e.g., education on new requirements and procedures for those required to report) Restriction provisions on what filers can and cannot do Enforcement, fines, and penalties Audits (to monitor compliance with requirements and procedures of disclosure reports) Public access to filer’s data (e.g., timing and format for providing information) Additional practical issues and concerns that would need to be considered include: A robust enforcement effort may be necessary to ensure compliance: Specifically, interviewees from four of eight political intelligence firms said firms could be less willing to register and report political intelligence activities because of concerns that public disclosure could result in a loss of their competitive advantage. In addition, seven of thirty-four interviewees stated that once political intelligence is defined some firms may attempt to avoid having their activities categorized or identified as political intelligence in order to avoid registration requirements. For example, firms may more discretely and informally provide services, may advertise their services in a way that does not indicate that they provide political intelligence information, or may join other types of businesses, such as lobbying firms, and bundle political intelligence services with other services so that they are not detected as political intelligence firms. Concern about exposure of clients and clients’ interests may need to be considered: Seven out of thirty-four interviewees had concerns regarding their clients’ interests being exposed. For example, an official from one political intelligence firm said that some of their clients include a clause in their contracts with political intelligence firms requiring that the firm not disclose that the political intelligence firm is working for the client because they do not want their competitors to find out who gathers information for them. The potential need for, and scope of, a media exemption would need to be considered: Of the seventeen interviewees who said an exemption from disclosure may be necessary for media organizations, eight stated that an exemption from registration for and reporting on political intelligence should be established for media organizations because of the First Amendment press protection. However, other interviewees questioned the need for a media exemption. For example, three political intelligence firms, and one attorney from a law firm said that there should not be an exemption for media organizations because they engage in the same activities as political intelligence firms, and ask the same type of questions about the same issues that their subscribers and clients are interested in. The definition of “media” could further complicate a possible media exemption. For example, in 2006 the Federal Election Commission (Commission) amended its campaign finance rules to clarify the applicability to the Internet. The Commission acknowledged the expansion of the Internet and noted that bloggers and others who communicate on the Internet are entitled to the media exemption in the same way as traditional media. The Commission did not change its rules to specifically exempt all blogging activity. Instead, it amended the media exemption to use the terms “website” and “Internet or electronic publication” with the purpose of encompassing a wide range of existing and developing technologies. “Chilling” effect or slowing of communication between government, media, and political intelligence firms: Twenty-one of thirty-four interviewees said that disclosure of political intelligence activities could result in a potential chilling effect among government officials, the media, and political intelligence firms. For example, a political intelligence firm and an attorney from a law firm that gathers political intelligence stated that firms would likely be reluctant to share or request government information because disclosure could expose them to potential liability from an allegation of insider trading or would risk damage to their reputation from negative media coverage. Similarly, a slowdown of communication could also affect Congress as they often consult with interested parties when crafting legislation which could in some cases be considered political intelligence. In addition, some interviewees said that they foresee legal challenges to political intelligence disclosure stemming from potential or perceived restrictions on First Amendment rights, attorney-client privilege, and an attorney’s duty of confidentiality. Specifically, sixteen out of thirty-four interviewees stated that those who challenge disclosure could contend that their First Amendment rights have been violated. Four of four attorneys at law firms that gather political intelligence stated that this could be an issue because under the First Amendment there is a constitutional right to participate in the political process and that disclosure could impede that process. However, three of four attorneys at these law firms and an academic researcher said that political intelligence is not different from gathering any other kind of information and there is nothing wrong with gathering information from the government. One attorney said that gathering information is what any thoughtful individual does to analyze or form conclusions about policies, regulations, or the law. Thirteen of thirty-four interviewees stated that a political intelligence disclosure requirement could be challenged on the basis that it contradicts the attorney-client privilege and the attorney’s duty of confidentiality to his client. Under this rule, keeping client confidences applies not only to matters communicated to the lawyer in confidence but also to all information relating to the representation, no matter the source. However, one of eight citizen advocacy groups and one of three legal experts suggested that this argument is likely to be rejected as a similar concern was raised during consideration of the LDA. The LDA requires lobbyists, many of whom are attorneys, to report identifying information about their clients. For example, the LDA requires lobbyists to report the names of their clients, physical address, principal place of business, a general description of the client’s business or activities, and the issue areas the attorney is lobbying for on behalf of the clients. Government information helps companies and individuals understand and anticipate the potential effects of executive and legislative branch actions on business, finance, and other decisions. The financial market value of government information can hinge on the materiality and timing of such information. What is most difficult to measure is the extent to which investment decisions are based on a single piece of government information or political intelligence. Even when a connection can be established between discrete pieces of government information and investment decisions, it is not always clear whether such information could be definitively categorized as material or nonmaterial and whether such information stemmed from public or nonpublic sources at the time of the information exchange. This is in part because government information is often bundled with other information which collectively influences an investment decision and in part because the flow of information does not lend itself to quantification or ongoing documentation for the purpose of measuring industry activity. While no laws or ethics rules specifically govern the political intelligence industry, executive and legislative branch ethics guidance and securities laws provide parameters for government officials to protect material nonpublic information. Specifically, SEC’s Rule 10b-5, which applies to both the executive and legislative branches of government, prohibits the use of material nonpublic information. The SEC can open an investigation if it is suspected that a person has used material nonpublic information to trade stocks. If Congress chose to supplement existing guidance and laws with required disclosure of political intelligence information, the benefits and costs of disclosure would have to be balanced along with consideration of related practical and legal issues. We are sending copies of this report to the Secretary of the Senate, Clerk of the House of Representatives, Senate Select Committee on Ethics, House Committee on Ethics and other interested congressional committees and members. This report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-6806 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II. The Stop Trading on Congressional Knowledge (STOCK) Act of 2012 (P.L. 112-105) directed us, in consultation with the Congressional Research Service (CRS), to report on the role of political intelligence in the financial markets. The objectives for conducting our work were to describe the legal and ethical issues, if any, that may apply to the sale of political intelligence; what is known about the sale of public and nonpublic political intelligence, the extent to which investors rely on such information, and the effect the sale of political intelligence may have on the financial markets; and any potential benefits and any practical or legal issues that may be raised from imposing disclosure requirements on those who engage in these activities. To address these objectives, we conducted key word searches of relevant databases and literature for studies that included political intelligence and policy research and analysis. In addition, we conducted 34 semi-structured interviews with entities that were selected to provide a range of views from those involved in providing, regulating, researching, analyzing, and receiving political intelligence. Individuals provided their own perspectives rather than the official view of their firm or organization. Specifically we interviewed individuals from: eight political intelligence firms, eight non-governmental citizen advocacy or protection groups that cover public policy issues such as government transparency and openness, five trade associations representing pension funds and businesses (investors) four law firms that conduct political intelligence, three legal experts that specialized in the Lobbying Disclosure Act (LDA), securities law or ethics law; three regulatory entities—the Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority, and the Commodity Futures Trading Commission one financial services firm (investor), one academic researcher specializing in law reform for securities one media organization. We selected the interviewees because they were the most frequently mentioned in the results of our database and literature searches of research reports, articles, and studies. In addition, we included interviewees that were referred by one or more participants from other interviews. As such, our results may not reflect the opinions of firms not publicly identified as political intelligence firms. We used the interviews to obtain the following types of information (depending on the type of individual or organization we interviewed): differences in the use of the terms lobbying, political intelligence and range of services provided by the respondent, process for collecting information, client relationships and services, legal questions pertaining to direct communication, legal and ethical issues that may arise from the sale of political intelligence, any statutes and regulations that cover political intelligence activities, compliance mechanisms in place to deal with legal, ethical, or regulatory issues, information shared that would be considered material nonpublic information, any benefits to requiring registration and reporting of political any disadvantages to requiring registration and reporting of political intelligence activities. The information we obtained from these interviews cannot be generalized to all parties that are knowledgeable about political intelligence. Prior to conducting the semi-structured interviews, the questions were pretested with five firms and questions were reframed based on the findings from these pretests. In addition to the semi-structured interviews, we separately interviewed ten entities including staff from the Senate Select Committee on Ethics, the House of Representatives Committee on Ethics, the Secretary of the Senate, the Clerk of the House of Representatives, the Senate Judiciary Committee, the House of Representatives Financial Services Committee, three individuals selected based on their broad expertise as private sector leaders and their experience from previous positions in the executive and legislative branches of government, and officials from the Food and Drug Administration (FDA). The interviews were conducted to discuss legal and ethical issues that could arise if disclosure of political intelligence activities was required, as well as any compliance mechanisms in place to safeguard the disclosure of material nonpublic information. We also consulted with the Congressional Research Service and the National Academy of Public Administration as we conducted our work. We identified executive and legislative branch examples of the prior use of government information with a resulting effect on financial markets or individual portfolios based on literature reviews, media reports, and referrals by political intelligence practitioners. For purposes of this report we focused on two examples. One example is a 2011 FDA case where a chemist misused government information and pled guilty to insider trading. The other example was a 2005 case where the Senate proposed a bill to create an asbestos trust fund. Investors traded stock based on information about the proposed bill which had not been publicly released. No wrongdoing was found. We selected the two cases and highlighted the issues associated with them in order to show potential problems that could result from the exchange of government information. In addition, we used these examples to discuss and illustrate the guidance, policies, and procedures in place for protecting and disseminating information with the potential to be defined as political intelligence from the two branches of government. For these cases we reviewed relevant legal documentation and executive and legislative branch guidance on protecting information. We interviewed FDA officials concerning the FDA case and a congressional staff member about the asbestos trust fund case. To determine the laws and ethics rules that govern the sale of political intelligence and to determine the extent to which information being sold would be considered nonpublic information we examined legislative and executive branch ethics guidance and the interpretation and application of SEC Rule 10b-5 (related to insider trading) to identify and summarize the distinctions between public and nonpublic information. Interviews were used to obtain opinions on what information shared by Members of Congress or executive or legislative branch employees would be considered material nonpublic information. In addition, we obtained opinions about the statutes and regulations that cover political intelligence activities, and the compliance mechanisms in place to deal with legal, ethical, and regulatory issues that may arise regarding the use of political intelligence. We also met with staff from the Senate and House ethics committees to discuss the laws and ethics rules for political intelligence activities and contacted the Office of Government Ethics. To determine what is known about the sale of political intelligence and assess the extent to which investors rely on such information and what is known about the effect the sale of political intelligence may have on the financial markets, we used the semi-structured interviews to systematically collect testimonial evidence from the various interviewees potentially engaged in political intelligence activities. We asked interviewees about the role of various parties involved in the collection and dissemination of political intelligence, the process through which information is gathered and disseminated, client relationships and services, the types of information used to make an investment or business decision, and the extent to which political intelligence information affects financial markets. To seek economic data on the size of the political intelligence industry (i.e. measure the size of the industry), we searched for political intelligence in the industry classification systems used by federal statistical agencies to collect economic data on U.S. business establishments, the North American Industry Classification System and the Standard Industrial Classification system. To describe any benefits or practical and legal issues that could arise from the imposition of disclosure requirements on those who engage in political intelligence activities, during the semi-structured and open-ended interviews we asked interviewees to describe any benefits or costs, as well as potential legal and practical issues, that could be raised by the imposition of disclosure requirements on those who engage in political intelligence activities. We also reviewed three federal disclosure models—the LDA, the Investment Advisers Act, and the Federal Election Campaign Act—to determine the types of requirements that would likely need to be considered for any potential disclosure model developed for political intelligence. We selected these models based on a database search of other disclosure models to ensure their potential applicability, as well as suggestions from external parties such as congressional staff and officials at regulatory agencies. Further, we selected these models because they all included a requirement to publicly disclose information, financial and non-financial data about the filer’s activities, and elements that could provide useful investigative data. The elements in each of the models were ranked based on relevance, independently reviewed for objectivity, and then selected as possible elements that could be relevant for consideration of political intelligence disclosure. In addition to the contact named above, Lisa M. Pearson (Assistant Director), Pawnee A. Davis, Rebecca S. Heimbach, Hayley Landes, Lou V. B. Smith, and Katrina D. Taylor made key contributions to this report. | Companies and individuals use political intelligence to understand the potential effects of legislative and executive branch actions on business, finance, and other decisions. The STOCK Act of 2012 directed GAO to report to Congress on the role of political intelligence in the financial markets. GAO reviewed (1) the legal and ethical issues, if any, that may apply to the sale of political intelligence; (2) what is known about the sale of public and nonpublic political intelligence, the extent to which investors rely on such information, and the effect the sale of political intelligence may have on the financial markets; and (3) any potential benefits and any practical or legal issues that may be raised from imposing disclosure requirements on those who engage in these activities. To answer these objectives GAO examined federal guidance including Securities and Exchange Commission Rule 10b-5 (related to insider trading), federal disclosure models including the Lobbying Disclosure Act, the Investment Advisers Act, and the Federal Election Campaign Act; and the extent to which data existed to measure the size of the political intelligence industry. GAO also interviewed individuals at political intelligence, media, financial services, and law firms; trade associations; advocacy organizations; and executive and legislative branch officials. Interviewees were selected based on research on the political intelligence industry, their experience with these activities and referrals. The Stop Trading on Congressional Knowledge (STOCK) Act of 2012 specifically defines political intelligence as information that is "derived by a person from direct communications with an executive branch employee, a Member of Congress, or an employee of Congress; and provided in exchange for financial compensation to a client who intends, and who is known to intend, to use the information to inform investment decisions." While no other laws or ethics rules specifically govern political intelligence activities, securities laws and executive and legislative branch ethics rules and guidance do provide guidelines for government officials to protect material nonpublic information (e.g., information that has not been disseminated to the general public or is not authorized to be made public). For example, insider trading laws apply to both the executive and legislative branches and prohibit the disclosure of material nonpublic information derived from employees' official positions for personal benefit. The prevalence of the sale of political intelligence is not known and therefore difficult to quantify. The extent to which investment decisions are based on a single piece of political intelligence would be extremely difficult to measure. This is in part because a firm's information is often bundled with other information such as industry research and policy analysis, and because the flow of information does not readily lend itself to quantification or ongoing documentation for the purpose of measuring industry activity. Investors typically use multiple sources of information to influence their investment and business decisions. Even when a connection can be established between discrete pieces of government information and investment decisions, it is not always clear whether such information could be definitively categorized as material (would a reasonable investor find the information important in making an investment decision) and whether such information stemmed from public or nonpublic sources at the time of the information exchange (information has a higher value at a time when it is not widely known and thus has the potential to inform a profitable transaction). It is also difficult to determine the extent to which nonpublic government information is being sold as political intelligence. Specifically, it is not always possible to determine the timing of when nonpublic information becomes public. Representatives of most political intelligence firms interviewed said they have policies in place to ensure they do not knowingly sell material nonpublic information and potentially violate insider trading laws. Finally, if Congress chose to supplement existing guidance and laws with required disclosure of political intelligence information, the benefits (such as greater transparency) and costs (such as resources to administer) of disclosure would have to be balanced along with consideration of related practical and legal issues. For example, Congress would need to address the lack of consensus on the meaning of the terms "direct communication" and "investment decision" to provide clarity regarding the definition of political intelligence as well as guidance to specify the purpose of disclosure, who would be required to file, how often disclosures would be required, and who would manage the disclosure process. GAO is not making recommendations in this report. |
With this context in mind, I would like to turn now to recent trends in DOD’s contracting activities. If you would turn to slide 4, DOD’s spending on goods and services has increased by 88 percent since fiscal year 2000. In fiscal year 2005, DOD obligated nearly $270 billion on contracts for products, research and development efforts, and services, such as for information technology and management support. All indications are that this upward trend will continue. Aside from growth in dollar value, there have also been changes in what DOD is buying. DOD’s new weapon system programs are expected to be the most expensive and complex ever, and will consume an increasingly large share of DOD’s budget. To illustrate, in the last 5 years DOD has doubled its commitment to major weapon systems from $700 billion to $1.4 trillion. DOD is counting on these efforts to fundamentally transform military operations. The Army, for example, is undertaking the Future Combat Systems program—a family of weapons, including 18 manned and unmanned ground vehicles, air vehicles, sensors and munitions, that will be linked by an information network—to enable its combat force to become lighter, more agile, and more capable. Future Combat Systems’ procurement will represent 60 to 70 percent of Army procurement from fiscal years 2014 to 2022. The Army, however, is not alone in pursuing complex and costly systems. For example, the Air Force is modernizing its tactical aircraft fleet as part of the $200 billion Joint Strike Fighter program and the F-22A Raptor aircraft, which is expected to cost more than $65 billion. Similarly, the Navy’s Virginia class submarine is expected to cost about $80 billion, while the DDG-51 class of destroyer is expected to cost some $70 billion. DOD’s development of such systems requires more funds than may reasonably be expected to be available. For example, we testified in April 2006 that the Navy’s shipbuilding plan projects a supply of shipbuilding funds that will double by 2011 and will stay at high levels for years to follow. As overall obligations have increased, so has DOD’s reliance on the private sector to provide services to fulfill DOD’s missions and support its operations. In some cases, the growth in services reflects that DOD is using a different acquisition approach to support its missions. For example, DOD is now buying launch services, rather than rockets. Service contracts pose a number of challenges in terms of defining requirements, establishing expected outcomes, and assessing contractor performance. Additionally, in recent years, federal agencies including DOD have moved away from using in-house contracting capabilities and are making greater use of existing contracts awarded by other agencies. If you would turn now to slide 7, these interagency contracts are intended to leverage the government’s buying power; provide a faster and easier method for procuring commonly used goods and services, and reduce initial contracting administrative costs. DOD is the largest user of these interagency contracting vehicles, and their availability has enabled DOD to save time by paying other agencies to award and administer contracts for goods and services on its behalf. DOD, however, lacks complete information about purchases made through other agencies’ contracts. Moreover, our work and that of some agency inspectors general have uncovered instances of improper use of interagency contracts, including issuing orders that were outside the scope of the underlying contract, failing to follow procedures intended to ensure best pricing, and failing to establish clear lines of accountability and responsibility. Further, in some instances fee-for-service arrangements may have led to an inordinate focus on meeting customer demands at the expense of complying with sound contracting policy and required ordering procedures. These and other issues led us to designate management of interagency contracting a governmentwide high-risk issue in January 2005. Ensuring the proper use of interagency contracts must be viewed as a shared responsibility which requires that agencies clearly define responsibilities and adopt clear, consistent, and enforceable policies and processes that balance the need for customer service with the requirements of contract regulations. At the same time that the amount, nature, and complexity of contract activity has increased, DOD’s acquisition workforce has remained relatively unchanged in size and faces certain skill gaps and serious succession planning challenges. DOD’s acquisition workforce must have the right skills and capabilities if it is to effectively implement best practices and properly manage the goods and services it buys. We noted in a report issued in 2003, and again in July 2006, however, that procurement reforms, changes in staffing levels, workload, and the need for new skill sets have placed unprecedented demands on the acquisition workforce. Moreover, DOD’s current civilian acquisition workforce level reflects the considerable downsizing that occurred in the 1990s. DOD’s approach to acquisition workforce reduction during the 1990s was not oriented toward shaping the makeup of the workforce; rather, DOD relied primarily on voluntary turnover and retirements, freezes on hiring authority, and its authority to offer early retirements and buyouts to achieve reductions. Indeed, during our work on the early phases of DOD downsizing, some DOD officials voiced concerns about what was perceived to be a lack of attention to identifying and maintaining a balanced, basic level of skills needed to maintain in-house capabilities. I would like to turn now to briefly discuss some of DOD’s practices in three areas—(1) competition and sound pricing; (2) incentivizing contractors; and (3) contract oversight—that increase risks and undermine DOD’s ability to establish sound business arrangements. Our work has identified a number of issues related to competition and pricing in DOD’s efforts to obtain needed goods and services. Under the Competition in Contracting Act of 1984, DOD contracting officers are, with certain exceptions, to solicit offers and award contracts using full and open competition, in which all responsible sources are permitted to compete. As shown on slide 10, DOD reports that only forty-one percent of its contract obligations in fiscal year 2005 were made on contracts that were awarded using full and open competition. The impact of not using full and open competition is reflected in one recent example involving the Army’s award of sole-source contracts for security guards. In this case, we found that the Army devoted twice as many contract dollars—nearly $495 million—to sole-sourced contracts for security guards at 46 of 57 Army installations, despite the Army’s recognition that it was paying about 25 percent more for its sole-source contracts than for those it previously awarded competitively. GAO, Defense Acquisitions: DOD Has Paid Billions in Award and Incentive Fees Regardless of Acquisition Outcomes, GAO-06-66 (Washington, D.C.: Dec. 19, 2005); and GAO, Defense Acquisitions: DOD Wastes Billions of Dollars through Poorly Structured Incentives, GAO-06-409T (Washington, D.C.: April 5, 2006). Another element of a sound business arrangement is the fee mechanism used to incentivize excellent contractor performance. In December 2005, we reported that DOD gives its contractors the opportunity to collectively earn billions of dollars through monetary incentives. Unfortunately, we found DOD programs routinely engaged in practices that failed to hold contractors accountable for achieving desired outcomes and undermined efforts to motivate results-based contractor performance, such as evaluating contractor performance on award-fee criteria that are not directly related to key acquisition outcomes (e.g., meeting cost and schedule goals and delivering desired capabilities to the warfighter); paying contractors a significant portion of the available fee for what award-fee plans describe as “acceptable, average, expected, good, or satisfactory” performance, which sometimes did not require meeting the basic requirements of the contract; and giving contractors at least a second opportunity to earn initially unearned or deferred fees. As a result, DOD has paid out an estimated $8 billion in award fees on contracts in our study population, regardless of whether acquisition outcomes fell short of, met, or exceeded DOD’s expectations. On slide 15, we have included four cases in which contractors that were behind schedule and over cost were paid between 74 and 100 percent of the available award fee. Despite paying billions of dollars in award and incentive fees, DOD has not compiled data or developed performance measures to evaluate the validity of its belief that award and incentive fees improve contractor performance and acquisition outcomes. DOD’s strategies for incentivizing its contractors, especially on weapon system development programs, are symptomatic of a lack of discipline, oversight, transparency, and accountability in DOD’s acquisition process. I would like to briefly discuss the third element of sound business arrangements, DOD’s oversight of its service contracts. Government monitoring and inspection of contractor activity, if not done well, can contribute to a lack of accountability and poor acquisition outcomes. In 2005, we reported that DOD’s monitoring of nearly a third of the 90 service contracts we reviewed was insufficient. In these cases, we identified a number of contributing factors, including DOD’s failure to assign government performance monitors and the fact that personnel are usually assigned such duties on a part-time basis and not evaluated on how well they performed their duties. DOD and senior military acquisition policy officials acknowledged that the priority of contracting offices is awarding contracts, not ensuring that trained performance monitors are assigned early so that contract oversight can begin upon contract award. Ultimately, however, if appropriate monitoring is not being done, DOD is at risk for paying contractors more than the value of the services they performed. In closing, these three illustrative business arrangement issues, along with those we have identified in DOD’s acquisition and business management processes, present a compelling case for change. In short, it takes a myriad of things to go right for acquisitions to be successful, but only a few things to go wrong to cause major problems. Slide 17 provides examples of the impact that these problems can have on reducing the government’s buying power. Such examples illustrate the outcomes of poor acquisition executions. The debate now centers on future investments and what return on investment will be realized. Finally, on slide 18 you will find a number of actions that can and should be taken to improve acquisition outcomes. By implementing the recommendations we have made on individual issues, DOD can improve specific processes and activities and save huge amounts of taxpayer dollars. At the same time, by working more broadly to improve its acquisition practices, DOD can set the right conditions for becoming a smarter buyer, getting better acquisition outcomes, and making more efficient use of its resources in what is sure to be a more fiscally constrained environment. DOD’s written acquisition policies reflect many of our recommendations and often incorporate best practices. As such, the policies provide the basis for sound decisions and actions. The policies, however, are not consistently manifested on decisions made on individual acquisitions. In these cases, officials are rarely held accountable when acquisitions go astray. It is essential to create an environment conducive to changing behaviors and to recognize that achieving sound acquisition outcomes are a shared responsibility between the Congress, DOD, and the contractor community. Unless changes are made, DOD will continue on a path where wants, needs, affordability and sustainability are mismatched, with predictably and recurring unsatisfactory results. Mr. Chairman and members of the subcommittee, this concludes my testimony. I would be happy to answer any questions you may have. In preparing for this testimony, we relied principally on previously issued GAO reports. We also obtained data on DOD’s contract activity from DOD’s DD350 database and from the General Services Administration’s Federal Procurement Data System. We have previously expressed concerns about the accuracy of the data contained in the Federal Procurement Data System. We determined, however, that the data were sufficiently reliable for the purposes of this testimony. We also obtained data from the Office of Personnel Management regarding DOD’s acquisition workforce. For the purposes of this report, we selected 14 occupation series including contracting, business, purchasing, quality assurance and supply and inventory management personnel. We conducted our work in April and July 2006 in accordance with generally accepted government auditing standards. For further information regarding this testimony, please contact Katherine V. Schinasi at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Key contributors to this report were Lily Chin, David E. Cooper, Brendan Culley, Thomas Denomme, Timothy DiNapoli, Paul Francis, Alan Frazier, Christopher Kunitz, Michele Mackin, William Russell, Adam Vodraska, and Karen Zuckerstein. do the business of government. The work of the government is increasingly performed by the private sector under contract. DOD’s spending on goods and services has grown significantly since fiscal year 2000, and all indications are the trend will continue. DOD’s weapon systems acquisition and contract management processes have been on GAO’s high-risk list for more than a decade. GAO designated the management of interagency contracting a governmentwide high-risk issue in January 2005; DOD is the largest user of interagency contracting vehicles. Workforce: GAO analysis of OPM data of 14 acquisition-related job series. Following the terrorist attacks of September 11, 2001, increased security requirements and deployment of active duty and reserve personnel resulted in DOD having fewer military personnel to protect domestic installations. The U.S. Army awarded contracts worth nearly $733 million to acquire contract guards at 57 installations. The Air Force historically bought space launch vehicles, such as the Delta and Titan rockets, as products; under the Evolved Expendable Launch Vehicle program, the Air Force purchases launch services using contractor-owned launch vehicles. Projected program cost is $28 billion. Defining requirements, establishing expected outcomes, and assessing contractor performance is often more complicated compared with contracting for supplies and equipment. changes to the scope and cost of the work. Use of task order contracts and time-and-materials contracts provides DOD flexibility to add work to contracts once needs are defined but may pose additional management and oversight risks. DOD may authorize contractors to begin work before reaching agreement on terms and conditions, including scope of work, specifications, and price, under agreements termed letter contracts or undefinitized contract actions. DOD obligated nearly $6.5 billion under letter contracts in fiscal year 2004. Allows DOD to initiate work quickly to meet urgent operational needs, but contract incentives to control costs are likely to be less effective. This enables the government to rely on competitive market forces to obtain needed goods and services at fair and reasonable prices. Use of other than full and open competition must be justified in writing and must cite specific statutory authority. 46 of 57 installations resulted in the Army paying 25 percent more for its sole-source contracts than for those it previously awarded competitively. February 2005 review of sole-source AWACS spare parts found that DOD did not obtain or evaluate appropriate pricing information, such as sales data for items asserted to be commercial, or adequately consider analyses conducted by the Defense Contract Audit Agency or Defense Contract Management Agency. In the absence of adequate price competition, the Truth-in-Negotiations Act enables DOD to obtain certified cost and pricing data for negotiated contracts exceeding $550,000 that are not for commercial items. GAO reviewed 20 contract actions valued at $4.4 billion in which DOD waived the requirement for cost and pricing data. DOD lacked guidance to help contracting officers determine whether a waiver should be granted, what constitutes acceptable data and analyses, or the need for assistance. range of responsibilities than traditional prime contractors. Examples include: The Army’s $200 billion Future Combat Systems, in which the contractor is acting as a lead system integrator. Contractor is assuming greater responsibility for requirements development, design, and source selection of major system and subsystem contractors, and trade-off decisions. In an interagency contract for construction services, DOD paid 7 percent to Treasury to award a contract to a staffing company, which then subcontracted to a construction firm. In combination, Army paid 17 percent more than subcontractor’s proposed price. Historically, DOD has limited visibility over the cost impact associated with using multiple layers of contractors to perform work. contractors the opportunity to collectively earn billions of dollars through monetary incentives known as award and incentive fees. On award-fee contracts, DOD personnel conduct periodic evaluations of the contractor’s performance against specified criteria and recommend the amount of fee to be paid. Criteria and evaluations tend to be subjective. Incentive-fee contracts typically apply a formula, specified in the contract, that adjusts the fee based on an objective evaluation of the contractor’s performance. DOD reports it obligated more than $75 billion on award- and incentive-fee contracts in fiscal year 2004. programs engaged in practices that undermined efforts to motivate contractor performance and that did not hold contractors accountable for achieving desired outcomes. DOD frequently paid most of available award fees regardless of whether acquisition outcomes fell far short of, met, or exceeded expectations; allowed contractors at least a second opportunity to earn initially unearned or paid significant amount of fee for “acceptable, average, expected, good, or satisfactory” performance. Contracts with incentive fees provided a clearer link to acquisition outcomes; however, about half of the contracts failed or are projected to fail to complete the acquisition at or below the target price. Despite paying billions in fees, DOD has little evidence to support its contention that these fees improved contractor performance. *When calculating the percentage of award fee paid (i.e. percentage of award paid = total fee paid to date/ (total fee pool – remaining fee pool)), we included rolled-over fees in the remaining fee pool when those fees were still available to be earned in future evaluation periods. If monitoring and inspection is not performed, not sufficient, or not well documented, DOD is at risk of being unable to identify and correct poor contractor performance in a timely paying contractors more than the value of the services performed. DOD personnel performed insufficient monitoring on nearly a third of the 90 service contracts reviewed in March 2005 report. DOD personnel failed to assign personnel to perform monitoring or did not document monitoring and some monitoring personnel were not formally trained; Monitoring is not perceived as important as awarding contracts; and Personnel are usually assigned monitoring duties as a part-time responsibility and are not evaluated on how well duties were performed. 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) spending on goods and services has grown significantly since fiscal year 2000 to well over $250 billion annually. Prudence with taxpayer funds, widening deficits, and growing long-range fiscal challenges demand that DOD maximize its return on investment, while providing warfighters with the needed capabilities at the best value for the taxpayer. DOD needs to ensure that its funds are spent wisely, and that it is buying the right things, the right way. In this testimony, GAO discusses (1) recent trends in DOD contracting activity and the environment in which this activity takes place, and (2) practices which undermine its ability to establish sound business arrangements, particularly those involving the selection and oversight of DOD's contractors and incentivizing their performance. This statement is based on work GAO has completed over the past 6 years covering a range of DOD acquisition and contracting issues. Some of these issues are long-standing. GAO has identified DOD contract management as a high-risk area for more than decade. With awards to contractors large and growing, DOD will continue to be vulnerable to contracting fraud, waste or misuse of taxpayer dollars, and abuse. DOD obligated nearly $270 billion on contracts for goods and services in fiscal year 2005, an 88 percent increase over the amount obligated in fiscal year 2000. All indications are that this upward trend will continue. Aside from growth in dollar value there have also been changes in what DOD is buying. DOD's new weapons system programs are expected to be the most expensive and complex ever and will consume an increasingly large share of its budget. In the last 5 years DOD has doubled its commitment to major weapon systems from $700 billion to $1.4 trillion, and DOD is counting on these efforts to fundamentally transform military operations. As overall obligations have increased so has its reliance on the private sector to provide services to fulfill DOD's missions and support its operations. Additionally, in recent years DOD has increased its use of existing contracts awarded by other agencies (i.e. interagency contracts). While this approach provides a number of benefits, our work, and that of some agency inspector generals, revealed instances of improper use, including issuing orders that were outside the scope of the underlying contract as well as failing to establish clear lines of accountability and responsibility. While the amount, nature, and complexity of DOD contract activity have increased, its acquisition workforce has remained relatively unchanged in size. At the same time, the acquisition workforce faces certain skills gaps and serious succession planning challenges. There are a number of DOD practices which undermine its ability to establish sound business arrangements. For example, with regard to competition and pricing, we recently found that the Army acquired guard services under authorized sole-source contracts at 46 of 57 Army installations, despite the Army's recognition that it was paying about 25 percent more for its sole-source contracts than for those it previously awarded competitively. Another element of a sound business arrangement is the fee mechanism used to incentivize excellent contractor performance. In December 2005, we reported that DOD gives its contractors the opportunity to collectively earn billions of dollars through monetary incentives. Unfortunately, we found DOD programs routinely engaged in practices that failed to hold contractors accountable for achieving desired outcomes and undermined efforts to motivate results-based contractor performance. As a result, DOD paid out an estimated $8 billion in award fees on contracts in our study population, regardless of whether acquisition outcomes fell short of, met, or exceeded DOD's expectations. DOD also increased its risk of poor acquisition outcomes by not assuring that another element of a sound business arrangement, contractor oversight, was sufficient. For example, in 2005 we reported that DOD's oversight on nearly a third of 90 service contracts reviewed was insufficient, in part because DOD failed to assign performance monitors. |
In December 2009, we published a report assessing DHS’s efforts to establish the National Biosurveillance Integration Center (NBIC). We reported that NBIC was not fully equipped to carry out its mission because it lacked key resources—data and personnel—from its partner agencies, a situation that could be at least partially attributed to collaboration challenges NBIC faced. We recommended that NBIC work with its federal partners to develop a strategy to enhance collaboration— including sharing data, personnel, and other resources—and to establish effectiveness measures for that collaboration. DHS generally concurred with our findings and recommendations and stated that NBIC would work with its partners to develop a collaboration strategy to clarify both the mission space and roles and responsibilities for all partners. In August 2012, DHS issued the National Biosurveillance Integration Center Strategic Plan. According to DHS officials, the plan articulates a clear approach with a series of measurable steps and initiatives to enhance the nation’s biosurveillance capability. In late August 2012, when providing us with a copy of the strategy, officials stated that they believe it satisfies the intent of our recommendations. Officials said the plan was written in coordination with NBIC’s federal partners and is the result of a deliberative process examining NBIC’s current capabilities and capability gaps. We are currently assessing the extent to which the plan fully responds to the recommendations. In June 2010, we reported on federal efforts that support a national biosurveillance capability and the extent to which mechanisms were in place to guide the development of a national biosurveillance capability. We reported that a national biosurveillance capability would largely rely on an interagency effort because the activities and accompanying resources that support the capability—personnel, training, equipment, and systems—are dispersed across a number of federal agencies. However, we found that the federal government did not have a unifying framework and structure for integrating dispersed capabilities and responsibilities and no federal agency had authority to guide and oversee the development and implementation of a national effort that encompassed all stakeholders with biosurveillance responsibilities. We concluded that without such a framework and an entity with the authority, resources, time, and responsibility for guiding its implementation, it would be very difficult to create an integrated approach to building and sustaining a national biosurveillance capability. We recommended that the Homeland Security Council within the White House direct the National Security Staff to identify, in consultation with relevant federal agencies, a focal point to lead the development of such a strategy. Our June 2010 report also noted that a national biosurveillance capability depends upon participation from state, local, and tribal governments, because few of the resources required to support the capability are wholly owned by the federal government. In October 2011, we reported on how the federal government worked with its nonfederal partners to support biosurveillance, activities those partners identified as essential to their biosurveillance efforts, and particular challenges those partners faced. We recommended that the strategy we called for in June 2010 incorporate a means to leverage existing efforts that support nonfederal biosurveillance capabilities, consider challenges that nonfederal jurisdictions face, and include a framework to develop a baseline and gap assessment of nonfederal jurisdictions’ biosurveillance capabilities. The White House did not comment on these recommendations. In July 2012, the White House released the National Strategy for Biosurveillance to describe the U.S. government’s approach to strengthening biosurveillance. The strategy describes guiding principles, core functions, and enablers for strengthening biosurveillance. The strategy states that its approach emphasized teamwork between and within federal departments, across all layers of government, and with private sector partners. A strategic implementation plan is to be completed within 120 days of the strategy issuance. The strategy does not fully meet the intent of our June 2010 and October 2011 recommendations, as discussed later in this statement, but it is possible that it will when the implementation plan is complete. DHS approved the Gen-3 acquisition in October 2009 without fully developing critical knowledge that would help ensure sound investment decision making, pursuit of optimal solutions, and reliable performance, cost, and schedule information. Specifically, DHS did not engage the initial phase of its Acquisition Life-cycle Framework, which is designed to help ensure that the mission need driving the acquisition warrants investment of limited resources. In the Acquisition Life Cycle Framework design, it is not the purpose of the Mission Needs Statement to specify a technical solution. Rather it is to serve as a touchstone for subsequent acquisition efforts by focusing on the capability gap to help articulate and build consensus around the goals and objectives for a program. However, DHS began to pursue a specific autonomous detection solution well before completing a Mission Needs Statement. Specifically, DHS’s Integrated Planning Guidance (IPG) for fiscal years 2010-2014, which was finalized in March 2008, included specific goals for the next generation of BioWatch—to deploy in all major cities an autonomous BioWatch detection device reducing the operating cost per site by more than 50 percent and warning time to less than 6 hours. The purpose of DHS’s IPG is to communicate the Secretary’s policy and planning goals to component-level decision makers to inform their programming, budgeting, and execution activities. As such, this specific set of goals for BioWatch Gen-3 demonstrates that DHS leadership had established a course for the acquisition by March 2008, in advance of efforts to define the mission need through the Mission Needs Statement process, which was finalized more than a year and a half later. DHS officials in multiple departments described a climate, in the wake of the September 11, 2001, terrorist attacks and the subsequent Amerithrax attacks, in which the highest levels of the administration expressed interest in quickly deploying the early generation BioWatch detectors and improving their functionality—as quickly as possible—to allow for faster detection and an indoor capability. BioWatch officials stated that they were aware that the Mission Needs Statement prepared in October 2009 did not reflect a systematic effort to justify a capability need, but stated that the department directed them to proceed because there was already departmental consensus around the solution. Accordingly, the utility of the Mission Needs Statement as a foundation for subsequent acquisition efforts was limited. Additionally, DHS did not use the processes established by its Acquisition Life-cycle Framework to systematically ensure that it was pursuing the optimal solution—based on cost, benefit, and risk—to mitigate the capability gap identified in the Mission Needs Statement. The DHS Acquisition Life-cycle Framework calls for the program office to develop an Analysis of Alternatives that systematically identifies possible alternative solutions that could satisfy the identified need, considers cost- benefit and risk information for each alternative, and finally selects the best option from among the alternatives. However, the Analysis of Alternatives prepared for the Gen-3 acquisition did not reflect a systematic decision-making process. For example, in addition to—or perhaps reflecting—its origin in the predetermined solution from the Mission Needs Statement, the Analysis of Alternatives did not fully explore costs or consider benefits and risk information as part of the analysis. Instead, the Analysis of Alternatives focused on just one cost metric that justified the decision to pursue autonomous detection—cost per detection cycle—to the exclusion of other cost and benefit considerations that might have informed decision makers.the Analysis of Alternatives examined only two alternatives, though the Additionally, guidance calls for at least three. The first alternative was the currently deployed Gen-2 technology with a modified operational model (which by definition was unable to meet the established goals). The second alternative was the complete replacement of the deployed Gen-2 program with an autonomous detection technology and expanded deployment. BioWatch program officials acknowledged that other options—including but not limited to deploying some combination of both technologies, based on risk and logistical considerations—may be more cost-effective. As with the Mission Needs Statement, program officials told us that they were advised that a comprehensive Analysis of Alternatives would not be necessary because there was already departmental consensus that autonomous detection was the optimal solution. Because the Gen-3 Analysis of Alternatives did not evaluate a complete solution set, did not consider complete cost information, did not consider benefits, and did not include a cost-benefit analysis, it does not provide information on which to base trade-off decisions. For example, it does not provide information about the extent to which various aspects of the solution—such as the number of participating jurisdictions—results in a reduction of risk and at what cost. Given the uncertainty related to Gen- 3’s costs, benefits, and risk mitigation potential, DHS does not have reasonable assurance that the strategy of expanding and completely replacing the existing Gen-2 program with autonomous detection technology is the most cost-effective solution. In October 2009, DHS approved the Gen-3 acquisition at Acquisition Decision Event (ADE) 2A—one of the key formal decision points in DHS’s Acquisition Life-cycle Framework—based on information contained in acquisition documents provided by the BioWatch program. One critical purpose of the ADE-2A documentation set required by DHS’s acquisition guidance is to describe the expected performance, cost, and schedule parameters for an acquisition. However, the ADE-2A Acquisition Decision Memorandum stated that significant data necessary for the proper adjudication of an ADE-2A decision were missing. Further, we reported that some performance, cost, and schedule expectations presented at ADE-2A were not developed in accordance with DHS guidance and good acquisition practices—like accounting for risk in schedule and cost estimates. On the basis of the Gen-3 documentation submitted at ADE-2A, DHS expected to acquire a system that would cost $2.1 billion, be fully deployed by fiscal year 2016, and meet certain performance requirements. However, the performance, cost, and schedule parameters for the Gen-3 acquisition have changed. Specifically, certain performance requirements have been revised, the estimated date for full deployment has been delayed from fiscal year 2016 to fiscal year 2022, and the expected life cycle cost has changed from the $2.1 billion point estimate prepared for ADE-2A to a risk-adjusted $5.8 billion estimate, calculated at the 80 percent confidence level. BioWatch program officials told us that they had to prepare ADE-2A documentation quickly because ADE-2A had been accelerated by more than a year. Additionally, DHS officials from multiple offices described a climate around the time of ADE-2A in which the department’s business processes—including acquisition practices—were maturing and thus were less rigorous in their adherence to best practices for cost and schedule estimating. However, in the absence of complete and reliable information, DHS had limited assurance that the acquisition would successfully deliver the intended capability within cost and on schedule. Comprehensive and systematic information developed using good practices for cost and schedule estimating could help ensure that more reliable performance, cost, and schedule information is available for future acquisition decision making. We recommended that before continuing the acquisition, DHS reevaluate the mission need and alternatives and develop performance, cost, and schedule information in accordance with guidance and good acquisition practices. DHS concurred with the recommendations but plans to proceed with the next step in the acquisition—performance testing—while implementing them. We are pleased that DHS plans to implement the recommendation but are concerned by DHS’s intention to continue the acquisition efforts before ensuring that it has fully developed the critical knowledge a comprehensive Acquisition Life-cycle Framework effort is designed to provide. The BioWatch program completed initial testing and evaluation on a Gen- 3 prototype technology in June 2011, but several steps remain before For example, the BioWatch Gen-3 can be deployed and operational.program must complete additional testing. The characterization testing conducted in 2010 and 2011 was intended to assess the state of available technology. This testing sought to demonstrate the performance of available candidate Gen-3 technologies against the requirements established by the BioWatch program, and consisted primarily of laboratory testing of individual system components. This testing did not demonstrate the performance of the full system in detecting live pathogens in the operational environment. It also did not test the information technology network that will transmit results for public health officials. Now the program plans to conduct the next phase of testing— performance testing in three independent laboratories and operational test and evaluation in four BioWatch jurisdictions. On the basis of the June 2011 Life-cycle Cost Estimate, the BioWatch program estimates this testing will take approximately 3 years and cost approximately $89 million (risk adjusted at the 80 percent confidence level). The Deputy Secretary of Homeland Security and other senior officials met on August 16, 2012 for an Acquisition Review Board, during which the BioWatch program was seeking approval to initiate the next phase of the acquisition. DHS did not make a final decision, but authorized release of a solicitation for performance testing under the next testing phase. In response to the recommendations we made in the Gen-3 report, DHS officials stated that before awarding a performance testing contract— which would allow the program to acquire a small number of test units— the program office is directed to return to the Acquisition Review Board for approval. Before undertaking the remaining steps in the acquisition, the program office is directed to return for Acquisition Decision Event-2B (ADE-2B)— the next formal decision point in DHS’s Acquisition Life-cycle Framework—with updated information, including an Analysis of Alternatives and Concept of Operations, as we recommended. No timeframe for completing these actions has been specified, but according to DHS officials, it may take up to 1 year to update the Analysis of Alternatives. In preparation for the August 16, 2012, meeting, the BioWatch program had updated key acquisition documents—including the Life-cycle Cost Estimate and Acquisition Program Baseline—as required by the Acquisition Decision Authority in a February 2012 memo. However, in order to inform the ADE-2B decision, these documents must accurately reflect changes to Gen-3 performance requirements and updated cost and schedule estimates for the acquisition and therefore may require further revisions. If approved at ADE-2B, the BioWatch program plans to conduct operational testing of Gen-3 units in four BioWatch jurisdictions. Following operational testing, DHS intends to decide whether to authorize the production and deployment of Gen-3. If Gen-3 is approved, the BioWatch program plans to prepare for deployment by working with BioWatch jurisdictions to develop location-specific plans to guide Gen-3 operations. DHS estimates based on the June 2011 Life-cycle Cost estimate show that about $5.7 billion of the $5.8 billion life-cycle cost (risk adjusted at the 80 percent confidence level) remains to be spent to test, produce, deploy, and operate Gen-3 through fiscal year 2028. In the report on Gen-3 released today, we noted that beyond the uncertainty related to the costs and benefits of the planned Gen-3 approach, there is additional uncertainty about the incremental benefit of this kind of environmental monitoring as a risk mitigation activity because of its relatively limited scope. As the study committee for a 2011 National Academies evaluation of BioWatch noted, there is considerable uncertainty about the likelihood and magnitude of a biological attack, and how the risk of a release of an aerosolized pathogen compares with risks from other potential forms of terrorism or from natural diseases. The National Academies report also notes that while the BioWatch program is designed to detect certain biological agents (currently five agents) that could be intentionally released in aerosolized form, detecting a bioterrorism event involving other pathogens or routes of exposure requires other approaches. In the report we released today, we stated that given the total estimated operating cost for the Gen-3 program, it is important, especially in an increasingly resource-constrained environment, to consider the benefit— in terms of its ability to mitigate the consequences of a potentially catastrophic biological attack—that the investment provides. We noted that the scope limitations of this kind of environmental monitoring provide context in both the consideration of mission need and in analyzing cost effectiveness. However, it was not within the scope of our BioWatch Gen-3 study nor was it our intention to reach a firm conclusion about the value of this kind of activity as part of a layered biosurveillance strategy. Rather, we believe the need to consider value within the larger biosurveillance enterprise as part of an effort to define mission need for a single federal program like Gen-3 provides a timely and concrete illustration of the kind of issues we sought to address with our June 2010 recommendation. The recommendation for the Homeland Security Council to direct the National Security Staff to identify a focal point to lead the development of a national biosurveillance strategy was grounded in previous work on desirable strategy characteristics for complex homeland security missions. We recognized the difficulty that decision makers and program managers in individual federal agencies face prioritizing resources to help ensure a coherent effort across a vast and dispersed interagency, intergovernmental, and intersectoral network. Therefore, we called for a strategy that would, among other things, (1) define the scope and purpose of a national capability; (2) provide goals, objectives and activities, priorities, milestones, and performance measures; and (3) assess the costs and benefits and identify resource and investment needs, including investment priorities. We stated that one of the aims of a national biosurveillance strategy should be to help prioritize where resources and investments should be targeted and guide agencies to allocate resources accordingly. Further, we reported that a national strategy could begin to address the difficult but critical issues of who pays and how funding for biosurveillance will be sustained in the future. Finally, we noted that in an environment with competing priorities, a strategy could help address situations where investments must be carefully weighed and sound judgments made about the most cost-effective approaches, but doing so would require information about the cost, benefits, and risks associated with the whole biosurveillance enterprise. The National Strategy for Biosurveillance includes four guiding principles that are designed to serve as a foundation for enterprisewide efforts, four core functions that are designed to promote a deliberate and shared approach, and four enabling capabilities that are designed to represent areas for ongoing focus. These planks of the strategy align with our call for a strategy that would help to clarify the scope and purpose of a national biosurveillance capability and the goals of that capability. Our June 2010 report described several categories of federal efforts to improve the personnel, training, and systems and equipment that support a national capability. These included responding to workforce needs, facilitating information sharing, and applying technologies to enhance surveillance. Among the planks of the National Strategy for Biosurveillance, it is possible to discern support for each these categories. For example, the enabling capability called build capacity, discusses both workforce and information sharing issues. The four guiding principles that serve as the strategy’s foundation encourage broad-based and cross-cutting actions to leverage constrained resources, responding, in part, to our call for the strategy to help identify the resources currently being used, additional resources that may be needed, and opportunities for leveraging resources. However, the strategy does not yet offer a mechanism to identify resource and investment needs, including investment priorities among these various efforts. Accordingly, the enterprise is still without a framework to guide the systematic identification of risk, assessment of resources needed to address those risks, and the prioritization and allocation of investment across the entire biosurveillance enterprise, as we recommended in June 2010. For example, in the case of the broader contextual information needed to inform the BioWatch Gen-3 mission need, the strategy has language indicating that advances in science and technology are a priority. In fact, the capability enabler called fostering innovation specifically calls for science and technology capabilities, including new detection approaches. However, the strategy does not facilitate analysis or provide tools to assess the risks to be addressed—in the context of enterprisewide goals—by such science and technology approaches or the value they should offer the enterprise relative to their costs. Without such a framework and tool set, it remains difficult for decision makers—in both the executive and legislative branches—to help ensure that their resource allocation decisions contribute to a coherent enterprisewide approach. We are encouraged by the National Strategy for Biosurveillance and the work the White House has done to date to provide a platform for achieving a well-integrated national biosurveillance enterprise. We are hopeful that the forthcoming strategic implementation plan which promises to include specific actions and activity scope, designated roles and responsibilities, and a mechanism for evaluating progress will help to address the ongoing need for mechanisms to help prioritize resource allocation. Chairmen Bilirakis and Lungren, this concludes my prepared statement. I would be happy to respond to any questions you or the other committee members may have. For further information on this testimony, please contact Bill Jenkins, (202) 512-8757 or by e-mail at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Other contributors include; Hal Brumm, Nirmal Chaudhary, Michelle Cooper, Edward George, Kathryn Godfrey, Allyson Goldstein, Tracey King, Amanda Miller, Jan Montgomery, Katy Trenholme, and Katherine Trimble. 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. | A catastrophic biological event could have devastating consequences. The U.S. government has efforts to provide early detection and warning of biological threats. DHSs BioWatch, which aims to detect certain pathogens in the air, is one such program. DHS has been pursuing a third generation of BioWatch technology (Gen-3) to further enhance detection. GAO has published a series of reports on national biosurveillance efforts, including a report released today on DHSs efforts to acquire Gen-3. This statement discusses (1) prior biosurveillance work and related federal efforts, (2) todays report on the Gen-3 acquisition, and (3) prior strategy recommendations and the White Houses July 2012 National Strategy for Biosurveillance. This statement is based on GAO reports published from December 2009 to September 2012 and GAOs review of the National Strategy for Biosurveillance in relation to prior GAO recommendations for a national biosurveillance strategy. The Department of Homeland Security (DHS) and the White House have acted to strengthen biosurveillance consistent with prior GAO recommendations made from December 2009 through October 2011.In August 2012, DHS issued a strategic plan for its National Biosurveillance Integration Center (NBIC) that officials say was written in coordination with federal partners and designed to respond to GAOs December 2009 findings that NBIC did not have key resources to carry out its mission, in part due to collaboration issues it faced. In July 2012, the White House released the National Strategy for Biosurveillance, which describes guiding principles, core functions, and enablers for strengthening biosurveillance. In June 2010, GAO recommended a national biosurveillance strategy to provide a unifying framework for building and maintaining a national biosurveillance capability. In October 2011, GAO also recommended the strategy account for the need to leverage resources and respond to challenges while partnering with nonfederal entities. The July 2012 strategy partially responds to the issues GAO called for such a strategy to address, but does not fully address them, as discussed below. A strategic implementation plan is to be published within 120 days of strategy issuance (October 2012), and may align the strategy more fully with the array of issues GAO identified. DHS approved the Generation-3 (Gen-3) acquisition in October 2009, but it did not fully engage its acquisition framework to ensure that the acquisition was grounded in a justified mission need and that it pursued an optimal solution. The performance, schedule, and cost expectations presented in required documents when DHS approved the acquisition were not developed in accordance with DHS guidance and good acquisition practiceslike accounting for risk in schedule and cost estimates. Since October 2009, the estimated date for full deployment has been delayed from fiscal year 2016 to fiscal year 2022. The 2009 life-cycle cost estimatea point estimate unadjusted for riskwas $2.1 billion. In June 2011, DHS provided a risk-adjusted estimate at the 80 percent confidence level of $5.8 billion. Several steps remain before DHS can fully deploy Gen-3 including additional performance testing, operational testing, and developing location specific deployment plans. The White Houses National Strategy for Biosurveillance serves as a foundation for enterprisewide efforts and begins to define mission, goals, and objectives, as we called for in making the June 2010 strategy recommendation; however, the strategy does not yet offer the mechanism GAO recommended to identify resource and investment needs, including investment priorities. Accordingly, the biosurveillance enterprise remains without a framework to guide the systematic identification of risk, assessment of resources needed to address those risks, and the prioritization and allocation of investment across the entire enterprise. In recommending a national strategy, GAO recognized the challenges individual federal programs and agencies face prioritizing resources to help ensure a coherent effort across the dispersed biosurveillance enterprise. Todays report on Gen-3 offers a timely and concrete example of this challengeto assess the extent to which Gen-3 warrants the investment of scarce resources when the incremental value of the environmental monitoring Gen-3 offers is considered as part of a layered biosurveillance strategy. In prior reports, GAO made biosurveillance recommendations to DHS and the White House Homeland Security Council. DHS concurred with prior recommendations. The White House did not comment. In todays report, GAO recommended that before continuing the Gen-3 acquisition, DHS reevaluate the mission need and alternatives and update associated performance, schedule, and cost information. DHS concurred but stated it plans to reevaluate the acquisition and pursue performance testing concurrently. We believe DHS should first develop the critical information we recommended. |
Section 1016 of the Intelligence Reform and Terrorism Prevention Act of 2004 (Intelligence Reform Act), as amended, required the President to take action to facilitate the sharing of terrorism-related information by creating an information-sharing environment. In April 2005, the President designated a Program Manager—a position situated within the Office of the Director of National Intelligence—to, among other things, plan for, oversee implementation of, and manage the ISE. Consistent with the Intelligence Reform Act, the Program Manager intends for the ISE to provide the means for sharing terrorism-related information in a manner that—to the greatest extent practicable—ensures a decentralized, distributed, and coordinated environment that builds upon existing systems and leverages ongoing efforts. The Program Manager is to submit annual reports to Congress, as required by the Intelligence Reform Act, on the state of the ISE and information sharing across the federal government. Among other things, the reports examine the extent to which the ISE is being implemented by agencies that possess or use terrorism-related information, operate systems within the ISE, or otherwise participate in the ISE. For example, the 2012 ISE annual report to Congress describes how agencies have fared against established performance measures and highlights accomplishments, including examples of progress toward information-sharing goals. DOJ and DHS are among the ISE mission partners, that is, the bureaus and agencies of federal, state, local, and tribal governments; the private sector; and foreign governments that contribute to the nation’s homeland security and counterterrorism missions. ONDCP is involved in the ISE through its coordination with DHS regarding efforts to enhance partnerships between HIDTA Investigative Support Centers and fusion centers. In July 2009, the administration established the ISA IPC to, among other things, identify future information-sharing priorities. With representation of participating ISE agencies and communities, the ISA IPC is responsible for advising the President and Program Manager in developing policies, procedures, guidelines, roles, and standards necessary to establish, implement, and maintain the ISE. The ISA IPC formally charters on coordinating federal support to fusion centers by providing guidance and standards for how federal resources are applied to help ensure information sharing between and among fusion centers and all levels of subcommittees, including a Fusion Center Sub‐Committee that focuses government. This sub‐committee is cochaired by the FBI and DHS, and includes members from, among others, BJA and ONDCP, as well as a representative from the Criminal Intelligence Coordinating Council, which is made up of members representing law enforcement and homeland security agencies from all levels of government and is an advocate for state, local, and tribal law enforcement. In 2010, we were directed to identify programs, agencies, offices, and initiatives with duplicative goals and activities within departments and government-wide and report annually to Congress. In March 2011 and February 2012, we issued our first two annual reports to Congress in response to this requirement. The annual reports describe areas in which we found evidence of fragmentation, overlap, or duplication among federal programs. Using the framework we established in these reports, we used the following definitions for the purpose of assessing field-based information-sharing entities: Fragmentation occurs when more than one federal agency (or more than one organization within an agency) is involved in the same broad area of national interest. Overlap occurs when multiple programs have similar goals, engage in similar activities or strategies to achieve those goals, or target similar beneficiaries. Overlap may result from statutory or other limitations beyond the agency’s control. Duplication occurs when two or more agencies or programs are engaging in the same activities or providing the same services to the same beneficiaries. In general, while the five types of field-based entities in our review were established under different authorities, each type of entity may engage in the sharing of information. In addition, while these entities also have distinct missions, roles, and responsibilities, we identified overlap in various analytical activities. For example, for the eight urban areas in our review, we identified overlap in how entities produce and disseminate intelligence reports. We also identified overlap in how entities provide investigative support activities and services, such as providing tactical analysis, which entities conducted in the same mission area for similar customers in the eight urban areas in our review. Additionally, RISS centers and HIDTAs both operate systems with functions to ensure law enforcement officers are not conducting a similar type of enforcement action or investigating the same target, and HIDTAs can improve efforts to reduce risks to law enforcement officers’ safety. The five types of field-based entities in our review were established under different authorities and by, or with support from, different agencies at different times over the past three decades. However, each type of entity may engage in counterterrorism-related efforts and terrorism-related information sharing. Terrorism-related information, for example, has no single source and is derived by gathering, fusing, analyzing, and evaluating relevant information from all levels of government. This information can be used by federal, state, local, and tribal government organizations for multiple purposes, including supporting activities to prevent terrorist attacks. Since it involves the efforts of several federal agencies, terrorism-related information sharing is by definition fragmented and can produce unique perspectives when information from multiple sources is combined. However, this fragmentation can be disadvantageous if activities are not coordinated, as well as if opportunities to leverage resources across entities are not fully exploited. Specifically, RISS centers and HIDTAs have been in existence since before the September 2001 terrorist attacks on the United States and focus primarily on combating criminal conspiracies or drug-trafficking organizations; however, both are also authorized to dedicate resources to engage in or support counterterrorism-related efforts. For example, the RISS program, which originated in 1974 and is administered by BJA, supports the ability of federal, state, local, and tribal law enforcement member agencies to identify, target, arrest, and prosecute criminal conspirators. There are six RISS centers, and each focuses on all crimes, which may include efforts on activities and conspiracies related to terrorism. Similarly, the HIDTA program was established in 1988 and is a federally funded program administered by ONDCP that brings together federal, state, and local law enforcement agencies into task forces that conduct investigations of drug-trafficking organizations in designated areas. The HIDTA program is focused on counternarcotics; however, HIDTA program resources may be used to assist law enforcement agencies in investigations and activities related to terrorism and the prevention of terrorism. There are 28 HIDTAs, and each has an Investigative Support Center that serves to support the HIDTA program by providing analytical case support, promoting officer safety, preparing and issuing drug threat assessments, and developing and disseminating intelligence products. The other three types of entities—JTTFs, FIGs and fusion centers—were generally established, or in the case of JTTFs expanded, after September 11, 2001, to more effectively address the threat of terrorism, among other things. Specifically, the FBI increased the number of JTTFs and established FIGs. JTTFs, which consist of FBI special agents, as well as federal, state, and local task force officers (TFO), pursue leads, gather evidence, respond to threats and incidents, make arrests, provide security for special events, conduct training, and gather intelligence related to threats, among other counterterrorism-related activities. Since September 2001, the number of JTTFs has increased from 35 to 103. In addition, the FBI established the first FIG in 2003 to coordinate, manage, and execute all of the functions of the intelligence cycle, including collection, analysis, production, and dissemination, for the FBI in the field. FIGs are teams of FBI intelligence analysts, special agents, language analysts, and financial analysts, among others, working in each of the 56 FBI field offices to analyze information from cases in their field office and share intelligence locally and nationally. Similarly, after the September 2001 attacks, state and local governments began to establish fusion centers. They did so in part to serve as intermediaries within states and localities for the gathering, receipt, analysis, and sharing of threat-related information between the federal government and state, local, tribal, territorial, and private sector partners, and to fill gaps in information sharing that the federal government alone could not address. As defined by the Implementing Recommendations of the 9/11 Commission Act of 2007, a fusion center is “a collaborative effort of two or more federal, state, local, or tribal government agencies that combines resources, expertise, or information with the goal of maximizing the ability of such agencies to detect, prevent, investigate, apprehend, and respond to criminal or terrorist activity.” As of January 2013, 77 fusion centers were located in states and major urban areas throughout the country. While fusion centers are owned and operated by state and local agencies, the federal government encourages fusion centers to become interconnected with one another and the federal government in a national network capable of sharing terrorism-related information. Further, the federal government supports centers through deployed personnel, security clearances, connectivity to federal systems, and grant funding, among other things. More information about each of these types of entities is included in appendix I. In total, as of January 2013, 268 units of the five types of field-based entities were located throughout the United States, as shown in figure 1. In fiscal year 2011, federal agencies provided an estimated 72 full-time personnel to support fusion centers or HIDTA Investigative Support Centers in the eight urban areas we reviewed. RISS centers do not have any full-time federal personnel. In fiscal year 2011, federal agencies provided an estimated $64.6 million to support RISS centers, fusion centers, and HIDTA Investigative Support Centers in the eight urban areas. The five types of field-based entities have distinct missions, as shown in table 1, as well as distinct roles and responsibilities, which are generally consistent with their missions. For example, consistent with its mission to detect and investigate terrorists and terrorist groups and prevent them from carrying out terrorist acts directed against the United States, JTTFs, among these entities, are solely responsible for conducting counterterrorism investigations. RISS centers and HIDTA Investigative Support Centers both have missions, roles, and responsibilities that include supporting investigations. However, RISS centers focus on all crimes and support law enforcement agencies and officers from the beginning of an investigation to the prosecution and conviction of criminals. HIDTA Investigative Support Centers, on the other hand, focus on narcotics-related matters and support the HIDTA drug task force initiatives in their respective areas in the identification, targeting, arrest, and prosecution of key members of criminal drug organizations. FIGs and fusion centers both gather, analyze, and disseminate intelligence. However, consistent with their mission, FIGs are responsible for serving as the FBI’s intermediary for information sharing and collaboration among the FBI; the U.S. intelligence community; fusion centers; and other federal, state, local and tribal law enforcement, government, and private sector entities. Fusion centers, which are state or locally owned and operated, conduct these activities to serve as state and local intermediaries for information sharing and collaboration among the national network of fusion centers, and other federal, state, local, and tribal law enforcement; government; and private sector entities. In general, the purpose of fusion centers is to improve information sharing within their states or localities, and between state and local agencies and the federal government to help prevent terrorism or other threats. Indeed, the National Strategy for Information Sharing states that fusion centers “will serve as the primary focal points within the state and local environment for the receipt and sharing of terrorism-related information.” However, the missions of individual fusion centers vary to meet the specific state and local needs of their jurisdictions. The strategy also states that it recognizes the sovereignty of state and local governments and understands that fusion centers are owned and managed by state and local governments. In carrying out their respective missions, roles, and responsibilities, entities in the eight urban areas in our review conducted activities that overlap. That is, the entities may conduct similar analytical or investigative support activities or services in support of similar goals in the same mission areas (e.g., all crimes, counterterrorism, and counternarcotics) for similar customers (e.g., federal, state, and local agencies). Across the eight urban areas, 34 of the 37 field-based entities we reviewed conducted an analytical or investigative support activity that overlapped with that of another entity. Overlap in these activities can lead to benefits, such as validating information for customers, or inefficiencies, such as burdening customers who use resources to sort through redundant information. As shown in figure 2, in each of the eight urban areas in our review, we identified instances of overlap in analytical activities and services conducted by field-based entities for similar customers in the same mission area. First, looking across mission areas and entities, we identified more instances of overlap in analytical activities and services being conducted in the mission areas of all crimes and counterterrorism compared with the mission area of counternarcotics. Specifically, out of the 91 instances of overlap—in which more than one type of entity in the same urban area conducted the same analytical activity or service for similar customers in the same mission area—41 were in the mission area of all crimes, and 33 were in the mission area of counterterrorism compared with 17 that were in the mission area of counternarcotics. We also identified more instances of overlap involving a fusion center and a FIG compared with the other three types of entities. Out of the 91 instances of overlap, 88 involved a fusion center, 59 involved a FIG, and 54 involved both a fusion center and a FIG. For example, in the one urban area, the fusion center and FIG both produced all-crimes analytical products, threat and risk assessments, and criminal bulletins and publications, as well as disseminated all-crimes information, for federal, state, and local customers. Second, we identified more instances of overlap in the category of dissemination compared with other analytical activities and services. For example, in five of the eight urban areas, the fusion center, RISS center, and FIG disseminated information in the mission area of all crimes for federal, state, and local customers. In addition, in seven of the eight urban areas, the fusion center and FIG both disseminated information in the mission area of counterterrorism. For example, according to officials at one local law enforcement agency, the fusion center and the FIG in their area both produce and disseminate counterterrorism analytical products, such as “Terrorism Indicators” or “Possible High Value Targets.” The broad missions of fusion centers as state and local entities increase the potential for overlap in analytical activities and services. One explanation for the overlap in activities conducted in the all-crimes mission area is that fusion centers conduct activities related to a range of criminal activity in addition to terrorism-related information sharing. Officials from 7 of the 10 fusion centers that we interviewed in our eight urban areas reported that their fusion centers were initially established with an all-crimes mission, and officials from the other 3 fusion centers reported that they expanded the missions of their centers to include all crimes. Officials from all 3 of these fusion centers explained that they expanded the missions of their fusion centers to include all crimes because of the nexus, or link, of many crimes to terrorist-related activity. In addition, officials from all 3 of these fusion centers explained that they also expanded their missions in an effort to better serve state and local customers. This is consistent with nationwide information. According to data collected by DHS as of 2011, 63 of 72 fusion centers reported that the fusion center’s mission included all crimes, and 54 of 72 fusion centers reported that the center’s mission included counterterrorism. Five fusion centers reported that their mission was exclusively related to counterterrorism. In addition, the overlap in counterterrorism, as well as the overlap between fusion centers and FIGs, can be explained by fusion centers’ unique role as state and local entities. As previously mentioned, fusion centers and FIGs both, among other things, analyze and disseminate intelligence. However, fusion centers generally conduct these activities to serve as state and local intermediaries, while FIGs generally conduct these activities to serve as the FBI and U.S. intelligence community intermediaries. Thus, while both types of entities may conduct similar analytical activities and services, they are doing so for different purposes. For example, officials from all 10 of the fusion centers that we interviewed explained that their analysts infuse state or local perspectives with information that they receive from federal partners to provide customers with relevant context. Overlap in analytical activities and services can be beneficial, for example, by increasing entities’ focus on sharing information, validating information, or allowing for competing or complementary analysis; however, it can also lead to inefficiencies, such as burdening customers with redundant information. Officials from six of the seven state and local law enforcement customer agencies we interviewed stated that when entities have information, they feel the need to share it through the production of analytical products and dissemination of information. For example, an official from one local law enforcement agency explained that the benefit of entities disseminating information is that they are ensuring that information gets to those that need it. Additionally, officials from all seven of these agencies said that they expect to get all available information to make decisions to protect the citizens in their jurisdiction. Moreover, officials from three of the seven customer agencies we interviewed stated that receiving similar information from more than one entity enables them to validate and corroborate information. Further, officials from DHS and BJA noted benefits of competing or complementary analytical products. For example, different entities may draw different conclusions from the same or similar data given their unique missions and differing customers, perspectives, or jurisdictions. However, while officials from all seven state and local law enforcement customer agencies had varying preferences regarding the frequency and amount of information they receive from entities, officials from four of these agencies stated that receiving redundant information is burdensome. For example, an official from one local law enforcement agency stated that when entities forward original products, criminal bulletins, and publications without coordinating them, this leads to law enforcement leadership getting inundated with redundant information. This has led him to devote time to developing processes to ensure that his e-mail inbox does not reach capacity, because then he would not be able to receive additional e-mails that may contain important information. Entity officials in the eight urban areas in our review provided examples of efforts they have taken to coordinate products, among other things, that have helped to address instances of unnecessary overlap, which we discuss later in this report. As shown in figure 3, we also identified instances of overlap in investigative support activities and services conducted by entities for similar customers in the same mission area. First, looking across mission areas and types of entities, we identified more instances of overlap in investigative support activities and services being conducted in the mission area of all crimes compared with the mission areas of counterterrorism and counternarcotics. Specifically, out of the 32 instances of overlap—in which more than one type of entity in the same urban area conducted the same investigative support activity or service for similar customers in the same mission area—25 were in the mission area of all crimes. Additionally, more instances of overlap involved a RISS center and fusion center compared with the other three entities. Out of the 32 instances of overlap, 27 involved a RISS center, 23 involved a fusion center, and 18 involved both a RISS center and a fusion center. For example, in one urban area, the RISS center and fusion center both conducted tactical analysis, target deconfliction, and event deconfliction in the mission area of all crimes for federal, state, and local customers. The RISS center and fusion center in this urban area also both provided equipment and money loans in the mission area of all crimes for state and local customers. Second, looking at investigative support activities and services, we identified more instances of overlap in tactical analysis, such as link analysis or telephone toll analysis, compared with other investigative support activities and services. Specifically, in seven of the eight urban areas, the RISS center and fusion center both conducted tactical analysis in the mission area of all crimes. In four of these seven urban areas, the RISS center and fusion center conducted all-crimes tactical analysis for federal, state, and local customers. In another two of these urban areas, the RISS center and fusion center conducted the activity for state and local customers. In the remaining urban area, the RISS center and fusion center conducted the activity for federal customers. For example, while officials from the RISS center in one urban area acknowledged that other entities, including the fusion center, in their urban area also conducted all- crimes tactical analysis, they stated that they have an active and close working relationship with these other entities. Specifically, to coordinate all-crimes tactical analysis, the RISS center’s Field Service Coordinator attends bimonthly regional intelligence meetings alongside representatives from the other entities, and provides technology to and receives training from the fusion center. Entity officials cited efforts they have taken to coordinate and address unnecessary overlap, which we discuss later in this report. RISS centers and HIDTAs operate duplicative deconfliction systems— that is, systems that aim to ensure law enforcement officers are not conducting enforcement actions at the same time in the same place or investigating the same target—which could pose risks to officer safety and lead to inefficiencies. RISS and HIDTA officials have taken steps to connect target deconfliction systems—those that inform agencies when they are investigating the same individuals, weapons, vehicles, or businesses—and two of three event deconfliction systems. However, HIDTA officials have not finalized plans to make the remaining event deconfliction system interoperable with the other two systems, which could further reduce risks to officer safety and lessen the burden on law enforcement agencies that are currently using multiple systems to notify agencies when they are conducting conflicting enforcement actions. Specifically, the RISS and HIDTA programs operate three separate systems that have (1) event deconfliction functions to determine when multiple federal, state, or local law enforcement agencies are conducting enforcement actions (e.g., raids, undercover operations, or surveillances) in proximity to one another during a specified time period, or (2) target deconfliction functions, which determine if multiple law enforcement agencies are investigating, for example, the same person, vehicle, weapon, or business. In 2009, RISS developed RISSafe to provide event deconfliction to its members and those not being served by another system. Individual HIDTAs have used the Secure Automated Fast Event Tracking Network (SAFETNet) system, which has had event deconfliction functions, among other functions, since 2001 to help ensure officer safety. In 2009, the HIDTA program introduced deconfliction features into the Case Explorer system that differed from SAFETNet by providing a free service that is tied to its performance management process. Table 2 provides details about the features of these three systems. Law enforcement officers generally enter events into a deconfliction system electronically or by calling a watch center. Individuals operating a watch center plot the location of the event on a map and notify the officer for whom contact information is available in the system of other officers who have entered conflicting events into the same system. When events are not deconflicted, officer safety can be at risk. For example, HIDTA officials responsible for operating Case Explorer stated that, as a result of not deconflicting an undercover operation, an undercover officer was shot and killed by other law enforcement officers because the other officers did not know that an undercover officer was close to them. In addition, HIDTA and RISS officials described instances when officers did not deconflict drug busts, which led to undercover officers from different agencies drawing guns on one another thinking the other officers were drug dealers. The officials added that, had the events been deconflicted, the officers would have been aware of one another’s presence. However, RISS and HIDTA officials said that the use of more than one system with deconfliction functions increases the possibility of events not being coordinated because users have entered an event into only one system but not all of the systems. As shown in figure 4, law enforcement agencies in 12 states use more than one system to deconflict events. RISS and HIDTA officials stated that all of the systems are open to law enforcement agencies, and law enforcement agencies may choose one over the other based on preference, experience, or their affiliation with a particular RISS center or HIDTA. Duplicative event deconfliction systems may also lead to inefficiencies. For example, according to RISS officials, law enforcement agencies have expressed frustration in having their staff spend time entering information into multiple systems to ensure that their investigations are not conflicting with those of other agencies. These RISS officials also noted that the agencies could be jeopardizing officer safety if they choose to enter information into one system when more than one is available. RISS and HIDTA officials have already taken steps to reduce duplication in target deconfliction systems; however, these steps do not address the duplicative event deconfliction systems. Recognizing that target deconfliction can increase efficiency by connecting officers who may be working on the same or related cases, RISS centers and HIDTAs, along with the Drug Enforcement Administration, the International Justice and Public Safety Network and the National Alliance of State Drug Enforcement Agencies developed a National Virtual Pointer System (NVPS). The system connects existing investigative target deconfliction databases and notifies federal, state, local, and tribal law enforcement agencies participating in NVPS when an active investigative target they are investigating is also being investigated by another participant. NVPS facilitates target deconfliction and, as of March 2013, interoperability with existing event deconfliction systems is not being pursued. In September 2012, RISS and HIDTA officials signed a memorandum of understanding to coordinate efforts to make two of the three duplicative event deconfliction systems—RISSafe and Case Explorer—interoperable; however, the memorandum of understanding did not include SAFETNet. RISS and HIDTA officials stated that interoperability will be completely effective only with participation from all three systems, and risks to officer safety could remain with one system missing from the effort. The memorandum of understanding did not include SAFETNet because the 13 HIDTAs that operate the system and the contractor that provides support stated that they were going to first continue their ongoing efforts to make revisions to the target deconfliction function of SAFETNet— intended to link the users of this function—before they would consider changes to the event deconfliction function. RISS and HIDTA officials said that they chose to move forward with the memorandum of understanding and their efforts to make two of the systems interoperable with the intent of trying to integrate SAFETNet at a later date. While RISS and HIDTA officials noted that they had been discussing these issues since early 2012, they stated that the memorandum is a first step and was signed to demonstrate their recognition of the importance of officer safety, the need to coordinate operational and investigative efforts, and the need to leverage usage of proven systems and programs. RISS and HIDTA officials stated that they tested the software that would allow the two systems to be interoperable in December 2012 and expected to complete the effort in 2013. RISS and HIDTA officials stated that the HIDTAs that operate SAFETNet have expressed interest in making SAFETNet interoperable with the other two systems once SAFETNet users are linked. However, according to RISS officials, SAFETNet officials have not provided a target time frame for when they would finish linking SAFETNet users and have stated that this effort needs to be completed before they can commit to joining RISSafe and Case Explorer. Identifying milestones and time frames is consistent with best practices for program management. We have also reported that ensuring that all relevant participants are included is a key factor to the successful implementation of collaborative efforts. The effort to make the deconfliction systems interoperable, thus far, has not fully addressed these considerations. SAFETNet officials recognize the need for interoperability; however, milestones and time frames for completing the actions needed to link SAFETNet users and then join efforts to make the three systems interoperable would help to ensure that all parties involved accomplish their goals in a defined period of time. This could help achieve interoperability of all three event deconfliction systems, prevent delays in efforts to maximize the efficiency of the systems, and ensure the safety of officers by preventing incidents in the field. DOJ, DHS, and ONDCP acknowledge the importance of the entities working together and sharing information; however, they do not hold the entities accountable for coordinating with one another. A mechanism that holds entities accountable for coordination and enables agencies to monitor and evaluate the results of their efforts, such as performance metrics related to coordination, could help provide the agencies with information on the effectiveness of coordination among field-based entities and help reduce any unnecessary overlap in entities’ efforts. Officials in the eight selected urban areas we reviewed cited the inclusion of partners on governance boards and field-based entities’ physical or virtual colocation as two practices that helped to enhance coordination, information sharing, and efficiencies—in their view, reducing the potential for unnecessary overlap and duplication in their analytical and investigative support activities. DOJ, DHS, and ONDCP have not fully assessed the extent to which such practices could be applied nationwide to increase the benefits already being realized in some urban areas. DOJ, DHS, and ONDCP have processes in place to collect and measure information on the capabilities or performance of the entities in information sharing, but do not specifically hold field-based entities accountable for coordinating with one another. Accordingly, coordination is not a specific expectation in the entities’ performance management systems, and agencies do not track or measure the extent to which entities in urban areas are coordinating to leverage resources, collaborate, and reduce overlap. For example, according to FBI officials, the FBI has several performance metrics that hold JTTFs and FIGs accountable for sharing information, but none specific to coordinating with other field-based entities in their urban areas. RISS centers report performance indicators to BJA, such as the number of officers with access to their systems and the number of products and services provided in a given year, but these measures do not address coordination with other entities. DHS I&A officials stated that they are currently developing a set of performance measures to help determine how effectively the centers are meeting certain targets by collecting information on fusion centers’ coordination with other fusion centers; however, whether the measures will collect information related to the centers’ coordination with other field-based information-sharing entities has not yet been determined. HIDTA Investigative Support Centers also have a performance measurement program that holds them accountable for referring leads to other HIDTAs and other agencies, but the program does not include measures about the HIDTA’s ability to coordinate with other entities. As members of the ISA IPC Fusion Center Subcommittee, participating senior officials from DOJ, DHS, and ONDCP have established coordination as a goal and have worked together to share and standardize practices, such as developing criteria for allocating resources to fusion centers, but have not established a mechanism to monitor, evaluate, and report results to ensure that entities are coordinating with each other. Coordination can reduce unnecessary overlap to ensure that the activities and products of the entities complement rather than duplicate those of other entities. Further, officials from the FBI, BJA, DHS, and ONDCP each stated that coordination among the entities is essential in accomplishing individual missions. However, these officials told us that they ultimately rely on the leadership of their respective field-based entities to ensure that successful coordination is occurring because the leaders in the field-based entities are most familiar with the other stakeholders and issues in their areas, and are best suited to develop working relationships with each other. For example, the FBI special agent-in-charge at each field office is expected to reach out to law enforcement and private sector stakeholders and potential partners in their respective areas. However, officials at 22 of the 37 entities stated that successful coordination depends most on personal relationships and can be disrupted when new leadership takes over at an entity. Specifically, they noted that the potential for overlap and duplication can increase when new leaders assume they understand the roles and activities of the other entities. Establishing a mechanism to measure coordination would hold entities accountable for working with other entities and help to reduce overlap. Officials at 20 of 37 entities stated that measuring and monitoring coordination could alleviate the process of starting over when new personnel take over at a partner entity and ensure that maintaining coordinated efforts is a priority. We have previously reported that high-performing organizations use their performance management systems to strengthen accountability for results, specifically by placing greater emphasis on fostering the necessary coordination both within and across organizational boundaries to achieve results. Individual accountability for collaborative efforts can be reinforced through performance management systems by identifying competencies related to collaboration and setting performance expectations for collaboration. Incorporating performance metrics that emphasize collaboration and coordination with partners can benefit multiagency efforts. These efforts are further enhanced when mechanisms are developed to monitor, evaluate, and report on the results of the collaborative effort. A mechanism that holds field-based entities accountable for coordinating with each other and enables agencies to monitor and evaluate these efforts could help DOJ, DHS, and ONDCP, working through the ISA IPC, to provide agencies with information about the effectiveness of coordination among field-based entities and provide additional incentives for personnel in the field to strengthen coordination efforts. Officials at each of the 37 entities in the eight urban areas we reviewed described how practices such as serving on one another’s governance boards or, in some cases, colocating with other entities allowed or could allow them to achieve certain benefits. These include better understanding the missions and activities of the other entities, coordinating the production of analytical products, and sharing resources such as subject matter experts. In their view, this helped to increase coordination, leverage resources, and avoid or reduce the negative effects of unnecessary overlap and duplication in their analytical, tactical, and dissemination activities. Twenty-seven of the 37 entities had a governance board that was responsible for the management of the entity. Specifically, these boards were responsible for managing the operations of the entities, promoting information sharing, developing standards, and overcoming obstacles to sharing information across levels of government. Officials from each of the 10 entities with at least one member of another entity on their governance board said they were able to better understand each others’ missions, more readily identify areas of overlap, and share resources, which enhanced coordination. For example, officials from a RISS center stated that serving as a member of a JTTF board allowed the center to detail an analyst to the task force. The JTTF benefitted because the RISS analyst showed it the types of support the RISS center can provide, and the RISS center benefited because the analyst acquired training on counterterrorism investigations that could be taken back to the center. Officials that had members from other entities on their boards as well as those who did not stated that participating on each others’ boards facilitated or could facilitate the ability to readily identify overlapping activities. For example, participants on these boards were able to determine when similar analytical products from more than one entity were being produced and avoid overlap and duplication by deciding to produce a collaborative product or share resources, such as data systems. In one urban area, the governance board of a fusion center included members from the JTTF and the FIG. Center officials stated that having these entities represented on the board helped the JTTF and FIG better understand the mission of the fusion center. With this increased understanding, both sides looked at how they could use each other’s agents, analysts, and subject matter experts as resources. Officials from 9 other entities stated that governance board participation from the other entities allowed them to adopt a regionalized approach that incorporated the expertise of all parties in developing strategies that avoided unnecessary overlap and duplication of activities. For example, activities such as preparing threat assessments for major events became collaborative efforts with roles and responsibilities discussed and agreed upon at governance board meetings. Officials in the eight urban areas in our review also reported that varying degrees of colocation helped them to avoid unnecessary overlap through the coordination of analytical and tactical activities and sharing of resources, such as analysts with a particular area of expertise. Entities in the eight urban areas used various models of colocation including combining entities, sharing physical space, operating within shared networks, and having federal personnel colocated at the entity. As examples, officials from two colocated entities in our review stated that colocating and combining, as well as creating shared information spaces in a virtual environment, allowed them to share information more efficiently, develop more sophisticated products, and increase coordinated and collaborative efforts. Physical colocation allowed for increased efficiencies as the overhead cost of operating the entities, such as facilities, supplies, and utilities, was shared. Officials at entities that were not colocated recognized the benefits of colocation and agreed that, under the right circumstances, colocation could increase the effectiveness of coordination and efficiencies. In one urban area, a fusion center and a HIDTA Investigative Support Center combined their locations, staff, and activities. While funding sources for the two sides were distinct, the staff worked across the fusion center and HIDTA and were able to shift their focus onto the prioritized mission needs of the center. For example, during a national sporting event, staff that usually focused on counternarcotics helped in monitoring potential non-drug-related threats to the area. In another urban area, entities operated separately but were physically located within the same building, making communication and collaboration more convenient. At entities we visited in three urban areas, staff used computer systems to create virtually colocated environments, which allowed partners to have a presence in a shared data and communications system while operating from their own physical space. For example, one fusion center has established a virtual information-sharing system in which federal, state, and local law enforcement and non-law enforcement partners can post and retrieve information related to suspicious activities, security concerns, and security-related information that affects the entire urban area or region. According to fusion center officials, this approach was useful in areas where partner agencies’ jurisdictions covered a large geographic area, since law enforcement agents could participate virtually in a fusion center or HIDTA while being physically located in a different area. In addition to citing these models of colocation, officials in each of the 10 fusion centers in our review stated that colocating federal personnel, such as FBI special agents or DHS intelligence officers, with fusion centers was a practice that benefits, or could benefit, their centers. We present these officials’ perspectives on the benefits of having deployed federal personnel in their centers as well as the status of FBI and DHS personnel deployed to fusion centers in appendix II. DOJ, DHS, and ONDCP have not assessed the extent to which practices that could enhance coordination and help reduce unnecessary overlap and duplication in activities—such as participation on governance boards and colocation—could be applied more comprehensively nationwide across these field-based entities. Activities such as participation on governance boards and colocation are consistent with practices and mechanisms that we have previously reported federal agencies have used to implement interagency collaborative efforts, as well as with guidance provided to the entities by DOJ, DHS, and ONDCP. For example, we reported that colocation can be a mechanism that can facilitate collaboration between agencies. Further, guidance for fusion centers states that governance structures should include representatives from the federal government in at least an advisory capacity and should also include local representatives from the FBI (i.e., the JTTF and FIG) and components of DHS, such as the U.S. Coast Guard. According to the guidance, the governance structures should also consider including or coordinating with HIDTAs as appropriate to the center’s mission and location. The FBI also directs its field offices to emphasize the importance of representation in fusion centers by ensuring FBI executive management’s participation on fusion center governance boards and advisory councils. Additionally, HIDTAs are directed and guided by executive boards comprising an equal number of federal and nonfederal (i.e., state, local, and tribal) law enforcement leaders. However, entities nationwide do not all use practices such as governance boards and colocation. Specifically, according to survey data collected by DHS I&A, 11 of 72 fusion centers do not have governance boards, and not all entities with governance boards include members of the other entities. For example, of the 37 entities in our review, 27 had governance boards and 10 included members from other entities. Entities’ experience with governance boards demonstrates that providing increased participation from entities on one another’s governance boards could foster more effective collaboration. Additionally, while officials from each of the entities in the urban areas in our review expressed the benefits of colocation, they stated that agencies had not fully explored opportunities to engage in the various forms of colocation. For example, 16 fusion centers are colocated with JTTFs, and six JTTFs and four FIGs are also colocated with HIDTA Investigative Support Centers. While the focus of HIDTAs is counternarcotics, five of seven HIDTA directors stated that colocation with JTTFs and FIGs has strengthened, or would strengthen, their ability to share information, build databases, provide training opportunities, deconflict targets, and exchange best practices. Therefore, agencies may have additional opportunities to apply these types of practices. DOJ, DHS, and ONDCP have begun to take some steps to discuss these issues. For example, the Fusion Center Sub‐Committee of the ISA IPC brought its members and others together to discuss how to establish stronger partnerships between fusion centers and HIDTAs, and to further define the operational roles, responsibilities, and relationships among these entities. As a result of this meeting, participating fusion center and HIDTA officials determined that, under the right circumstances, the colocation or integration of fusion centers and HIDTA Investigative Support Centers may bring significant benefits, but this should not be advocated as a universal approach because it may not be practical in all cases. According to agency officials present at the meeting, while the participation of entities on each others’ boards and colocation were discussed as potentially beneficial practices, the subcommittee did not explore the extent to which these or other coordination practices could benefit additional entities across the nation. The subcommittee also did not identify characteristics of locations that promote successful colocation or specific locations where colocation could benefit the entities. Rather, the intent was to provide a forum to share practices, and the subcommittee did not have a plan to implement or promote specific practices nor to further assess their greater applicability. According to the Program Management Institute’s Standard for Program Management, organizations should determine the value of a project’s benefits, such as an assessment of participation on governance boards or collocation, identify the interdependency of benefits in different programs, and assign responsibilities and accountability for the realization of those benefits. An assessment of participation on governance boards and the colocation of these entities in specific geographic areas, as well as other practices that could enhance coordination and reduce unnecessary overlap, could better position DOJ, DHS, and ONDCP, working through the ISA IPC, to assist the entities. Such an assessment could identify characteristics that make these practices successful, inform whether additional governance boards or colocated entities should be pursued, or determine whether other opportunities to leverage resources and increase cost efficiencies and operational capabilities exist. Further, as required by the Intelligence Reform Act, the Program Manager is to submit annual reports to Congress. Accordingly, the Program Manager has reported on the benefits and importance of promoting partnerships and developing standards and has highlighted progress and successes, such as implementing privacy, civil rights, and civil liberties protections and strengthening cybersecurity in the annual reports to Congress on implementing the ISE. These reports, however, have not included information about specific coordination efforts across these five types of entities. According to the Program Manager, past reports have focused on broader issues such as strengthening the safeguarding of terrorism-related information, but including information on specific coordination efforts among the five types of field-based entities in future reports would provide beneficial information to the information-sharing environment. We have previously reported that defining and articulating a common outcome; developing mechanisms to monitor, evaluate, and report on results; and reinforcing agency accountability for collaborative efforts through agency plans and reports can help enhance and sustain coordinated efforts among agencies. The inclusion of the results of such an assessment conducted by DOJ, DHS, and ONDCP—including any additional coordination practices identified, efficiencies realized, or actions planned—in the ISE annual report to Congress could help the Program Manager hold agencies accountable for completing the assessment and disseminate its results to further enhance collaborative efforts and efficiencies across agencies. FBI, BJA, DHS, and ONDCP collect information on the results that JTTFs, FIGs, RISS centers, fusion centers and HIDTA Investigative Support Centers achieve. Although some of these agencies consider the results when they make decisions about future funding, others consider different factors—such as risk and threats—rather than results, or do not directly make decisions about future funding. According to FBI officials, the FBI gathers information on the results that JTTFs and FIGs achieve through annual field office reports and other performance reviews. Specifically, each field office is subject to semiannual performance reviews and submits an annual report in order for the FBI to assess how well each field office identifies and addresses threats in its area. According to FBI officials, the reviews and annual field office report contain data on established performance measures for the FIG and all investigative programs, including counterterrorism task forces such as the JTTFs. For example, the FBI tracks FIG results, such as the number of strategic intelligence reports produced and requests for information received, and collects various case-related results from JTTFs, including the number of investigations conducted and information sources developed. FBI officials responsible for the oversight of the JTTFs and FIGs stated that the reviews are primarily used to report and assess field office performance. They also reported that the FBI allocates funding and resources to its field offices based primarily on the prevalence of risks and threats within a region. The FBI funding that supports all resources for the FIGs and the JTTFs is congressionally appropriated and scored to the National Intelligence Program. Uses of these funds, for example, include the salaries of FBI special agents that serve on the JTTF through allocations to FBI field offices, as well as other JTTF operational costs, including rental of office space, information technology requirements, and support for participating state and local TFOs, including vehicles and overtime pay. Consistent with RISS program grant guidance, in conducting grant oversight, BJA collects information on various results that each RISS center achieves. According to RISS and BJA officials, BJA collects information quarterly on results that member agencies achieve that can be attributed to the products and assistance they receive from RISS centers, including the number of resulting arrests and the value of narcotics, currency, and property seizures during investigations that RISS centers supported. For example, according to the quarterly reports, in 2011, law enforcement agencies used RISS services on cases that resulted in more than 5,000 arrests and $43 million in narcotics, currency, and property seizures. BJA also collects other data on RISS centers, such as the number of state and local law enforcement agencies that are members of each center and the number of analytical products each center developed. According to BJA officials responsible for overseeing the RISS program, the agency collects information on RISS centers’ results to fulfill grant management requirements. BJA officials stated that RISS center directors use information regarding the needs of the state and local law enforcement agencies that are members of each center when making recommendations to BJA about funding for individual centers, and the agency considers each center’s work when approving final funding decisions. According to BJA officials that administer the grant program, BJA provides RISS directors with the total funding amount available for the RISS program, and RISS directors unanimously recommend funding amounts for each RISS center. RISS center directors covering the urban areas in our review reported that they consider multiple factors when deciding how much funding to recommend, such as each center’s geographic coverage, the size of its member agencies, and the types of services the center provides to its members. According to BJA officials, BJA reviews the recommendations to ensure that they are consistent with the work submitted for the centers in previous grant cycles and that each center has submitted all financial and progress reports required by the grant. These officials added that, on the basis of this review, BJA makes a final funding decision. Annually, DHS I&A collects information on the progress fusion centers have made in meeting baseline capabilities—a defined set of standards developed by DHS and DOJ, in conjunction with fusion centers, that centers should achieve to be considered capable of performing basic functions in the national information-sharing network. Among the baseline capability information that DHS I&A collects and tracks are four critical capabilities—including a center’s ability to analyze threat information and disseminate intelligence products to stakeholders—as well as other capabilities, such as the ability to protect individuals’ privacy, civil rights, and civil liberties. For example, in reporting on fusion centers’ progress in achieving the four critical capabilities, in 2011 DHS reported that at least 75 percent of fusion centers, or 54 centers, had approved plans, policies, or standard operating procedures for each of the critical capabilities. DHS provides grants to individual states and urban areas that can be used to support fusion centers. Starting with fiscal year 2011, DHS modified requirements in the Homeland Security Grant Program (HSGP)—which is administered through the Federal Emergency Management Agency (FEMA) and provides funding that states and local jurisdictions can use to support fusion centers—to state that any federal funds centers receive must be used to fill gaps in critical capabilities identified through its annual assessment process. Further, DHS I&A and FEMA required that fusion center applicants identify the corresponding baseline capability they will address in their proposals to state grant recipients for portions of federal grant funding. To strengthen the coordinated use of grant funds, DHS also required that HSGP funds that are used to support intelligence or fusion-related activities (e.g., intelligence units) are integrated or coordinated with the respective state or local fusion center. DHS has also recognized the need to develop performance measures to capture data that demonstrate the value of the national network of fusion centers in support of national information-sharing and homeland security goals. In September 2010, we recommended that DHS define steps to develop and implement a set of standard performance measures for fusion centers to show the results that the centers are achieving and the value they are adding to federal information-sharing efforts. According to DHS I&A officials, DHS, in coordination with fusion center directors and other federal partners, has identified an initial set of five performance measures, including the number of products that two or more fusion centers jointly produce and the number of requests for information from other fusion centers that are addressed. Further, according to these officials, the agency is leading efforts to define more measures during 2013 and plans to work with FEMA to identify potential ways to incorporate performance-reporting requirements into the HSGP process. ONDCP has established a performance management process that requires HIDTAs to submit, among other results, five measures specifically related to HIDTA Investigative Support Center performance that serve, in part, as the basis for future funding decisions. These measures include (1) the number of cases in which the center provided analytical support and (2) satisfaction ratings from stakeholders of the support provided and strategic intelligence products disseminated by the center. As part of ONDCP’s performance management process, each HIDTA executive board annually sets target goals for each of these measures. ONDCP officials stated that both they and the HIDTA executive boards review the performance measure results to ensure that Investigative Support Centers meet their goals, the boards also consider these results when deciding the amount of future funding to dedicate to the center. In addition to results, HIDTA executive boards consider other factors, such as the expected needs of its members and availability of staff, when determining the level of funding that initiatives, including Investigative Support Centers, will receive. For example, ONDCP officials stated that in cases where center performance was less than expected, HIDTAs could provide ONDCP with an appropriate explanation regarding the variance in performance allowing for appropriate decisions to be made in the budget approval process. The efforts of JTTFs, FIGs, RISS centers, fusion centers, and HIDTA Investigative Support Centers to gather, analyze, and disseminate law enforcement, public safety, and terrorism-related information are essential for our nation’s homeland security. Similarities in their activities and customers can provide benefits through competing or complementary analysis and corroboration of reports. However, these similarities could also lead to unnecessary overlap and duplication that reduce the effectiveness of their activities and create inefficiencies. For example, HIDTAs and RISS centers both have systems with deconfliction functions that can save the lives of officers by preventing conflicting operations. However, the lack of interoperability requires officers, in some cases, to input their events into the three systems with duplicative functions, which, if not done, increases the likelihood of risks to officers and inefficiencies. Agencies recognize the need for the systems to be interoperable and have some efforts under way to make them so. However, articulating time frames for the completion of these efforts would help ensure their success. Further, with multiple entities supporting investigations through tactical and analytical support, the coordination of similar activities can create opportunities to leverage resources and reduce the potential for unnecessary overlap or inefficiencies. DOJ, DHS, and ONDCP do not hold field-based entities accountable for coordinating with each other, nor do they assess opportunities for additional coordination. With a mechanism to track and evaluate how field-based entities are working together, agencies can identify successful coordination practices and where those practices can be implemented. Obtaining insight into how well coordination is working can help agencies ensure that field-based entities are maximizing opportunities to reduce overlap, collaborate, and leverage resources. In addition, officials from each of the entities stated that practices such as participating on one another’s governance boards and various forms of colocation help them understand other entities’ roles and create such opportunities. However, agencies have not fully explored the extent to which these and other practices can be applied nationwide across the five types of field-based entities and may be missing opportunities to share facilities and resources, better meet customer needs with collaborative products, and achieve benefits through increased interaction. Further, by identifying characteristics that make these practices successful and assessing geographic areas in which they can be applied, agencies can expand their use. Recognizing that agencies are taking steps to ensure that two of the three systems officers use to deconflict their law enforcement actions are interoperable, we recommend that the Director of ONDCP work with the appropriate HIDTA officials to develop milestones and time frames for actions needed to make the third system, SAFETNet, interoperable in order to prevent unnecessary delays in reducing risks to officer safety and lessening the burden on law enforcement agencies that are currently using multiple systems. To promote coordination as a practice to help avoid overlap, we recommend that the Secretary of Homeland Security, the Attorney General, and the Director of ONDCP work through the ISA IPC or otherwise collaborate to develop a mechanism, such as performance metrics related to coordination, that will allow them to hold field-based information-sharing entities accountable for coordinating with each other and monitor and evaluate the coordination results achieved. To help identify where agencies and the field-based entities they support could apply coordination mechanisms to enhance information sharing and reduce inefficiencies resulting from overlap, we recommend that the Secretary of Homeland Security, the Attorney General, and the Director of ONDCP work through the ISA IPC or otherwise collaborate to identify characteristics of entities and assess specific geographic areas in which practices that could enhance coordination and reduce unnecessary overlap, such as cross-entity participation on governance boards and colocation of entities, could be further applied. The results of this assessment could be used by the agencies to provide recommendations or guidance to the entities to create coordinated governance boards or colocate entities, which can result in increased efficiencies through shared facilities and resources and reduced overlap through coordinated or collaborative products, activities, and services. To help ensure that an assessment of practices that could enhance coordination and reduce unnecessary overlap is shared and used to further enhance collaboration and efficiencies across agencies, we recommend that the Program Manager, with input from the ISA IPC collaborating agencies, report in the ISE annual report to Congress the results of the assessment, including any additional coordination practices identified, efficiencies realized, or actions planned. We provided a draft of the sensitive version of this report to DHS, DOJ, ONDCP, and the Program Manager for the ISE for review and comment. DHS and DOJ provided written comments: Comments from DHS are reprinted with sensitive information omitted in appendix III, and comments from DOJ are reprinted in full in appendix IV. DHS concurred with the two recommendations that apply to it and reported steps it was taking to address them. In written comments, DOJ stated that the department generally agreed with the goal or intent of the two recommendations made to it; however, it did not concur with the premises underlying the two recommendations. ONDCP and the Program Manager for the ISE did not provide written comments on the draft report. However, in an e-mail dated March 8, 2013, ONDCP General Counsel concurred with the three recommendations made to it, and in oral comments obtained on March 7, 2013, the Program Manager concurred with the fourth recommendation. With respect to the second recommendation to collaborate to develop a mechanism to hold field-based information-sharing entities accountable for coordinating with each other, DHS concurred and stated that each agency should develop mechanisms appropriate to its respective missions in order to effectively oversee the field activities for which it is responsible or, in the case of state and local fusion centers, the activities with which they coordinate. DHS stated that it has included two measures in the 2012 Fusion Center Assessment that respectively measure the number of Suspicious Activity Reports submitted by fusion centers that result in an FBI investigation and the number of fusion center analytical products authored by two or more fusion centers. While we agree that both measures do hold fusion centers accountable for coordinating a specific information sharing activity, they do not fully address the recommendation to hold centers accountable for coordinating activities and services with each of the other entities in an effort to look for additional ways to limit any overlap and better leverage resources. As the report recognizes, to this end, DHS I&A is developing additional performance measures for the Fiscal Year 2013 Fusion Center Assessment, expected to begin in August 2013, that will explore the degree to which fusion centers collaborate with other field-based information-sharing entities and with federal partners to develop analytic products. Since DHS is developing the measures and expects to complete this action in August 2013, it is too soon to know what specific measures DHS will include and whether they will fully address the intent of the recommendation. DOJ, in its letter, stated that it generally agreed with the goal of the second recommendation to develop a mechanism to hold field-based information-sharing entities accountable for coordinating with each other, but that it did not concur that the department was not already actively promoting coordination. For example, officials stated that DOJ has participated in summits with other agencies, including DHS, in an ongoing dialogue on efficient and effective coordination of information sharing in the field. While these efforts are positive steps for sharing information and coordinating to improve sharing, the efforts do not fully address the recommendation to develop a mechanism for accountability and monitoring coordination across all five entities included in the review. We maintain that such a mechanism that specifically and directly holds field- based entities accountable for coordinating with one another could add valuable context to the type of dialogue DOJ describes while encouraging entities to maintain working relationships when new leadership is assigned and engage in coordination activities, such as leveraging resources, to avoid unnecessary overlap. With respect to the third recommendation to collaborate and assess where successful coordination practices could be further applied, DHS concurred and stated that it supported working through the ISA IPC, since its work includes the identification and implementation of best practices and operational improvements in the sharing of information. DHS added that it has collected information on the other entities’ participation on fusion center governance boards, as well as the colocation of these entities to ensure that the fusion centers benefit from the perspective of their stakeholders and partners. This is a positive step in gaining insights into identifying fusion centers where these and other practices can be applied. With similar input from DOJ and ONDCP, an assessment of this information could allow the agencies to identify where it might be appropriate to apply these and other practices across entities. It is too soon to know how DHS will use the information it has collected in collaboration with the other agencies, but DHS stated it will work with us to define specific and measurable outcomes in response to the recommendation. In its letter, DOJ stated that it agreed with the general intent of the third recommendation to collaborate and assess where successful coordination practices could be further applied, but did not concur with the premise that the department does not already routinely seek to identify potential efficiency gains and that colocation is something that should be a goal in and of itself. DOJ stated that it does encourage entities to explore efficiencies that can be gained by, for example, cross-entity participation or colocation in circumstances where appropriate and efficient. However, DOJ stated that what is appropriate and efficient is highly dependent on local circumstances, and a one-size-fits-all approach will not work because of variation in the entities, regions, and laws under which they operate. We agree, and the report states that colocation should not be advocated as a universal approach because it may not be practical in all cases. Accordingly, the recommendation calls for the agencies that operate or otherwise support these entities to collectively assess opportunities to enhance coordination through whatever effective means they identify. Additionally, DOJ stated that a comparison of the FIGs and JTTFs with the other entities overgeneralizes their activities since they are operational while the others are analytical. Similarly, DHS stated that the comparison of FIGs with fusion centers overgeneralizes the unique nature of the entities’ products and their intended recipients. The report outlines the distinct missions, authorities, roles, and responsibilities of each of the entities, noting the JTTFs’ unique role in conducting counterterrorism investigations. Further, we acknowledge that entities serve as intermediaries to different customers, while each has a broader role in sharing information with its partners as appropriate. DOJ’s letter also commented on the generalizeability of our analysis. We selected eight urban areas to explore activities conducted and coordination mechanisms across the five entities in its review. On the basis of our analysis, we identified instances of reported overlap in activities and also examples of where coordination was working well across the entities. The report states that the results from the eight urban areas are not generalizeable, and thus we made recommendations for agencies to assess practices that we identified that were working well, as well as other coordination practices, to identify additional opportunities nationwide to coordinate and reduce any unnecessary overlap in entities’ activities. DHS and DOJ also provided technical comments, which we incorporated as appropriate. We are providing copies of this report to the Attorney General, the Secretary of Homeland Security, the Director of ONDCP, the Program Manager for the Information Sharing Environment, and interested congressional committees. 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) 512-8777 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 V. This appendix provides an overview of each of the five types of field- based information-sharing entities included in our review. The RISS program, which originated in 1974, supports the ability of local, state, federal, and tribal law enforcement member agencies to identify, target, arrest, and prosecute criminal conspirators. The program, which the Bureau of Justice (BJA) administers, consists of six multistate regional information analysis centers that offer services—including information and intelligence sharing, investigative and case support, and officer safety and deconfliction—to member agencies in their respective regions. RISS centers serve member agencies in all 50 states, U.S. territories, Canada, England, Australia, and New Zealand. RISS centers focus on all crimes; however, they also may focus their efforts on activities and conspiracies related to terrorism. Established in 1988, the HIDTA program is a federally funded program administered by the Office of National Drug Control Policy (ONDCP) that brings together federal, state, and local law enforcement agencies into task forces that conduct investigations of drug-trafficking organizations in designated areas. Before designating an area as a HIDTA, the Director of ONDCP must consider the extent to which the area is a significant center of illegal drug production, manufacturing, importation, or distribution; state, local, and tribal law enforcement agencies have committed resources to respond to the drug-trafficking problem in the area, thereby indicating a determination to respond aggressively to the problem; drug-related activities in the area are having a significant harmful impact in the area and in other areas of the country; and a significant increase in allocation of federal resources is necessary to respond adequately to drug-related activities in the area. As of March 2013, ONDCP had designated 28 HIDTAs. A statutory purpose of the HIDTA program is to reduce drug trafficking and drug production through information sharing. Thus, among other initiatives, every HIDTA has an Investigative Support Center that serves to support all of the investigation and interdiction initiatives in the HIDTA by providing analytical case support, deconfliction, issuing drug threat assessments, and developing and disseminating intelligence products. There are 32 HIDTA Investigative Support Centers—1 in 27 of the 28 HIDTAs, in addition to the Southwest Border HIDTA, which has a center for each of its five regions. The HIDTA program is focused on counternarcotics; however, HIDTA program resources may be used to assist law enforcement agencies in investigations and activities related to terrorism and the prevention of terrorism. The Federal Bureau of Investigation (FBI) established the first JTTF in 1980 in its New York City field office after recognizing the value of the task force concept—which it began using in the prior year to jointly investigate bank robberies with the New York City Police Department— and subsequently applied the concept to counterterrorism. The FBI continued to expand the terrorism task force concept to field offices after September 2001, increasing the number of JTTFs from 35 to 103. The FBI has 56 field offices (also called divisions) centrally located in major metropolitan areas across the United States and Puerto Rico. Within field offices, there are a total of about 400 resident agencies located in smaller cities and towns. Each JTTF is housed in an FBI field office or resident agency. JTTFs, which consist of FBI special agents, as well as federal, state, and local task force officers (TFO), pursue leads, gather evidence, respond to threats and incidents, make arrests, provide security for special events, conduct training, and gather intelligence related to threats, among other counterterrorism-related activities. According to the 2012 Information Sharing Environment (ISE) annual report to Congress, JTTFs are dedicated to sharing information among their partners to investigate terrorism and coordinate counterterrorism efforts. The FBI established the first FIG in 2003 to coordinate, manage, and execute all of the functions of the intelligence cycle, including collection, analysis, production, and dissemination, for the FBI in the field. FIGs are teams of FBI intelligence analysts, special agents, language analysts, and financial analysts, among others, working in each of the 56 FBI field offices to analyze information from cases in their field offices and share intelligence locally and nationally. After the September 2001 attacks, state and local governments began to establish fusion centers, in part to serve as intermediaries within states and localities for the gathering, receipt, analysis, and sharing of threat- related information among the federal government and state, local, tribal, territorial and private sector partners, and to fill gaps in information sharing that the federal government alone could not address. As defined by the Implementing Recommendations of the 9/11 Commission Act of 2007, a fusion center is “a collaborative effort of two or more federal, state, local, or tribal government agencies that combines resources, expertise, or information with the goal of maximizing the ability of such agencies to detect, prevent, investigate, apprehend, and respond to criminal or terrorist activity.” As of January 2013, there are 77 fusion centers located in states and major urban areas throughout the country. This appendix provides information about the deployment of federal personnel, specifically FBI and Department of Homeland Security (DHS) personnel, to fusion centers. Officials from each of the 10 fusion centers in our review stated that colocating federal personnel at fusion centers was a practice that benefits, or could benefit, their center. The FBI and DHS deploy personnel such as special agents, intelligence officers, and reports officers to fusion centers to perform a number of duties ranging from the collection of intelligence to training state and local counterparts. According to officials from each of the 10 fusion centers, colocating representatives from the FBI and DHS allowed or could allow fusion center products and services to incorporate more information from these agencies, ensuring consistency in content and format with information being released from those agencies. Fusion center officials in each of the urban areas noted that, while not all of the fusion centers have dedicated DHS or FBI staff, having an on-site presence at fusion centers facilitates collaborative products between the agencies and the fusion centers. For example, officials in 8 of the 10 fusion centers reported that their analysts worked with the FBI to develop joint products ranging from threat assessments associated with major events to guides on identifying tattoos and terminology used by extremist groups. Additionally, officials in each of the 10 fusion centers said that the presence of FBI and DHS personnel allows or could allow fusion centers to have products reviewed and checked against federal sources before they are disseminated, preventing duplicative or erroneous information from reaching stakeholders. In one urban area, an FBI analyst stated that the review process improved the quality and relevance of the fusion centers’ products. For example, before the review process was in place, the FBI received some outdated and incorrect information from the local fusion center. In one case, they recognized the information in a threat bulletin because they had determined it to be a nonthreat 2 years prior. Both the FIG and the fusion center officials in this urban area stated that errors such as this have not occurred since the FBI has had a presence in the fusion center. Officials in all 10 of the fusion centers also stated that an important benefit of having FBI or DHS personnel at the center is access to classified information systems such as the Federal Bureau of Investigation Network (FBINet), which is the FBI’s primary network system for communicating Secret information, including intelligence pertaining to national security, and DHS’s Homeland Secure Data Network (HSDN), which is a classified network for DHS, its components, and other partners. According to FBI officials, policies on FBINet access require the presence of FBI personnel, and according to the FBI, the network allows deployed FBI personnel to more fully collaborate with fusion center personnel by providing them with Secret information, including investigative case files and intelligence pertaining to national security. Officials in one urban area that did not have FBI personnel at their fusion center stated that not having access to FBINet limited their ability to access classified information. In another urban area, the fusion center director stated that access to FBINet was limited to when the part- time FBI agent deployed to the center was in the office. The fusion center director stated that the arrangement reduced the effectiveness of having access to the system because the information is needed when events occur. For example, if a crime was committed, it may take a day or more to access FBI information on the suspect. Fusion center officials stated that while access to HSDN does not require the presence of DHS personnel, navigating the system with DHS personnel on site allows them to find information more quickly and provides them with a better sense of the information that is available. DHS Office of Intelligence and Analysis (DHS I&A) and the FBI have initiatives underway to deploy personnel to fusion centers. For example, the Implementing Recommendations of the 9/11 Commission Act of 2007 require that DHS, in coordination with fusion center officials, assign DHS officers and intelligence analysts to fusion centers. DHS I&A has an initiative to deploy intelligence officers to each of the fusion centers. Similarly, the FBI, in its 2011 Information Sharing Report highlighted the importance of the coordination of information sharing among FBI field offices, their FIGs, and the fusion centers. The FBI identified the JTTFs as the principals for operational-level coordination with fusion centers. FBI field offices plan to designate at least one experienced intelligence analyst to fusion centers depending on the extent to which a center has, among other criteria, a focus on counterterrorism and the ability to house secure systems such as FBINet. DHS and FBI officials stated that they are continuing to work toward these goals. In 2012, DHS had 164 personnel deployed to fusion centers, including 98 from DHS I&A. The FBI had 95 personnel deployed to 59 fusion centers, with 47 embedded full-time in 29 fusion centers and 48 working on a part-time basis. As centers become more mature, and as resources allow, both DHS and the FBI plan to increase the number of personnel deployed to centers and introduce personnel in those centers that currently do not have federal staff. In addition to the contact named above, Mary Catherine Hult, Assistant Director; Kevin Heinz; Justine Lazaro; Christine Ramos; Yanina Golburt Samuels; Katherine Davis; Eric Hauswirth; Tom Lombardi; and Amanda Miller made significant contributions to the work. | Federal agencies and state and local governments have established field-based entities (e.g., centers and task forces) nationwide that share terrorism-related information, among other things. GAO was asked to assess these entities. This report addresses (1) the extent to which these entities are distinct, fragmented, overlapping, or duplicative; (2) the extent to which DOJ, DHS, and ONDCP hold entities accountable for coordinating and have assessed coordination opportunities; and (3) how, if at all, DOJ, DHS, and ONDCP incorporate information on the results entities achieve when making funding decisions. GAO analyzed entities' missions, activities, and coordination efforts in eight selected urban areas that range in geographic dispersion and risk. Although not generalizable, this analysis provided insights. This is a public version of a sensitive report GAO issued in March 2013. Information the Federal Bureau of Investigations (FBI) deemed sensitive has been redacted. Five types of field-based information-sharing entities are supported, in part, by the federal government--Joint Terrorism Task Forces, Field Intelligence Groups, Regional Information Sharing Systems (RISS) centers, state and major urban area fusion centers, and High Intensity Drug Trafficking Area (HIDTA) Investigative Support Centers--and have distinct missions, roles, and responsibilities. However, GAO identified 91 instances of overlap in some analytical activities--such as producing intelligence reports--and 32 instances of overlap in investigative support activities, such as identifying links between criminal organizations. These entities conducted similar activities within the same mission area, such as counterterrorism, for similar customers, such as federal or state agencies. This can lead to benefits, such as the corroboration of information, but may also burden customers with redundant information. GAO also found that RISS centers and HIDTAs operate three different systems that duplicate the same function--identifying when different law enforcement entities may be conducting a similar enforcement action, such as a raid at the same location, to ensure officer safety--resulting in some inefficiencies. RISS and HIDTA have taken steps to connect two of the systems, but HIDTA does not have target time frames to connect the third system. A commitment to time frames would help reduce risks to officer safety and potentially lessen the burden on law enforcement agencies that are currently using multiple systems. Agencies have neither held entities accountable for coordinating nor assessed opportunities for further enhancing coordination to help reduce the potential for overlap and achieve efficiencies. The Departments of Justice (DOJ) and Homeland Security (DHS), and the Office of National Drug Control Policy (ONDCP)--the federal agencies that oversee or provide support to the five types of field-based entities-- acknowledged that entities working together and sharing information is important, but they do not hold the entities accountable for such coordination. A mechanism that enables agencies to monitor the results of coordination efforts could encourage more coordination, help reduce any unnecessary overlap and leverage resources. Officials in the eight urban areas said that practices such as having representatives from other agencies on governance boards and colocating entities where possible enhanced coordination, information sharing, and efficiencies--in their view, reducing the potential of unnecessary overlap. Federal agencies have not assessed the extent to which such practices could be further implemented and, therefore, may be missing opportunities to maximize benefits. The Program Manager for the Information Sharing Environment (PM-ISE)--which manages efforts to enhance sharing governmentwide--has not reported on specific coordination efforts across the entities. Including agencies' assessment progress in the annual reports to the Congress would enhance accountability. The agencies collect information on entities' results, but vary in the extent to which they consider the results when they make decisions about future funding. For example, agencies may consider other factors--such as risk and threats--rather than results, or funding decisions may be determined by state grant recipients or set in part by statutory or other requirements. GAO recommends that ONDCP work with HIDTA officials to establish time frames to connect systems; DHS, DOJ, and ONDCP develop measures to hold entities accountable for coordination and assess opportunities to enhance coordination; and the PM-ISE report on the results of the agencies efforts to assess coordination. DHS, ONDCP, and the PM-ISE concurred. DOJ generally agreed with the intent of the recommendations, but disagreed with their underlying premises that DOJ was not already taking such actions. GAO believes these actions do not fully address the recommendations as discussed further in this report. |
In recent years, the scale and scope of for-profit colleges have changed considerably. Traditionally focused on certificate and programs ranging from cosmetology to medical assistance and business administration, for- profit institutions have expanded their offerings to include bachelor’s, master’s, and doctoral level programs. Both the certificate and degree programs provide students with training for careers in a variety of fields. Proponents of for-profit colleges argue that they offer certain flexibilities that traditional universities cannot, such as, online courses, flexible meeting times, and year-round courses. Moreover, for-profit colleges often have open admissions policies to accept any student who applies. Currently, according to Education about 2,000 for-profit colleges participate in Title IV programs and in the 2008–2009 school year, for- profit colleges received approximately $24 billion in Title IV funds. Students can only receive Title IV funds when they attend colleges approved by Education to participate in the Title IV program. The Higher Education Act of 1965, as amended, provides that a variety of institutions of higher education are eligible to participate in Title IV programs, including: Public institutions—Institutions operated and funded by state or local governments, which include state universities and community colleges. Private nonprofit institutions—Institutions owned and operated by nonprofit organizations whose net earnings do not benefit any shareholder or individual. These institutions are eligible for tax- deductible contributions in accordance with the Internal Revenue code (26 U.S.C. § 501(c)(3)). For-profit institutions—Institutions that are privately owned or owned by a publicly traded company and whose net earnings can benefit a shareholder or individual. Colleges must meet certain requirements to receive Title IV funds. While full requirements differ depending on the type of college, most colleges are required to: be authorized or licensed by the state in which it is located to provide higher education; provide at least one eligible program that provides an associate’s degree or higher, or provides training to students for employment in a recognized occupation; and be accredited by an accrediting agency recognized by the Secretary of Education. Moreover, for-profit colleges must enter a “program participation agreement” with Education that requires the school to derive not less than 10 percent of revenues from sources other than Title IV funds and certain other federal programs (known as the “90/10 Rule”). Student eligibility for grants and subsidized student loans is based on student financial need. In addition, in order for a student to be eligible for Title IV funds, the college must ensure that the student meets the following requirements, among others: has a high school diploma, a General Education Development certification, or passes an ability-to-benefit test approved by Education, or completes a secondary school education in a home school setting recognized as such under state law; is working toward a degree or certificate in an eligible program; and is maintaining satisfactory academic progress once in college. In August 2009, GAO reported that in the repayment period, students who attended for-profit colleges were more likely to default on federal student loans than were students from other colleges. When students do not make payments on their federal loans and the loans are in default, the federal government and taxpayers assume nearly all the risk and are left with the costs. For example, in the Direct Loan program, the federal government and taxpayers pick up 100 percent of the unpaid principal on defaulted loans. In addition, students who default are also at risk of facing a number of personal and financial burdens. For example, defaulted loans will appear on the student’s credit record, which may make it more difficult to obtain an auto loan, mortgage, or credit card. Students will also be ineligible for assistance under most federal loan programs and may not receive any additional Title IV federal student aid until the loan is repaid in full. Furthermore, Education can refer defaulted student loan debts to the Department of Treasury to offset any federal or state income tax refunds due to the borrower to repay the defaulted loan. In addition, Education may require employers who employ individuals who have defaulted on a student loan to deduct 15 percent of the borrower’s disposable pay toward repayment of the debt. Garnishment may continue until the entire balance of the outstanding loan is paid. In order to be an educational institution that is eligible to receive Title IV funds, Education statutes and regulations require that each institution make certain information readily available upon request to enrolled and prospective students. Institutions may satisfy their disclosure requirements by posting the information on their Internet Web sites. Information to be provided includes: tuition, fees, and other estimated costs; the institution’s refund policy; the requirements and procedures for withdrawing from the institution; a summary of the requirements for the return of Title IV grant or loan assistance funds; the institution’s accreditation information; and the institution’s completion or graduation rate. If a college substantially misrepresents information to students, a fine of no more than $25,000 may be imposed for each violation or misrepresentation and their Title IV eligibility status may be suspended or terminated. In addition, the FTC prohibits “unfair methods of competition” and “unfair or deceptive acts or practices” that affect interstate commerce. Our covert testing at 15 for-profit colleges found that four colleges encouraged fraudulent practices, such as encouraging students to submit false information about their financial status. In addition all 15 colleges made some type of deceptive or otherwise questionable statement to undercover applicants, such as misrepresenting the applicant’s likely salary after graduation and not providing clear information about the college’s graduation rate. Other times our undercover applicants were provided accurate or helpful information by campus admissions and financial aid representatives. Selected video clips of our undercover tests can be seen at http://www.gao.gov/products/GAO-10-948T. Four of the 15 colleges we visited encouraged our undercover applicants to falsify their FAFSA in order to qualify for financial aid. A financial aid officer at a privately owned college in Texas told our undercover applicant not to report $250,000 in savings, stating that it was not the government’s business how much money the undercover applicant had in a bank account. However, Education requires students to report such assets, which along with income, are used to determine how much and what type of financial aid for which a student is eligible. The admissions representative at this same school encouraged the undercover applicant to change the FAFSA to falsely add dependents in order to qualify for grants. The admissions representative attempted to ease the undercover applicant’s concerns about committing fraud by stating that information about the reported dependents, such as Social Security numbers, was not required. An admissions representative at another college told our undercover applicant that changing the FAFSA to indicate that he supported three dependents instead of being a single-person household might drop his income enough to qualify for a Pell Grant. In all four situations when college representatives encouraged our undercover applicants to commit fraud, the applicants indicated on their FAFSA, as well as to the for-profit college staff, that they had just come into an inheritance worth approximately $250,000. This inheritance was sufficient to pay for the entire cost of the undercover applicant’s tuition. However, in all four cases, campus representatives encouraged the undercover applicants to take out loans and assisted them in becoming eligible either for grants or subsidized loans. It was unclear what incentive these colleges had to encourage our undercover applicants to fraudulently fill out financial aid forms given the applicants’ ability to pay for college. The following table provides more details on the four colleges involved in encouraging fraudulent activity. The undercover applicant suggested to the representative that by the time the college would be required by Education to verify any information about the applicant, the applicant would have already graduated from the 7-month program. The representative acknowledged this was true. This undercover applicant indicated to the financial aid representative that he had $250,000 in the bank, and was therefore capable of paying the program’s $15,000 cost. The fraud would have made the applicant eligible for grants and subsidized loans. Admissions representative suggested to the undercover applicant that he not report $250,000 in savings reported on the FAFSA. The representative told the applicant to come back once the fraudulent financial information changes had been processed. This change would not have made the applicant eligible for grants because his income would have been too high, but it would have made him eligible for loans subsidized by the government. However, this undercover applicant indicated that he had $250,000 in savings—more than enough to pay for the program’s $39,000 costs. Financial aid representative told the undercover applicant that he should have answered “zero” when asked about money he had in savings—the applicant had reported a $250,000 inheritance. The financial aid representative told the undercover applicant that she would “correct” his FAFSA form by reducing the reported assets to zero. She later confirmed by email and voicemail that she had made the change. This change would not have made the applicant eligible for grants, but it would have made him eligible for loans subsidized by the government. However, this applicant indicated that he had about $250,000 in savings—more than enough to pay for the program’s $21,000 costs. Admissions representative encouraged applicant to change the FAFSA to falsely add dependents in order to qualify for Pell Grants. Admissions representative assured the undercover applicant that he did not have to identify anything about the dependents, such as their Social Security numbers, nor did he have to prove to the college with a tax return that he had previously claimed them as dependents. Financial aid representative told the undercover applicant that he should not report the $250,000 in cash he had in savings. This applicant indicated to the financial aid representative that he had $250,000 in the bank, and was therefore capable of paying the program’s $68,000 cost. The fraud would have made the undercover applicant eligible for more than $2,000 in grants per year. Admissions or financial aid representatives at all 15 for-profit colleges provided our undercover applicants with deceptive or otherwise questionable statements. These deceptive and questionable statements included information about the college’s accreditation, graduation rates and its student’s prospective employment and salary qualifications, duration and cost of the program, or financial aid. Representatives at schools also employed hard-sell sales and marketing techniques to encourage students to enroll. Admissions representatives at four colleges either misidentified or failed to identify their colleges’ accrediting organizations. While all the for-profit colleges we visited were accredited according to information available from Education, federal regulations state that institutions may not provide students with false, erroneous, or misleading statements concerning the particular type, specific source, or the nature and extent of its accreditation. Examples include: A representative at a college in Florida owned by a publicly traded company told an undercover applicant that the college was accredited by the same organization that accredits Harvard and the University of Florida when in fact it was not. The representative told the undercover applicant: “It’s the top accrediting agency—Harvard, University of Florida—they all use that accrediting agency….All schools are the same; you never read the papers from the schools.” A representative of a small beauty college in Washington, D.C. told an undercover applicant that the college was accredited by “an agency affiliated with the government,” but did not specifically name the accrediting body. Federal and state government agencies do not accredit educational institutions. A representative of a college in California owned by a private corporation told an undercover applicant that this college was the only one to receive its accrediting organization’s “School of Excellence” award. The accrediting organization’s Web site listed 35 colleges as having received that award. Representatives from 13 colleges gave our applicants deceptive or otherwise questionable information about graduation rates, guaranteed applicants jobs upon graduation, or exaggerated likely earnings. Federal statutes and regulations require that colleges disclose the graduation rate to applicants upon request, although this requirement can be satisfied by posting the information on their Web site. Thirteen colleges did not provide applicants with accurate or complete information about graduation rates. Of these thirteen, four provided graduation rate information in some form on their Web site, although it required a considerable amount of searching to locate the information. Nine schools did not provide graduation rates either during our in person visit or on their Web sites. For example, when asked for the graduation rate, a representative at a college in Arizona owned by a publicly traded company said that last year 90 students graduated, but did not disclose the actual graduation rate. When our undercover applicant asked about graduation rates at a college in Pennsylvania owned by a publicly traded company, he was told that if all work was completed, then the applicant should successfully complete the program—again the representative failed to disclose the college’s graduation rate when asked. However, because graduation rate information was available at both these colleges’ Web sites, the colleges were in compliance with Education regulations. In addition, according to federal regulations, a college may not misrepresent the employability of its graduates, including the college’s ability to secure its graduates employment. However, representatives at two colleges told our undercover applicants that they were guaranteed or virtually guaranteed employment upon completion of the program. At five colleges, our undercover applicants were given potentially deceptive information about prospective salaries. Examples of deceptive or otherwise questionable information told to our undercover applicants included: A college owned by a publicly traded company told our applicant that, after completing an associate’s degree in criminal justice, he could try to go work for the Federal Bureau of Investigation or the Central Intelligence Agency. While other careers within those agencies may be possible, positions as a FBI Special Agent or CIA Clandestine Officer, require a bachelor’s degree at a minimum. A small beauty college told our applicant that barbers can earn $150,000 to $250,000 a year. While this may be true in exceptional circumstances, the Bureau of Labor Statistics (BLS) reports that 90 percent of barbers make less than $43,000 a year. A college owned by a publicly traded company told our applicant that instead of obtaining a criminal justice associate’s degree, she should consider a medical assisting certificate and that after only 9 months of college, she could earn up to $68,000 a year. A salary this high would be extremely unusual; 90 percent of all people working in this field make less than $40,000 a year, according to the BLS. Representatives from nine colleges gave our undercover applicants deceptive or otherwise questionable information about the duration or cost of their colleges’ programs. According to federal regulations, a college may not substantially misrepresent the total cost of an academic program. Representatives at these colleges used two different methods to calculate program duration and cost of attendance. Colleges described the duration of the program as if students would attend classes for 12 months per year, but reported the annual cost of attendance for only 9 months of classes per year. This disguises the program’s total cost. Examples include: A representative at one college said it would take 3.5–4 years to obtain a bachelor’s degree by taking classes year round, but quoted the applicant an annual cost for attending classes for 9 months of the year. She did not explain that attending classes for only 9 months out of the year would require an additional year to complete the program. If the applicant did complete the degree in 4 years, the annual cost would be higher than quoted to reflect the extra class time required per year. At another college, the representative quoted our undercover applicant an annual cost of around $12,000 per year and said it would take 2 years to graduate without breaks, but when asked about the total cost, the representative told our undercover applicant it would cost $30,000 to complete the program—equivalent to more than two and a half years of the previously quoted amount. If the undercover applicant had not inquired about the total cost of the program, she would have been led to believe that the total cost to obtain the associate’s degree would have been $24,000. Eleven colleges denied undercover applicants access to their financial aid eligibility or provided questionable financial advice. According to federal statutes and regulations, colleges must make information on financial assistance programs available to all current and prospective students. Six colleges in four states told our undercover applicants that they could not speak with financial aid representatives or find out what grants and loans they were eligible to receive until they completed the college’s enrollment forms agreeing to become a student and paid a small application fee to enroll. A representative at one college in Florida owned by a publicly traded company advised our undercover applicant not to concern himself with loan repayment because his future salary—he was assured—would be sufficient to repay loans. A representative at one college in Florida owned by a private company told our undercover applicant that student loans were not like car loans because “no one will come after you if you don’t pay.” In reality, students who cannot pay their loans face fees, may damage their credit, have difficulty taking out future loans, and in most cases, bankruptcy law prohibits a student borrower from discharging a student loan. A representative at a college owned by a publicly traded corporation told our undercover applicant that she could take out the maximum amount of federal loans, even if she did not need all the money. She told the applicant she could put the extra money in a high-interest savings account. While subsidized loans do not accrue interest while a student is in college, unsubsidized loans do accrue interest. The representative did not disclose this distinction to the applicant when explaining that she could put the money in a savings account. Six colleges engaged in other questionable sales and marketing tactics such as employing hard-sell sales and marketing techniques and requiring enrolled students to pay monthly installments to the college during their education. At one Florida college owned by a publicly traded company, a representative told our undercover applicant she needed to answer 18 questions correctly on a 50 question test to be accepted to the college. The test proctor sat with her in the room and coached her during the test. At two other colleges, our undercover applicants were allowed 20 minutes to complete a 12-minute test or took the test twice to get a higher score. At the same Florida college, multiple representatives used high pressure marketing techniques, becoming argumentative, and scolding our undercover applicants for refusing to enroll before speaking with financial aid. A representative at this Florida college encouraged our undercover applicant to sign an enrollment agreement while assuring her that the contract was not legally binding. A representative at another college in Florida owned by a publicly traded company said that he personally had taken out over $85,000 in loans to pay for his degree, but he told our undercover applicant that he probably would not pay it back because he had a “tomorrow’s never promised” philosophy. Three colleges required undercover applicants to make $20–$150 monthly payments once enrolled, despite the fact that students are typically not required to repay loans until after the student finishes or drops out of the program. These colleges gave different reasons for why students were required to make these payments and were sometimes unclear exactly what these payments were for. At one college, the applicant would have been eligible for enough grants and loans to cover the annual cost of tuition, but was told that she needed to make progress payments toward the cost of the degree separate from the money she would receive from loans and grants. A representative from this college told the undercover applicant that the federal government’s “90/10 Rule” required the applicant to make these payments. However, the “90/10 Rule” does not place any requirements on students, only on the college. At two colleges, our undercover applicants were told that if they recruited other students, they could earn rewards, such as an MP3 player or a gift card to a local store. In some instances our undercover applicants were provided accurate or helpful information by campus admissions and financial aid representatives. In line with federal regulations, undercover applicants at several colleges were provided accurate information about the transferability of credits to other postsecondary institutions, for example: A representative at a college owned by a publicly traded company in Pennsylvania told our applicant that with regard to the transfer of credits, “different schools treat it differently; you have to roll the dice and hope it transfers.” A representative at a privately owned for-profit college in Washington, D.C. told our undercover applicant that the transfer of credits depends on the college the applicant wanted to transfer to. Some financial aid counselors cautioned undercover applicants not to take out more loans than necessary or provided accurate information about what the applicant was required to report on his FAFSA, for example: One financial aid counselor at a privately owned college in Washington D.C. told an applicant that because the money had to be paid back, the applicant should be cautious about taking out more debt than necessary. A financial aid counselor at a college in Arizona owned by a publicly traded company had the undercover applicant call the FAFSA help line to have him ask whether he was required to report his $250,000 inheritance. When the FAFSA help line representative told the undercover applicant that it had to be reported, the college financial aid representative did not encourage the applicant not to report the money. In addition, some admissions or career placement staff gave undercover applicants reasonable information about prospective salaries and potential for employment, for example: Several undercover applicants were provided salary information obtained from the BLS or were encouraged to research salaries in their prospective fields using the BLS Web site. A career services representative at a privately owned for-profit college in Pennsylvania told an applicant that as an entry level graphic designer, he could expect to earn $10–$15 per hour. According to the BLS only 25 percent of graphic designers earn less than $15 per hour in Pennsylvania. Some Web sites that claim to match students with colleges are in reality lead generators used by many for-profit colleges to market to prospective students. Though such Web sites may be useful for students searching for schools in some cases, our undercover tests involving four fictitious prospective students led to a flood of calls—about five a day. Four of our prospective students filled out forms on two Web sites, which ask questions about students’ interests, match them to for-profit colleges with relevant programs, and provide the students’ information to the appropriate college or the college’s outsourced calling center for follow-up about enrollment. Two fictitious prospective students expressed interest in a culinary arts certificate, one on Web site A and one on Web site B. Two other prospective students expressed interest in a bachelor’s in business administration degree, one on each Web site. Within minutes of filling out forms, three prospective students received numerous phone calls from colleges. One fictitious prospective student received a phone call about enrollment within 5 minutes of registering and another 5 phone calls within the hour. Another prospective student received 2 phone calls separated only by seconds within the first 5 minutes of registering and another 3 phone calls within the hour. Within a month of using the Web sites, one student interested in business management received 182 phone calls and another student also interested in business management received 179 phone calls. The two students interested in culinary arts programs received fewer calls—one student received only a handful, while the other received 72. In total, the four students received 436 phone calls in the first 30 days after using the Web sites. Of these, only six calls—all from the same college—came from a public college. The table below provides information about the calls these students received within the first 30 days of registering at the Web site. During the course of our undercover applications, some college representatives told our applicants that their programs were a good value. For example, a representative of a privately owned for-profit college in California told our undercover applicant that the $14,495 cost of tuition for a computer-aided drafting certificate was “really low.” A representative at a for-profit college in Florida owned by a publicly traded company told our undercover applicant that the cost of their associate’s degree in criminal justice was definitely “worth the investment”. However, based on information we obtained from for-profit colleges we tested, and public and private nonprofit colleges in the same geographic region, we found that most certificate or associate’s degree programs at the for-profit colleges we tested cost more than similar degrees at public or private nonprofit colleges. We found that bachelor’s degrees obtained at the for-profit colleges we tested frequently cost more than similar degrees at public colleges in the area; however, bachelor’s degrees obtained at private nonprofit colleges nearby are often more expensive than at the for-profit colleges. We compared the cost of tuition at the 15 for-profit colleges we visited, with public and private non-profit colleges located in the same geographic area as the for-profit college. We found that tuition in 14 out of 15 cases, regardless of degree, was more expensive at the for-profit college than at the closest public colleges. For 6 of the 15 for-profit colleges tested, we could not find a private nonprofit college located within 250 miles that offered a similar degree. For 1 of the 15, representatives from the private nonprofit college were unwilling to disclose their tuition rates when we inquired. At eight of the private nonprofit colleges for which we were able to obtain tuition information on a comparable degree, four of the for-profit colleges were more expensive than the private nonprofit college. In the other four cases, the private nonprofit college was more expensive than the for-profit college. We found that tuition for certificates at for-profit colleges were often significantly more expensive than at a nearby public college. For example, our undercover applicant would have paid $13,945 for a certificate in computer aided drafting program—a certification for a 7-month program obtained by those interested in computer-aided drafting, architecture, and engineering—at the for-profit college we visited. To obtain a certificate in computed-aided drafting at a nearby public college would have cost a student $520. However, for two of the five colleges we visited with certificate programs, we could not locate a private nonprofit college within a 250 mile radius and another one of them would not disclose its tuition rate to us. We were able to determine that in Illinois, a student would spend $11,995 on a medical assisting certificate at a for-profit college, $9,307 on the same certificate at the closest private nonprofit college, and $3,990 at the closest public college. We were also able to determine that in Pennsylvania, a student would spend $21,250 on a certificate in Web page design at a for-profit college, $4,750 on the same certificate at the closest private nonprofit college, and $2,037 at the closest public college. We also found that for the five associate’s degrees we were interested in, tuition at a for-profit college was significantly more than tuition at the closest public college. On average, for the five colleges we visited, it cost between 6 and 13 times more to attend the for-profit college to obtain an associate’s degree than a public college. For example, in Texas, our undercover applicant was interested in an associate’s degree in respiratory therapy which would have cost $38,995 in tuition at the for-profit college and $2,952 at the closest public college. For three of the associate’s degrees we were interested in, there was not a private nonprofit college located within 250 miles of the for-profit we visited. We found that in Florida the associate’s degree in Criminal Justice that would have cost a student $4,448 at a public college, would have cost the student $26,936 at a for-profit college or $27,600 at a private nonprofit college—roughly the same amount. In Texas, the associate’s degree in Business Administration would have cost a student $2,870 at a public college, $32,665 at the for- profit college we visited, and $28,830 at the closest private nonprofit college. We found that with respect to the bachelor’s degrees we were interested in, four out of five times, the degree was more expensive to obtain at the for-profit college than the public college. For example in Washington, D.C., the bachelor’s degree in Management Information Systems would have cost $53,400 at the for-profit college, and $51,544 at the closest public college. The same bachelor’s degree would have cost $144,720 at the closest private nonprofit college. For one bachelor’s degree, there was no private nonprofit college offering the degree within a 250 mile radius. Three of the four private nonprofit colleges were more expensive than their for-profit counterparts. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other members of the committee may have at this time. For additional information about this testimony, please contact Gregory D. Kutz at (202) 512-6722 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. The following table provides details on each of the 15 for-profit colleges visited by undercover applicants. We visited each school twice, posing once as an applicant who was eligible to receive both grants and loans (Scenario 1), and once as an applicant with a salary and savings that would qualify the undercover applicant only for unsubsidized loans (Scenario 2). Encouragement of fraud, and engagement in deceptive, or otherwise questionable behavior Scenario 1 Admissions representative compares the college to the University of Arizona and Arizona State University. Admissions representative did not disclose the graduation rate after being directly asked. He provided information on how many students graduated. This information was available on the college’s Web site; however, it required significant effort to find the college’s graduation rate, and the college did not provide separate graduation rates for its multiple campuses nationwide. Admissions representative says that he does not know the job placement rate because a lot of students moved out of the area. Admissions representative encourages undercover applicant to continue on with a master’s degree after finishing with the bachelor’s. He stated that some countries pay teachers more than they do doctors and lawyers. Scenario 2 Admissions representative said the bachelor’s degree would take a maximum of 4 years to complete, but she provided a 1-year cost estimate equal to 1/5 of the required credit hours. According to the admissions representative the undercover applicant was qualified for $9,500 in student loans, and the representative indicated that the applicant could take out the full amount even though the applicant indicated that he had $250,000 in savings. Admissions representative told the undercover applicant that the graduation rate is 20 percent. Education reports that it is 15 percent. Encouragement of fraud, and engagement in deceptive, or otherwise questionable behavior Scenario 2 Upon request by applicant, the financial aid representative estimated federal aid eligibility without the undercover applicant’s reported $250,000 in savings to see if applicant qualified for more financial aid. The representative informed the applicant he was ineligible for any grants. Admissions representative misrepresented the length of the program by telling the undercover applicant that the 96 credit hour program would take 2 years to complete. However, she only provided the applicant a first year cost estimate for 36 credit hours. At this rate it would take more than 2.5 years to complete. Scenario 1 College representative told the undercover applicant that if she failed to pass the college’s required assessment test, she can continue to take different tests until she passes. The college representative did not tell the graduation rate when asked directly. The representative replied, “I think, pretty much, if you try and show up and, you know, you do the work, you’re going to graduate. You’re going to pass guaranteed.” The college’s Web site also did not provide the graduation rate. Undercover applicant was required to take a 12-minute admittance test but was given over 20 minutes because the test proctor was not monitoring the student. Scenario 2 Undercover applicant was encouraged by a financial aid representative to change the FAFSA to falsely increase the number of dependents in the household in order to qualify for a Pell Grant. The financial aid representative was aware of the undercover applicant’s inheritance and, addressing the applicant’s expressed interest in loans, confirmed that he could take out the maximum in student loans. The career representative told the undercover applicant that getting a job is a “piece of cake” and then told the applicant that she has graduates making $120,000 - $130,000 a year. This is likely the exception; according to the BLS 90 percent of architectural and civil drafters make less than $70,000 per year. She also stated that in the current economic environment, the applicant could expect a job with a likely starting salary of $13-$14 per hour or $15 if the applicant was lucky. Encouragement of fraud, and engagement in deceptive, or otherwise questionable behavior The financial aid representative would not discuss the undercover applicant’s eligibility for grants and loans and required the applicant to return on another day. Scenario 2 While one school representative indicated to the undercover applicant that he could earn up to $30 an hour as a massage therapist, another representative told the applicant that the school’s massage instructors and directors can earn $150-$200 an hour. While this may be possible, according to the BLS, 90 percent of all massage therapists in California make less than $34 per hour. Scenario 1 Admissions representative explains to the undercover applicant that although community college might be a less expensive place to get a degree, community colleges make students spend money on classes that they do not need for their career. However, this school also requires students to take at least 36 credit hours of non-business general education courses. Admissions representative did not disclose the graduation rate after being directly asked. He told the undercover applicant that it is a “good” graduation rate. The college’s Web site also did not provide the graduation rate. Admissions representative encouraged the undercover applicant to enroll by asking her to envision graduation day. He stated, “Let me ask you this, if you could walk across the stage in a black cap and gown. And walk with the rest of the graduating class and take a degree from the president’s hand, how would that make you feel?” Scenario 2 Admissions representative said the bachelor’s degree would take 3.5 to 4 years to complete. He gave the applicant the cost per 12 hour semester, the amount per credit, the total number of credits required for graduation, and the number of credits for the first year. When asked if the figure he gave multiplied by four would be the cost of the program, the representative said yes, although the actual tuition would have amounted to some $12,000 more. Admissions representative required the undercover applicant to apply to the college before he could talk to someone in financial aid. Admissions representative told the undercover applicant that almost all of the graduates get jobs. Flyer provided to undercover applicant stated that the average income for business management professionals in 2004 was $77,000-$118,000. When asked more directly about likely starting salaries, the admissions representative said that it was between $40,000 and $50,000. Encouragement of fraud, and engagement in deceptive, or otherwise questionable behavior Admissions representative told the undercover applicant that the college was accredited by “an agency affiliated with the government,” but did not specifically name the accrediting body. Admissions representative suggested to the undercover applicant that all graduates get jobs. Specifically he told the applicant that if he had not found a job by the time he graduated from the school, the owner of the school would personally find the applicant a job himself. Scenario 2 Admissions representative told our undercover applicant that barbers can earn $150,000 to $250,000 a year, though that would be extremely unusual. The BLS reports that 90 percent of barbers make less than $43,000 a year. In Washington, D.C., 90 percent of barbers make less than $17,000 per year. He said, “The money you can make, the potential is astronomical.” Encouragement of fraud, and engagement in deceptive, or otherwise questionable behavior Scenario 1 When asked by the undercover applicant for the graduation rate for two programs, the admissions representative did not answer directly. For example the representative stated that “I’ve seen it’s an 80 to 90% graduation rate” for one of the programs but said for that information “I would have to talk to career services.” She also said 16 or 17 students graduated from one of the programs, but couldn’t say how many students had started the program. The college’s Web site also did not provide the graduation rate. Admissions representative told our prospective undercover applicant that student loans were not like car loans because student loans could be deferred in cases of economic hardship, saying “It’s not like a car note where if you don’t pay they’re going to come after you. If you’re in hardship and you’re unable to find a job, you can defer it.” The representative did not explain the circumstances under which students might qualify for deferment. Borrowers who do not qualify for deferment or forbearance and who cannot pay their loans face fees, may damage their credit or have difficulty taking out future loans. Moreover, in most cases, bankruptcy law prohibits a student borrower from discharging a student loan. Scenario 2 Admissions representative suggested to the undercover applicant that he not report $250,000 in savings reported on the FAFSA. The representative told the applicant to come back once the fraudulent financial information changes had been processed. This change would not have made the undercover applicant eligible for grants because his income would have been too high, but it would have made him eligible for loans subsidized by the government. Encouragement of fraud, and engagement in deceptive, or otherwise questionable behavior Admissions representative falsely stated that the college was accredited by the same agency that accredits Harvard and the University of Florida. A test proctor sat in the test taking room with the undercover applicant and coached her during the test. The undercover applicant was not allowed to speak to a financial aid representative until she enrolled in the college. Applicant had to sign agreement saying she would pay $50 per month toward her education while enrolled in college. On paying back loans, the representative said, “You gotta look at it…I owe $85,000 to the University of Florida. Will I pay it back? Probably not…I look at life as tomorrow’s never promised….Education is an investment, you’re going to get paid back ten-fold, no matter what.” Admissions representative suggested undercover applicant switch from criminal justice to the medical assistant certificate, where she could make up to $68,000 per year. While this may be possible, BLS reports 90% of medical assistants make less than $40,000 per year. Scenario 2 When the applicant asked about financial aid, the 2 representatives would not answer but debated with him about his commitment level for the next 30 minutes. The representative said that student loans would absolutely cover all costs in this 2-year program. The representative did not specify that federal student loans by themselves would not cover the entire cost of the program. While there are private loan programs available, they are normally based on an applicant passing a credit check, and typically carry higher interest rates than federal student loans. The representative said paying back loans should not be a concern because once he had his new job, repayment would not be an issue. The representatives used hard-sell marketing techniques; they became argumentative, called applicant afraid, and scolded applicant for not wanting to take out loans. Encouragement of fraud, and engagement in deceptive, or otherwise questionable behavior Scenario 2 Admissions representative initially provided misleading information to the undercover applicant about the transferability of the credit. First she told the applicant that the credits will transfer. Later, she correctly told the applicant that it depends on the college and what classes have been taken. Admissions representative said the bachelor’s degree would take 3.5-4 years to complete, but only provided an annual cost estimate for 1/5 of the program. Scenario 2 Admissions representative did not provide the graduation rate when directly asked. Instead she indicated that not everyone graduates. Scenario 1 Admissions representative told the undercover applicant that she could take out the maximum amount of federal loans, even if she did not need all the money. She told the applicant she could put the extra money in a high-interest savings account. While subsidized loans do not accrue interest while a student is in college, unsubsidized loans do accrue interest. The representative did not disclose this distinction to the applicant when explaining that she could put the money in a savings account. Scenario 2 Admissions representative told the undercover applicant that the college is regionally accredited but does not state the name of the accrediting agency. The college’s Web site did provide specific information about the college’s accreditation, however. Admissions representative said financial aid may be able to use what they call “professional judgment” to determine that the undercover applicant does not need to report over $250,000 in savings on the FAFSA. Admissions representative did not disclose the graduation rate after being directly asked. He instead explained that all students that do the work graduate. This information was available on the college’s Web site; however, it required significant effort to find the college’s graduation rate, and the college did not provide separate graduation rates for its multiple campuses nationwide. Encouragement of fraud, and engagement in deceptive, or otherwise questionable behavior Scenario 1 Admissions representative told the undercover applicant that she has never seen a student decline to attend after speaking with financial aid. The admissions representative would not allow the applicant to speak with financial aid until she enroll in the college. If the undercover applicant was able to get a friend to enroll in the college she could get an MP3 player and a rolling backpack. As noted in the testimony, although this is not illegal, it is a marketing tactic. Financial aid representative told the undercover applicant that he should have answered “zero” when asked about money he had in savings—the applicant had reported a $250,000 inheritance. The financial aid representative told the undercover applicant that she would change his FAFSA form by reducing the reported assets to zero. She later confirmed by e-mail and voicemail that she had made the change. This change would not have made the undercover applicant eligible for grants, but it would have made him eligible for loans subsidized by the government. Scenario 1 Admissions representative said the program would cost between $50,000 and $75,000 instead of providing a specific number. It was not until the admissions representative later brought the student to financial aid that specific costs of attendance were provided. Scenario 2 Admissions representative did not disclose the graduation rate after being directly asked. The college’s Web site also did not provide the graduation rate. Admissions representative encouraged undercover applicant to change the FAFSA to falsely add dependents in order to qualify for grants. This undercover applicant indicated to the financial aid representative that he had $250,000 in the bank, and was therefore capable of paying the program’s $68,000 cost. The fraud would have made the applicant eligible for $2,000 in grants per year. Encouragement of fraud, and engagement in deceptive, or otherwise questionable behavior Scenario 1 Admissions representative said the program takes 18 to 24 months to complete, but provided a cost estimate that suggests the program takes more than 2.5 years to complete. The college’s Web site did not provide the graduation rate. Scenario 2 Undercover applicant would be required to make a monthly payment to the college towards student loans while enrolled. Admissions representative guaranteed the undercover applicant that getting a degree would increase his salary. The undercover applicant was not allowed to speak to a financial aid representative until he enrolled in the college. Scenario 2 Admissions representative misrepresented the length of time it would take to complete the degree. He said the degree would take 2 years to complete but provided a cost worksheet that spanned 3 years. The undercover applicant was told he was not allowed to speak to a financial aid representative until he enrolled in the college. After refusing to sign an enrollment agreement the applicant was allowed to speak to someone in financial aid. Admissions representative told undercover applicant that monthly loan repayment would be lower than it actually would. 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. | Enrollment in for-profit colleges has grown from about 365,000 students to almost 1.8 million in the last several years. These colleges offer degrees and certifications in programs ranging from business administration to cosmetology. In 2009, students at for-profit colleges received more than $4 billion in Pell Grants and more than $20 billion in federal loans provided by the Department of Education (Education). GAO was asked to 1) conduct undercover testing to determine if for-profit colleges' representatives engaged in fraudulent, deceptive, or otherwise questionable marketing practices, and 2) compare the tuitions of the for-profit colleges tested with those of other colleges in the same geographic region. To conduct this investigation, GAO investigators posing as prospective students applied for admissions at 15 for-profit colleges in 6 states and Washington, D.C.. The colleges were selected based on several factors, including those that the Department of Education reported received 89 percent or more of their revenue from federal student aid. GAO also entered information on four fictitious prospective students into education search Web sites to determine what type of follow-up contact resulted from an inquiry. GAO compared tuition for the 15 for-profit colleges tested with tuition for the same programs at other colleges located in the same geographic areas. Results of the undercover tests and tuition comparisons cannot be projected to all for-profit colleges. Undercover tests at 15 for-profit colleges found that 4 colleges encouraged fraudulent practices and that all 15 made deceptive or otherwise questionable statements to GAO's undercover applicants. Four undercover applicants were encouraged by college personnel to falsify their financial aid forms to qualify for federal aid--for example, one admissions representative told an applicant to fraudulently remove $250,000 in savings. Other college representatives exaggerated undercover applicants' potential salary after graduation and failed to provide clear information about the college's program duration, costs, or graduation rate despite federal regulations requiring them to do so. For example, staff commonly told GAO's applicants they would attend classes for 12 months a year, but stated the annual cost of attendance for 9 months of classes, misleading applicants about the total cost of tuition. Admissions staff used other deceptive practices, such as pressuring applicants to sign a contract for enrollment before allowing them to speak to a financial advisor about program cost and financing options. However, in some instances, undercover applicants were provided accurate and helpful information by college personnel, such as not to borrow more money than necessary. In addition, GAO's four fictitious prospective students received numerous, repetitive calls from for-profit colleges attempting to recruit the students when they registered with Web sites designed to link for-profit colleges with prospective students. Once registered, GAO's prospective students began receiving calls within 5 minutes. One fictitious prospective student received more than 180 phone calls in a month. Calls were received at all hours of the day, as late as 11 p.m. To see video clips of undercover applications and to hear voicemail messages from for-profit college recruiters, see http://www.gao.gov/products/GAO-10-948T . Programs at the for-profit colleges GAO tested cost substantially more for associate's degrees and certificates than comparable degrees and certificates at public colleges nearby. A student interested in a massage therapy certificate costing $14,000 at a for-profit college was told that the program was a good value. However the same certificate from a local community college cost $520. Costs at private nonprofit colleges were more comparable when similar degrees were offered. |
Challenging economic conditions, a changing business environment, and declining mail volumes have contributed to USPS’s revenue shortfall and inability to cover its expenses and financial obligations. USPS has incurred 9 consecutive years of net financial losses and over $125 billion in unfunded liabilities as of fiscal year 2015. As a result, USPS has remained on GAO’s High Risk List since 2009. USPS’s financial condition is largely attributable to a decline in mail volume. Overall, mail has declined by 28 percent from its peak—213 billion pieces—in fiscal year 2006 to about 154 billion pieces in fiscal year 2015. Volume for First-Class Mail, USPS’s most profitable product, has significantly declined from its peak in fiscal year 2001. For instance, First- Class Single Piece mail—that is, all mail bearing postage stamps such as bill payments, personal correspondence, cards, and letters—has declined by about half over the last 9 years (see fig. 1). Although overall mail volumes have declined, USPS packaging and shipping services have experienced double-digit growth in recent years, largely as a result of electronic commerce. USPS package volume roughly doubled from 2008 to 2015. Package and shipping services, though, are sensitive to economic changes and have a lower profit margin than First-Class Mail. In addition to mail and package delivery, USPS maintains its retail network of post offices across the country. In fiscal year 2015, there were approximately 31,600 total postal managed retail offices. A key part of USPS’s revenue stream, post offices contributed a little over half of the $19 billion in total retail revenue that USPS earned in fiscal year 2015. USPS has reported decreases in retail revenue at its post offices, as well as fewer retail visits (see fig. 2). Online revenues through the USPS website (usps.com), though, generated over $1 billion in fiscal year 2015. USPS also has partnerships with retailers that provide another 64,000 locations for customers to access stamps and USPS services. In response to its financial crisis, USPS took a number of actions that attempted to balance its operating costs with its lower revenues, including making changes to its operations and network. For example: From 2009 to 2013, USPS decreased the size of its workforce as well as overall work hours through retirements, attrition, and initiatives to streamline its operations. In 2012 and 2013, USPS consolidated 141 mail-processing facilities and reduced mail-processing work hours by over 6 million in 2013. USPS reduced or modified retail hours in thousands of mostly small, rural post offices as part of its Post Office Structure Plan (POStPlan). USPS has also expanded its partnerships with retailers in an effort to provide greater access to its products and services while reducing costs. USPS changed its standards by increasing the number of days for some mail to be delivered and still be considered on time. These changes have led to concerns that rural areas are facing degraded delivery service performance. USPS is now collecting data to examine rural delivery service performance. Overall, Internet access and use has grown nationwide, and a large majority of Americans now have access to broadband. According to the Pew Research Center, use of broadband has grown from less than 10 percent of adults in 2000 to about 67 percent in 2015. However, FCC has concluded that advanced telecommunications capability is not being deployed to all Americans in a reasonable and timely fashion. In particular, many Americans still lack access to advanced telecommunications capability, especially in rural areas and on tribal lands. The federal government has made efforts to increase access to the Internet across the United States, especially in rural areas. As required by the American Recovery and Reinvestment Act of 2009 (Recovery Act), FCC released the National Broadband Plan in 2010 to improve access to, and the services provided by, broadband. To extend access to broadband as well as to stimulate the economy, Congress also appropriated $7.2 billion for broadband programs in the Recovery Act. This funding included $2.5 billion for USDA’s Broadband Initiatives Program (BIP), which provided financing for broadband infrastructure projects in rural areas. By 2010, USDA had awarded BIP funding to nearly 300 projects. Broadband access to various Internet services, especially online bill paying, has in recent years been associated with reduced of use transaction mail, a subset of First-Class Mail. Our analysis of USPS’s HDS data from 2007 to 2014 found a negative relationship between broadband use and the volume of transaction mail sent, after adjusting for available demographic and other factors that might be associated with the use of postal services. In other words, controlling for age, income, and education, households that used broadband to access Internet services tended to send less transaction mail than other households. Our analysis of the HDS data also found that households using broadband were specifically more likely to pay bills online. Further, other analysis we performed in one of our case study areas suggests that broadband availability was associated with greater likelihood of online bill payment. Specifically, we found that the more broadband providers available to customers of a specific regional bank in Louisiana, the more likely these customers were to pay certain bills online. These findings are consistent with other research that has shown First-Class Mail volume to be negatively affected by availability of the Internet. Further, these findings align with evidence that while some customers still prefer to receive paper statements through the mail, an increasing percentage now pay their bills electronically. Our summary of HDS data on how households pay their bills also illustrates this trend (see fig. 3). All 11 of the experts we spoke with agreed that individuals with broadband are more likely to engage in online activities that replace transaction mail use, such as online bill paying. One of the experts we spoke with noted that in contrast to correspondence mail, discussed below, bill payments are financial transactions and therefore more easily influenced by matters of cost and convenience. Two other experts we spoke with noted that some businesses have encouraged customers—often through financial incentives—to switch to electronic bill payment. Correspondence mail, another subset of First-Class Mail, has been in decline for over a decade, but we found that broadband use may not have had a significant effect on that trend in recent years. Specifically, our analysis of USPS HDS data found no statistically significant relationship between use of broadband and correspondence mail, after adjusting for demographic and other factors that might be associated with the use of postal services. USPS has reported that some decline in correspondence mail has been due to electronic diversion, but four of the experts, as well as the PRC officials, we spoke with suggested that by now most individuals have changed their behaviors to reflect their Internet use, since many households have had the basic Internet access necessary for electronic communications for years. That is, according to these experts, a substantial number of individuals now have established preferences for e-mail and other technologies over mail, developed over many years, and their behavior does not continue to change. As one expert we spoke with suggested, the lack of a relationship between broadband and correspondence mail in our analysis could reflect that individual communication choices are no longer significantly influenced by broadband in the home. Two experts we spoke with also noted that correspondence mail has been a relatively small portion of First-Class Mail and has generally been a durable part of the mail stream. Some individuals may continue to send personal cards and invitations as a matter of etiquette and tradition, possibly making this type of mail volume more resistant to electronic diversion. Although USPS’s First-Class Mail volume, including both correspondence and transaction mail, has declined substantially since 2000, it is unclear to what extent broadband use will lead to further declines. Several studies have found that electronic diversion was a key factor in past mail volume declines. However, although USPS has said that they anticipate that First-Class Mail volume will continue to decline with the migration to electronic alternatives resulting from technological changes, experts we spoke with had mixed views on the future of First-Class Mail and its relationship to broadband use. Only 4 of the 11 experts we spoke with said that First-Class Mail was likely to continue decreasing at least in the short-term. Two of these experts maintained that there may be another large decline in First-Class Mail as broadband access expands and the now younger generations—who have come of age almost entirely using electronic services and technologies for their business and personal interactions—become the dominant portion of the population and economy. One expert suggested that as the Internet continues to evolve, there are likely to be new, unforeseen ways in which postal business will be diverted online. As USPS has explained to PRC, even upon reaching the natural ceiling of Internet use (where theoretically everyone in the United States could have Internet access), electronic diversion of the mail could still increase because of an increasing depth of Internet usage (that is, an increasing number of things individuals can accomplish using the Internet). For example, First-Class Mail could erode further if more individuals abandon paper copies of their bills and rely on electronic records exclusively. Four experts, as well as officials from six of the groups we spoke with for our case studies, also suggested that Internet privacy and security concerns could be contributing to a slowed rate of electronic diversion. For example, officials from one group of business officials we met with said that many people in their area see mail as safer than Internet services because of computer hacking and identity theft concerns. According to these officials, cybersecurity concerns remain a barrier to broadband adoption and a source of continued First-Class Mail use. USPS officials told us they recognized that broadband use is changing the way people use postal services. As a result, USPS has been exploring a variety of initiatives to strengthen the value of First-Class Mail for all business and residential customers. USPS is piloting Informed Delivery, a program which lets customers receive an interactive e-mail each day that shows the faces of the mail pieces they will receive in their mailbox. Further, in an effort to appeal to the tactile satisfaction customers may experience when handling hardcopy mail (e.g., catalogs, advertising postcards) while also leveraging smartphone technologies, USPS has long collaborated with business customers to develop mail that incorporates a variety of paper textures as well as Quick Response codes that allow customers to easily access the business’s online presence. Two experts we spoke with, though, suggested that USPS should focus on its main business of mail delivery, rather than digital initiatives and other efforts that may distract the organization from its core competencies. According to the USPS officials we spoke with, USPS must continue to innovate to stay competitive and relevant to its customers. They believed that USPS cannot ignore the changes and opportunities created by broadband and mobile technologies. Overall, households in rural areas have tended to send more correspondence and transaction mail than non-rural households in recent years. Specifically, our analysis of USPS HDS data found that among households without broadband, households in rural areas tended to send more correspondence and more transaction mail than did non-rural households, after adjusting for demographic and other factors that might be associated with the use of postal services. This analysis is generally consistent with the USPS Office of Inspector General’s (OIG) findings on First-Class Mail trends. The OIG found that the areas with the lowest declines in mail volume also had the lowest populations. However, when factoring in broadband use, we found that rural households that used broadband tend to resemble non-rural households in the amount of correspondence mail they sent. In other words, after adjusting for demographic and other factors, rural households with broadband Internet access were not statistically different in the volume of correspondence mail sent compared to non-rural households. The USPS, ISP, and business officials we interviewed for our case studies generally agreed that overall, residents of rural areas value mail and postal services for a variety of reasons. First, they stated that rural residents generally have fewer alternatives to the mail. Officials from 7 of the 14 USPS and business group stakeholders we spoke with noted that customers in rural areas have less access to alternative forms of communication, with both broadband and mobile service generally less reliable. Second, officials stated that rural residents overall tend to be older and therefore less likely on average to adopt new technologies. Officials from 9 of the 19 USPS, ISP, and business group stakeholders we spoke with said that elderly residents generally make up a higher proportion of the population in rural areas and often do not have broadband access or, if they do, are reluctant to convert to online bill payment. Third, we were told in our case study areas that rural residents trust and value USPS services. For instance, three of the five groups of business stakeholders we spoke with in rural areas mentioned that they trust USPS employees and the mail. Internal research by USPS also suggests that rural customers are generally more satisfied with their USPS experiences than non-rural customers. Notwithstanding the strong relationship between many rural residents and USPS noted by the USPS, ISP, and business group stakeholders we interviewed, the future of First-Class Mail volume in rural areas is unclear. In the aggregate, rural areas have experienced mail volume declines. For example, the USPS official from one rural post office we spoke with recalled that postal carriers would have numerous trays of colorful envelopes ready to be delivered in the week before Mother’s Day, but that in recent years, such letters are rarer. Research suggests that some of this decline has likely been due to electronic diversion and that further declines may occur as broadband access expands to more rural areas. Two groups of business officials we spoke with for our case studies noted that introducing expanded and improved broadband access is likely to increase use of the Internet, resulting in further declines in mail volume. For instance, one business stakeholder we spoke with noted that prior to a fiber broadband project’s recent completion, many residents of this rural area only had DSL or satellite services for their Internet, which he said were less reliable. The full effect of such expanded broadband access in our case study areas specifically is unknown at this time, given the recent completion of many of the broadband projects. E-commerce continues to have a strong effect on USPS package volumes. Our analysis of USPS HDS data found a positive relationship between broadband use and packages both sent and received, after adjusting for demographic and other factors that might be associated with the use of postal services. In other words, broadband use in the home was associated with sending and receiving more packages with USPS. These findings align with other research showing growth in package volumes related to e-commerce activities. As we previously reported, the Internet has become an important part of the U.S. economy, particularly in how it facilitates e-commerce. Nine of the experts we spoke with specifically attributed the growth in e-commerce as largely responsible for the association we found between broadband use and package delivery. As one expert described, packages have increased in number dramatically as conducting online transactions became easier, and USPS’s large delivery network allows it to benefit from this trend. We found that households in rural areas made greater use of package and shipping services. Specifically, our analysis of USPS HDS data found that households in rural areas received more packages than did non-rural households, after adjusting for demographic and other factors that might be associated with the use of postal services. The same analysis also found that rural households without broadband tended to receive more packages than non-rural households without broadband. Our analysis also found that, substantively, rural households using broadband tended to resemble non-rural households using broadband in the number of packages they received. In other words, when rural households used broadband, they received packages at rates similar to non-rural households. The USPS, ISP, and business officials we interviewed for our case studies agreed that rural residents send and receive more packages than their non-rural counterparts. A commonly cited reason for the relatively high use of package delivery services was the lack of retail options in many rural areas. Three of the nine local USPS officials we spoke with specifically noted that e-commerce may be used at a higher rate in rural areas because of the lack of brick-and-mortar retail options. One USPS official mentioned that there are not many local shopping options in his town, which he said had only a tiny general store, a grocery store, and a Family Dollar store, with the nearest Walmart being 60 miles away. As a result, residents do a lot of online shopping and catalog shopping, with individuals regularly coming to the post office to collect packages. Officials from 7 of the 14 USPS and business group stakeholders we spoke with also attributed some of the recent growth of packages to rural entrepreneurs that ship merchandise sold through websites such as eBay or Etsy. The growth in USPS’s package business is likely to continue in the short term. E-commerce and thus package volumes have been forecasted to grow in the double digits year-over-year for the next few years. Other recent research indicates that while e-commerce continues to grow, it remains a modest share of overall consumer purchase activity, suggesting significant room for growth. Six of the experts we spoke with expected that as a result of overall e-commerce growth, USPS’s package and shipping services will likely continue to increase in the short-term. USPS has opportunities to maintain or enhance its share of the package delivery market. Two experts we spoke with said that USPS is likely to remain the dominant package deliverer in rural areas in the short-term because delivery in low-population-density areas is expensive, but USPS is already obligated to visit most households for mail delivery. USPS has also implemented measures to address the shipping needs of rural customers specifically. For instance, USPS created a new job category for rural carriers that will enable them to provide package delivery service on Sundays and holidays. Also, USPS is purchasing new vehicles that will accommodate projected package volumes. Under a pilot program in some cities, USPS is offering access to lockers in convenient locations that customers can use to receive or ship packages. USPS has also designed new mailboxes that can fit most packages weighing up to 5 pounds, which will enable carriers to deliver more packages directly to the mailbox, rather than having to leave their vehicle or leave a notice requiring the customer to retrieve the parcel at the Post Office. Regardless of any short-term gains in the package delivery market, USPS is likely to face challenges in the longer term. Six of the experts we spoke with suggested that it could be difficult for USPS to maintain large increases in package volumes since they are likely to face increased competition in the package delivery business. The online retailer Amazon, for instance, is developing its own delivery network that could eliminate large package volumes from USPS. One expert also noted that as USPS’s package business continues to increase, it could necessitate the development of additional routes, as well as the purchase of more trucks, to deliver packages. Additional routes beyond those necessary for daily mail delivery are more expensive to operate and thus could undercut any profits USPS would make from increased package volumes. This could be particularly challenging in rural areas where package deliveries are more expensive, as it may necessitate surcharges on package delivery in those areas. Furthermore, should the demand for USPS delivery of packages later decrease, USPS could find itself with an expensive, underutilized delivery-related infrastructure to maintain. Another expert also suggested that any shift in priority by USPS to package delivery could degrade the core business of delivering mail, leading to possible service declines for First-Class Mail and periodicals. While access to Internet services has had a major effect on other postal services, as described above, it is unclear what role the Internet has played in the nationwide reduction in post office visits in recent years. Our analysis of USPS’s HDS data found no statistically significant relationship between broadband use and post office visits. Our analysis of USPS’s retail facilities and FCC’s broadband subscriber data also did not demonstrate a clear connection between USPS retail availability and broadband use. Further, revenue data from the post offices in our case study areas show no consistent trends; some offices generated more revenue after the broadband project was completed, while others generated less revenue. One expert we spoke with suggested that these findings could be the result of off-setting trends, with some customers using post offices more frequently to pick up packages, while some customers are buying fewer stamps at the post office. Another expert said that broadband use may be unrelated to post office use because people have settled into new postal retail behaviors. That is, whether they use broadband to access the Internet could no longer be a significant factor in whether individuals choose to visit post offices. The PRC officials we spoke with also noted that not all postal transactions can be done online. For instance, purchasing money orders must be done in person at a USPS retail facility. With regard to rural households, however, we found that rural households tended to visit post offices more than non-rural households, independent of broadband use. Our analysis of the USPS HDS found that households in rural areas tended to make more post office visits than did non-rural households, after adjusting for demographic and other factors that might be associated with use of postal services. That is, our analysis suggests that rural households used local post offices at a higher rate than non- rural households. However, this information is limited because it does not capture the nature of the post office visits. Indeed, a possible explanation for the relationship we found is that some rural households are required to pick up their mail at the local post office because they are not eligible for home delivery. Rural residents may rely on post offices more than non-rural customers because, as noted previously, fewer retail options exist for them. Officials from 12 of the 19 USPS, ISP, and business group stakeholders we spoke with maintained that post offices provide services that are not available anywhere else in their communities. The PRC officials we spoke with also said that the lack of retail options could explain an increased reliance on USPS services. For instance, officials from eight post offices we spoke with said that some residents use post offices frequently for money orders, sometimes because they do not have bank accounts or because there are no banks in their rural communities. Although money orders are among USPS’s more profitable products, the number of domestic money orders sold has plunged 60 percent since their peak in fiscal year 2000, largely as the result of alternatives from other providers and broad shifts toward electronic payments. Rural residents may also use USPS services and post offices at higher rates because of the special role of USPS in rural communities. Officials from 12 of the 19 USPS, ISP, and business group stakeholders we interviewed for our case studies in rural areas agreed that post offices are valuable to the economic and social life of their communities. Seven of the 11 experts we spoke with believed that rural customers may have a different relationship with USPS than other customers. According to one expert, the post office is “disproportionately important” in rural areas while another expert noted that rural post offices provide a sense of community. Four of the nine local USPS officials we interviewed said that in very small communities where most of the residents know one another, the post office serves as one of the few places where residents see each other and talk. As a result, post offices serve as a valuable social space in these small communities, where even the bulletin board can be a valuable communication tool. The USPS OIG also recently stated that in rural areas the post office is not just a place to pick up mail, buy stamps, or mail a package, but can also serve as a community gathering place. Six local USPS officials also listed examples of when postal employees went above and beyond their typical duties to help fellow citizens of their rural communities. For instance, according to the USPS officials, staff commonly help illiterate, disabled, or non-English speaking customers complete forms. In addition to what we heard from our case study and expert interviews, research we identified through our literature review noted that USPS retail outlets have long played an important role in the health of rural communities for several reasons. Many rural areas, due to their remote locations and often limited retail options, face systemic disadvantages impeding their full and robust participation in the global economy. In these areas, USPS prices can establish a competitive baseline for other delivery services. USPS also ensures that anyone—including isolated or disadvantaged consumers—can access products from anywhere. Researchers have also reported, as discussed above, that in addition to the practical effects, post offices may serve an important symbolic and social role in rural areas. The mail carrier is a source of social contact for isolated populations and may be a rural resident’s only daily contact. Furthermore, USPS also cooperates with other government agencies for their mutual benefit. For example, state wildlife departments have used rural mail carriers to track populations of small game. To balance the benefits of its retail network with the high costs and decreasing revenue generated by those retail facilities, USPS is undertaking various initiatives. USPS officials we spoke with noted the real value of the local post office to rural customers. Officials said that POStPlan was implemented in a way that sought to minimize the impact on rural communities, such as keeping many post offices open but with more limited hours of service. USPS has also made the purchase of stamps easier for rural customers by selling stamps in grocery stores or pharmacies. Finally, rural carriers serve as a “Post Office on Wheels” and can both sell stamps and pick up packages for customers in very remote areas. USPS is also developing mobile technology applications that will allow customers to perform more services at retail USPS locations without interacting with USPS personnel, such as printing shipping labels. Irrespective of these efforts, balancing the benefits of a robust retail network with the costs of maintaining that network, especially in rural areas, will continue to be challenging for USPS. Research has indicated that though delivery of mail may be more expensive per piece in rural areas than in urban areas, a variety of benefits accrue to USPS for maintaining the network to deliver the mail in rural areas. Despite these and the more intangible benefits described above, research has also indicated that USPS’s retail network may not be structured efficiently. Prior to USPS’s recent retail changes as part of POStPlan, analysis prepared by USPS OIG suggested that USPS’s network had too many retail facilities located too closely together and with too many retail windows relative to the local population, though rural customers on average must travel farther to reach a postal facility than in urban areas. Another study of the distribution of USPS retail facilities found that the distribution of another valuable retail business, pharmacies, followed the distribution of population much more closely than did the distribution of postal retail outlets. Further, our analysis of USPS retail facilities data shows that USPS has more facility open hours per capita in rural areas than in nonrural areas. The postal retail network, though, is different from one based on market forces largely because of USPS’s universal service obligation, part of which requires it to provide access to retail services. We provided a draft of this report to FCC, PRC, and USPS for review and comment. FCC provided technical comments, which we incorporated as appropriate. PRC also provided technical comments, including requests for more information about our methodologies in the final report, which we incorporated as appropriate. USPS did not have any comments on the draft 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 appropriate congressional committees, the Postmaster General, the Acting Chairman of the PRC, the USPS Office of Inspector General, the Chairman of the FCC, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact 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 making key contributions to this report are listed in appendix II. This report assess the relationship between the use of broadband and the use of the U.S. Postal Service’s (USPS) (1) mail services, (2) package and shipping services, and (3) post offices, particularly in rural areas. For the purposes of all our data analysis in this report, we defined “rural” as areas identified as rural by the U.S. Department of Agriculture (USDA) Economic Research Service’s Rural-Urban Commuting Area Codes (RUCA). The 2013 RUCA data (the most recent available) incorporates Census tract commuting patterns and other measures of “rurality” in addition to population density. RUCA has 10 tiers along a spectrum of rurality, each of which is further broken down into secondary codes. We used the 4-tiered data consolidation, which collapses the 10 RUCA tiers into 4, where the bottom 2 tiers are considered rural. For background and context for this report, we examined our recent reports on USPS as well as the USPS Office of Inspector General’s reports on mail volume changes and USPS changes to its operations and network. We also examined USPS’s Revenue, Pieces & Weight reports from fiscal year 2001 to 2015 for information on mail volumes. Further, we reviewed recent Federal Communications Commission (FCC) and Pew Research Center reports on broadband trends. To assess the relationship between broadband use and overall use of postal services, we first identified factors associated with postal and broadband use through a review of academic and government literature. We also used our literature review to identify research on the role of post offices in rural America. To identify articles for our literature review, we searched databases such as Academic OneFile, National Technical Information Service, PolicyFile, ProQuest Research Library, Scopus, and WorldCat. Searches were limited to documents from 2010 and later. After conducting preliminary searches in these databases, two analysts separately reviewed the search results to identify the most relevant articles, with a third analyst resolving the differences. After this review, if an article cited another article or was cited by an article that seemed relevant to our audit, we included those articles in our literature review. With our full list of articles, an analyst reviewed each article for its key findings regarding factors associated with postal and broadband use. All of these key findings were then summarized by an analyst, with the conclusions used to inform our data analysis. We also identified other studies cited in this report through our interviews with various stakeholders. All articles cited in this report were also subjected to an internal review to ensure that the methodology was sufficient for our purposes and that we characterized its findings appropriately. To assess the relationship between broadband use and the use of postal services, as well as how use of postal products differs in urban and rural areas, we conducted regression analyses using data from the USPS’s Household Diary Survey (HDS). Conducted annually, the HDS obtains information from a nationally representative sample of over 5,200 households to provide a comprehensive and continuous description of the mail originating and destinating in American households. Our analysis used HDS data collected from 2007 to 2014 because data were collected for all our variables of interest for these years and because 2014 was the most recent year for which data were available for our analysis. The data were not available, and it was not our purpose, to assess the relationship between broadband use and the use of postal services in the early years of broadband, that is prior to 2007. For our analysis, we created a pooled dataset that included household-level data collected as part of the HDS from 2007 to 2014, and we used weights, calculated by USPS, designed to ensure that each yearly sample was representative of households nationwide. We used negative binomial regression analysis to model the HDS data. Negative binomial regression models are a type of count model that allow for overdispersion in zero counts in the dependent variable, which was appropriate given that not all households used all postal services we examined. Based on the findings from the literature review described above, we included independent variables for age, education, and income, because those factors have been found to be associated with use of both postal and broadband services. We also included independent variables for household location, to assess whether the rurality of a household affects postal use, and both the Census region and year, to control for any other regional or time effects. To examine the effect of Internet use on postal use, we included an independent variable for broadband access. We did not have complete information on all factors that might relate to volume of mail sent or received, such as proximity to a post office or the reliability or speed of a household’s broadband connection. Accordingly, our model omits some factors that may also influence the volume of mail households send and receive. Our dependent variables—the aspects of postal and broadband use we examined—were the volume of: visits to the post office; periodicals received; and bills paid online. We considered coefficient estimates statistically significant if they were significant at a level of 0.05 or less. For interaction coefficients that considered the joint effect of rural status and broadband access, we used an adjusted Wald F statistic to assess statistical significance. Because our primary goal was to assess the existence and direction of any relationship between broadband access and our dependent variables, and because of substantial variation in the distribution of counts across our different dependent variables, we focused our discussion on the direction and statistical significance of the estimated coefficients for broadband, rural status, and their interaction, rather than their individual magnitude. To ensure the accuracy of our data analysis, and reliability of the HDS data, we conducted various tasks. To verify that we understood the HDS data provided to us, and were able to correctly apply the weights that make the data nationally representative, we re-created select statistics reported by USPS in its 2014 HDS report. The statistics were selected to represent data from all of the USPS product types of interest to our model (i.e., First-Class Mail, Packages, and Post Office visits, as well as a selection of other product types). To assess the HDS data reliability, we interviewed USPS officials and reviewed documentation about the design of the survey and the methods by which survey data were collected and processed. Based on this information, we concluded that the HDS data were reliable for the purpose of conducting a regression analysis of broadband use and postal use while accounting for household location (rural versus non-rural) and other variables of interest. To assess the relationship between broadband availability and online bill paying, we analyzed data provided by a regional bank with operations in Louisiana and data on broadband providers in that same state. More specifically, we analyzed data from 2010 to 2015 on customers eligible for online bill-paying services from a regional bank in one of our case study areas—described further below—and broadband provider data collected by the National Broadband Map and FCC’s Form 477. Using these data, we created a zip-code-level dataset. With this dataset, we calculated the percentage of customers paying their bills online, among those eligible, for each month over our time period. We also calculated percentages of customers paying their bills online for categories of customers with different numbers of broadband providers (that is, those areas with 1, 2-3, 4-5, or more than 5 broadband providers available at that time). We also calculated percentages for the rural and urban zip codes specifically. Based on interviews with officials from FCC and the regional bank, as well as review of documentation associated with the broadband data, we concluded that these data were reliable for the limited purpose of creating summary statistics of broadband availability and customer online bill- paying trends. However, we acknowledge that the broadband data collected as part of the National Broadband Map and FCC’s Form 477 overstate broadband availability in some areas by counting entire Census blocks as served by providers who serve any portion of that block. Though there were over 11 million Census blocks in the United States for the 2010 Census, this limitation could be problematic in rural areas with relatively large Census blocks. We therefore are not reporting the results of this analysis for rural areas specifically. Nevertheless, the National Broadband Map and FCC data represent the best snapshot of broadband availability as of the time of the data’s collection. Further, GAO used the National Broadband Map data for other analysis in 2014. At that time, we assessed the reliability of the National Broadband Map data by reviewing how the map developers collected data and conducted quality assurance checks, as well as through interviews with stakeholders. Based on this information, and knowing the limitation described above, we determined that these data were sufficiently reliable for our reporting purposes. To assess the relationship between postal service availability and broadband use, we analyzed broadband subscriber data and information from USPS’s Facilities Database. More specifically, we analyzed data on the location and hours of service for USPS retail facilities as of January 2016 as well as broadband subscriber data collected by FCC’s Form 477. Using these data, we created a county-level dataset. With this dataset, we calculated the average hours of USPS retail availability for areas with different levels of broadband subscribers. In each county, we also calculated the average hours of USPS retail availability per capita, across counties with different levels of broadband subscribers. Based on interviews with USPS officials, we concluded that the Facilities Database was reliable for the purpose of conducting an analysis with broadband use. Based on interviews with FCC officials and review of documentation, we also concluded that the broadband subscriber data were reliable for the purpose of conducting analysis with USPS retail availability. To discuss interpretations of our data analyses and to better understand the implications of our findings for USPS, we conducted semi-structured interviews with 11 postal experts (see table 1 below). We selected individuals and entities intended to represent a variety of backgrounds— including mailers, researchers, consultants, and a consumer advocate— and based on their roles as experts in previous GAO reports and participation in recent postal conferences. We also discussed our findings with officials from USPS and the Postal Regulatory Commission (PRC). To assess the responses provided in these interviews, an analyst examined each interview summary for specific themes, and a second analyst reviewed the work for accuracy and completeness. To better understand use of Internet and postal services in rural areas and expand on the findings of our data analysis, we identified five case study areas that had recently received broadband access through receipt of broadband infrastructure loans or grants from USDA, met our definition of rural, and were geographically diverse. More specifically, we obtained a list of Broadband Initiatives Program (BIP) projects—including their completion date, service area, and broadband speeds offered—from USDA’s Rural Utilities Service. To identify areas that recently gained improved broadband access, we identified those BIP projects completed between January 2015 and September 2015. To assess whether the service areas of these projects met our definition of rural, discussed above, we analyzed the shape files of the service areas using RUCA code data to identify those with areas that were entirely rural. From these remaining projects, we selected five projects to obtain a range of geographic locations. These five projects were in northeast Louisiana, northern Missouri, northern New Mexico, western North Dakota, and western Virginia. Finally, we selected two of these areas to visit in person (Missouri and Virginia), based on resource and logistical considerations. For each of these case study areas, we interviewed officials with local USPS facilities, economic development entities and businesses, and Internet service providers (ISP) about the relationship between broadband use and use of postal services. In total, we interviewed officials at nine USPS post offices (see table below) and five ISPs, and conducted five meetings where we brought together economic development and business officials from our case study areas. To assess the responses provided in these interviews, an analyst examined each interview summary for specific themes, and a second analyst reviewed the work for accuracy and completeness. While findings from our case studies cannot be generalized to all rural areas, they provide illustrative examples of the relationship between broadband and postal services, as well as perspectives from residents and businesses in rural areas. To further understand how, if at all, the recent broadband projects affected postal use in our case study areas, we analyzed USPS’s post office revenue data. More specifically, we calculated the total revenue generated at nine post offices in our case study areas for the same 6- month periods before and after completion of the broadband project. We were not able to conduct more detailed analysis of revenue trends because of lack of equivalent data at all post offices, since different post offices have used different revenue and transaction-tracking systems, and other limitations. Based on interviews with USPS officials, we concluded that the USPS revenue data were reliable for the purpose of examining trends over time at selected post offices. We conducted this performance audit from October 2015 to September 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the individual named above, key contributors to this report were Mark Goldstein (Director); Teresa Anderson (Assistant Director); Faye Morrison (Assistant Director); Kyle Browning; Stephen Brown; Russ Burnett; Caitlin Cusati; Leia Dickerson; Sharon Dyer; Bill Egar; Georgeann Higgins; Kenneth John; John Mingus; Anna Maria Ortiz; Cheryl Peterson; and Michelle Weathers. | As broadband availability grows, Americans—including those in rural areas—increasingly partake in communications and services offered via the Internet. Some of these Internet services have changed how individuals use USPS. Though many factors influence use of postal services, understanding the relationship between broadband use and the use of postal services is critical to both the future of postal services overall and the communication options available to rural residents. GAO was asked to examine the relationship between broadband and postal use, particularly in rural areas. This report addresses the relationship between broadband use and the use of USPS's (1) mail services, (2) package and shipping services, and (3) post offices, particularly in rural areas. To address these objectives, GAO reviewed literature on broadband and mail trends, factors associated with postal and broadband use, and the role of post offices in rural America. GAO conducted regression analyses using 2007-2014 data, the most recent available, from the USPS HDS, which collects information from a nationally representative sample of households. GAO interviewed local stakeholders, such as officials from post offices and Internet service providers, in five rural areas, chosen based on recent deployment of broadband and other factors. GAO also interviewed 11 postal experts, chosen based on participation in previous GAO work and postal conferences. GAO is not making recommendations in this report. USPS did not have any comments on the draft report. Broadband use has in recent years been associated with reduced use of First-Class Mail. Continued declines as a result of broadband, however, are uncertain. Broadband access to various Internet services, especially online bill paying, is associated with reduced use of transaction mail, a subset of First-Class Mail. GAO analysis of the U.S. Postal Service's (USPS) Household Diary Survey (HDS) data from 2007-2014 found that households using broadband to access Internet services tended to send less transaction mail than other households, controlling for age, income, and education. However, GAO found that in recent years broadband use may not have had a statistically significant effect on correspondence mail, a subset of First-Class Mail that includes letters and greeting cards. Experts GAO spoke with had mixed views on the future of First-Class Mail as a result of broadband use, with only 4 of the 11 experts expecting decreases in First-Class Mail in the short term. Several experts and officials suggested that Internet privacy and security concerns, as well as many individuals having already changed postal habits in response to the Internet, are among the factors that could be contributing to a slowed rate of “electronic diversion” from mail. With regard to rural areas, GAO analysis of HDS data suggests that rural households without broadband tended to send more transaction and correspondence mail than non-rural households without broadband in recent years. The officials in rural areas GAO interviewed generally agreed that residents of rural areas value mail and postal services for a variety of reasons, including that they have fewer retail alternatives and trust USPS services. Despite this relationship, GAO found that the subset of rural households with broadband were not statistically different in the volume of correspondence mail sent compared to non-rural households. In rural areas, two groups of businesses that GAO spoke with also noted that improved Internet access could result in mail volume declines. E-commerce continues to have a strong effect on USPS package and shipping volumes. GAO analysis of HDS data found that broadband use in the home was associated with sending and receiving more packages with USPS in recent years. This analysis also found that households in rural areas made greater use of package and shipping services, a view echoed in interviews with officials in rural areas. While research and experts interviewed by GAO generally agreed that USPS's package business will grow in the short term, USPS is likely to face longer-term challenges, such as increased competition in the delivery market. It is unclear what role broadband use has played in the reduction in post office visits in recent years. GAO analysis of HDS data found no statistically significant relationship between broadband use and post office visits. However, GAO found that rural households tend to visit post offices more regardless of broadband use. Local stakeholders GAO interviewed said that rural residents may use post offices at higher rates because post offices play a valuable social role in small communities and that alternatives for certain services, such as money orders, are lacking. To balance the benefits of its postal retail network with the high costs of some facilities, USPS is undertaking various initiatives. Despite these efforts, balancing the benefits of a robust network with the costs of maintaining that network, especially in rural areas, will remain a challenge for USPS. |
Depot maintenance is a key part of the total DOD logistics system that supports millions of equipment items, over 52,000 combat vehicles, 351 ships, and over 17,000 aircraft. Depot maintenance is a vast undertaking that requires extensive shop facilities, specialized equipment, and highly skilled technical and engineering personnel to perform major overhauls of weapon systems and equipment, to completely rebuild parts and end items, to modify systems and equipment by applying new or improved components, to manufacture parts unavailable from the private sector, and to program the software that is an integral part of today’s complex weapon systems. This work is done in both military depots and the private sector. DOD facilities and equipment are valued at over $50 billion. A large but unknown amount of government-owned depot plant equipment is used by private contractors—many of them original equipment manufacturers of weapons or major systems and components. Appendix I contains the history of the DOD depot maintenance system. Appendix II provides summary information on our recent prior reports regarding DOD’s depot maintenance program. DOD spends about $13 billion—5 percent of its $250 billion fiscal year 1997 budget—on depot maintenance activities. Over $1 billion of this amount is procurement funding (rather than operation and maintenance funding) for contractor logistics support, interim contractor support, and some software maintenance. With the end of the Cold War and reduction in new defense procurement, commercial contractors would like more of the depot maintenance business. Other factors contribute toward a declining workload base, which must be shared among all potential sources of repair—both public and private. These factors include: (1) a reduction in the number of systems and equipment that need to be repaired and overhauled; (2) efforts by some components to do more repairs in field-level maintenance activities; and (3) the increased reliability, maintainability, and durability of some systems and equipment. Further, the already controversial debate is heating up over how various depot maintenance workloads should be allocated among the military depots, original equipment manufacturers seeking life-cycle management support to increase their shrinking workload base, and third-party repair vendors who would also like a larger share of this multibillion dollar business. In combination with these factors, the debate has been fanned by the implementation of base realignment and closure recommendations, proposals to privatize work in place, and by news of the success achieved by many private sector commercial activities in reducing their operations and support costs through outsourcing noncore activities. DOD’s depot system employs about 76,000 DOD civilian personnel, including laborers, highly trained technicians, engineers and top-level managers. As shown on figure 1, the number of depot maintenance personnel has been reduced by about 71,000 personnel—a 48-percent reduction since 1990. Over the same period of time, the organic depot maintenance workload had a similar decline of about 43 percent, while the total depot maintenance budget declined by a margin of only 12 percent. Appendix III shows the reduction of DOD personnel by service. While DOD has substantially reduced depot maintenance requirements, and the number of depot maintenance personnel has been similarly reduced, DOD has not completed complementary reductions in its depot maintenance infrastructure—despite four rounds of base closures. As a result, DOD has extensive excess capacity in the form of large numbers of under utilized buildings and equipment. Additionally, the private sector has seen its production workload for new systems and equipment decline and has significant excess production capacity. We refer to excess capacity that is derived by determining what is the potential for doing more work after the programmed workload is accomplished, assuming that the production capability will be used to the maximum extent, which would require the availability of additional trained personnel. This same measure was used in the BRAC process to identify the potential for consolidating like workloads to improve capacity utilization and reduce redundancies. However, DOD normally measures excess capacity by an analysis that constrains facility and equipment availability by the availability of trained personnel and the organization of work stations, assuming an 8-hour workday, for 5 days a week. A maximum potential capacity utilization between 75 and 85 percent is generally considered an efficient operating level. Using maximum potential capacity measurements, DOD is predicted to have excess capacity in fiscal year 1999 of about 50 percent. Figure 2 shows excess capacity using both the maximum potential capacity and constrained measurements. The Air Force has the most extensive excess capacity. Appendix IV shows excess capacity in each of the DOD depots using both the maximum potential capacity and constrained measurements. Even after four BRAC rounds, the four services have costly excess capacity within their depot maintenance systems. With the exception of the Navy privatization-in-place efforts, our work shows that the Navy has been the most successful at addressing this issue. However, the Army and the Air Force have not succeeded in making significant reductions in their excess capacity. Further, DOD’s privatization of depots and the Air Force’s plans to implement BRAC decisions have contributed to the excess capacity problem and ultimately will drive up depot maintenance costs. Such cost increases mean that military service customers can buy less depot maintenance with available operation and maintenance dollars. The Navy has closed three of its six aviation depots, consolidating workloads from the closing depots to improve capacity utilization and reduce excess capacity. These actions will significantly increase utilization and reduce excess capacity in the remaining three naval aviation depots. The 1993 BRAC Commission approved the Navy’s recommendation to close aviation depots located in Pensacola, Florida; Alameda, California; and Norfolk, Virginia. The Navy completed the closures in about 3 years versus the 6-year period allowed under the BRAC legislation. And through a combination of workload consolidations, interservicing actions, and outsourcing noncore workloads, the Navy reduced its projected operating rate by about $10 per hour. Based on a forecast of 13 million direct labor hours for fiscal year 1999, this is expected to produce a savings of about $130 million. Our work shows that based on maximum potential capacity and fiscal year 1999 workload forecasts, the three remaining naval aviation depots will have an average excess capacity of 37 percent, substantially lower than the other services. Because the Navy reallocated workloads and specialties among its aviation depots, and reengineered work spaces in the process, Navy officials state that given the availability of depot maintenance personnel, capacity utilization will be about 95 percent. This represents an increase of 36 percent after the workload transition is completed. The Navy has also expeditiously closed four of its eight naval shipyards. The 1991 BRAC Commission recommended closure of the Philadelphia Naval Shipyard, and repair work was terminated in 1995. The 1993 BRAC Commission recommended closure of the Charleston and Mare Island Naval Shipyards, and repair work was terminated in 1995. The 1995 BRAC Commission recommended closure of the Long Beach Naval Shipyard, and repair work was terminated in 1996. As a result, from September 30, 1991, through September 30, 1996, the Navy shipyard production had decreased in direct labor hours by 50 percent, while employees were reduced by about 63 percent. Table 1 shows other measures of the shipyard downsizing over this period. The Navy’s privatization of its Louisville depot was not the most cost-effective choice; the Navy could have saved more through consolidation of workloads and improved use of capacity in remaining industrial activities. The Louisville, Kentucky, Detachment of the Naval Surface Warfare Center, Crane Division, a depot recommended for closure by the 1995 BRAC Commission, supported the overhaul and remanufacture for naval surface ship gun and missile systems. In analyzing the cost of privatizing the Louisville workload in place versus transferring it to another depot, the Navy estimated that the contract alternative would cost more on an annual recurring basis and the one-time cost of transferring the workload to another depot would be prohibitive. However, we found the Navy’s analyses understated the annual savings of transferring the workloads to other underused facilities and overstated the one-time transfer costs. Our analysis shows a one-time cost of $243 million and an annual savings of $59 million by transferring the workload. The annual savings would offset the one-time cost in about 4 years. The Navy’s annual savings estimate recognized that transferring the workloads to underused facilities would reduce the overhead cost for those production units being considered for transfer. However, the per-unit savings were applied only to the workloads transferred and not to existing workloads at receiving locations. As a result of BRAC decisions during the 1988, 1991, and 1993 BRAC rounds, the Army terminated work at three of its eight maintenance depots—Lexington-Blue Grass, Kentucky; Sacramento, California; and Tooele, Utah. The Secretary’s recommendations to the 1995 BRAC Commission proposed realignment and termination of work at two additional depots—Letterkenny in Pennsylvania and Red River in Texas, but the Commission recommended that parts of each depot remain open. Plans for implementing the 1995 BRAC recommendations are still evolving. Nonetheless, based on the actions taken thus far, the Army is not effectively downsizing its depot maintenance infrastructure to reduce costly excess capacity. We reported in September 1996 that tentative plans for allocating some workloads from realigned depots to remaining depots will likely achieve some reduction in excess capacity and savings at two remaining depots. However, tentative plans to privatize workloads in place or retain workloads in facilities that were to be downsized or closed will increase excess capacity in the Army depots, from 42 to 46 percent over the next 3 years. This increase is caused by several factors including: (1) a forecasted decrease in future year depot-level workload; (2) the Army’s tentative decision to establish a government-owned, contractor-operated facility at Letterkenny for maintenance of the Paladin combat vehicle and tactical missile; and (3) the Defense Depot Maintenance Council’s decision supporting the Air Force plan to delay the transfer of the ground communications-electronics workload from the Sacramento depot to the Tobyhanna depot. We recommended that DOD reassess this delay, which is costing the Army about $24 million annually. On March 13, 1997, the Council approved the Air Force’s proposal for a 3-year workload transfer beginning in 1998 with the transfer of 20 percent of the workload in the first year, and 40 percent in each of the next 2 years with full operational capability at the Tobyhanna Depot in 2001. This transfer schedule will increase the total cost of the transfer and delay potential consolidation savings. Additionally, the BRAC recommendation to downsize rather than close Red River depot, although based on readiness concerns, adds to the excess capacity in the Army system. The Air Force has the most serious excess capacity problem. Although three of the six depots in the Air Force depot system were recommended for closure, the Air Force opted to privatize the workloads in place at all three. Despite major force structure reductions and significant excess capacity in the Air Force depot maintenance system, none of the Air Force’s five large, multicommodity logistics centers or their maintenance depots were recommended for closure during the first three BRAC rounds. These five depots have about 57 million direct labor hours of capacity to accomplish about 32 million direct labor hours of work, leaving about 26 million hours of excess capacity—or about 45 percent. Additionally, the Air Force military depots’ workloads are projected to decline to about 20 million direct labor hours of work in 1999. At this workload level, the Air Force depots would have about 65 percent unused capacity. Although depots at the Sacramento and San Antonio centers were identified for closure during the 1995 BRAC process, the executive branch, citing readiness, up-front costs, and potential effects on the local community, indicated that these workloads should be privatized-in-place or in the local communities. In December 1996, we reported that if the remaining depots do not receive additional workloads they are likely to continue to operate with significant excess capacity and to become more inefficient and expensive as workloads continue to dwindle due to downsizing and privatization initiatives. Our analysis indicates that redistributing 8.2 million direct labor hours of work from the closing Air Force depots to the three remaining depots would (1) reduce the projected excess capacity in 1999 from about 65 percent to about 27 percent, (2) lower the hourly rates by an average of $6 at receiving locations by spreading fixed cost over a larger workload, and (3) save as much as $182 million annually as a result of economies of scale and other efficiencies. This estimate was based on a workload redistribution plan that would relocate only 78 percent of the available hours to Air Force depots. Table 2 provides an overview of the savings achievable through consolidation and increased use of capacity in the remaining three Air Force depots. According to management officials at the three remaining centers, it would cost about $475 million to absorb all of the Sacramento and San Antonio workload. Using our estimate of $182 million in projected annual consolidation savings, net savings would occur within 2.6 years of the consolidation. The Air Force is currently conducting a public-private competition for the Sacramento and San Antonio depot workloads and plans to award contracts for three work packages and complete the transition by 2001. Initially, the Air Force pursued a prototype approach to privatization with three Sacramento workloads, hydraulics, electric accessories, and software, and two San Antonio workloads, C-5 aircraft paint/depaint and fuel accessories. However, shortly after the Defense Depot Maintenance Council approved the prototypes on February 1, 1996, DOD began to question this approach because of industry and community group desires to have larger segments of work competed. Consequently, on August 16, 1996, the Air Force Materiel Command announced it had revised its plans and created larger packages of work for competition. The Command’s planners project that with the current 60-40 limitation, about $600 million of the two centers’ $1.6 billion workload will be available to transfer to the private sector. Within this constraint, the Command believes it can privatize all of the Sacramento workload as a single package and San Antonio’s C-5 workload as a separate package. The Air Force’s current approach is to hold a public-private competition for the C-5 package first and then compete the Sacramento workload, excluding the BRAC-directed transfer of ground communication-electronics workload to Tobyhanna Army Depot. The San Antonio Air Logistics Center anticipates a later public-private competition for $240 million of the $700 million San Antonio engine workload. The Command is studying other San Antonio workloads for public-private competitions, if the 60-40 limitation is raised or eliminated. If there is no relief from 60-40 legislation, the Air Force in 1998 must begin moving large workloads and workers to other DOD depots. By 2001, this move would involve 5.6 million labor hours and more than 4,000 people making it comparable to one Air Force depot. Title 10 U.S.C. 2469 requires a public-private competition when outsourcing depot-level workloads valued at over $3 million. In structuring the competition, the Air Force responded to industry concerns that previous public-private competitions had favored the public depots. We have previously reported that private sector firms won about 57 percent of the public-private competitions between 1985 and 1993. These awards amount to about 44 percent of the total competitive award dollars in the competitions. In the interest of addressing concerns from both industry and public competitors, the Air Force held joint industry-depot conferences to solicit and discuss competition issues. The Air Force considered these issues and structured its competition procedures and evaluation criteria to reflect these concerns. For example, the Air Force’s C-5 request for proposal requires the public offeror to depreciate any newly acquired capital assets over the life of the contract. Private sector offerors, on the other hand, are allowed to choose the method of depreciation they will use. Also, the Air Force has precluded the public competitors from partnering with the private sector. The solicitation provides for the selection of the public or private sector entity that offers the lowest total evaluated cost. This is to be calculated based upon a cost realism assessment of each proposal, various cost adjustments to attempt to equalize the private and public sector proposals, and a quantified analysis of the dollar value of the technical merits of the respective proposals. We estimate that the cost of performing aviation and missile guidance repair at BGRC, Newark, Ohio, is from $13.3 million to $23.3 million higher than what the organic depot would have cost to perform the same work. This represents an increase of between 18 to 31 percent. Prior to its closure, the Aerospace Guidance and Metrology Center, located on Newark Air Force Base, Ohio, primarily supported three key workloads—repair and overhaul of missile and aircraft guidance systems and management of the Air Force’s metrology and calibration program. Recommended for closure by the 1993 BRAC Commission, the Air Force decided to privatize the workload in place. In December 1995, the Air Force awarded a contract for the repair and overhaul work to Rockwell International Corporation, Autonetics Electronic Systems Division, Anaheim, California, which was subsequently purchased by The Boeing Company in August 1996. The facility and workload were in transition between January and August 1996. A local reuse authority assumed control of the Newark facility when it closed, and has been in negotiation with the contractor over the terms of a lease agreement. After the transition period and 3 months of contractor performance during fiscal year 1997, the system program managers at the Ogden and Oklahoma City Air Logistics Centers noted that program funds were being expended faster than anticipated and the most significant contributing factor appeared to be the excessive amount of material ordered. Ogden and Oklahoma City system managers were investigating this condition at the same time we initiated a follow-up to determine the cost impact of the Newark privatization. After reviewing the Ogden and Oklahoma City information, we requested that the centers prepare an estimate of organic versus contractor costs for the fiscal year 1997 workload. On March 16, 1997, the Air Force Materiel Command released the completed cost analysis of the items managed by Ogden and repaired at BGRC. The analysis estimated that privatizing-in-place will result in a $3.4 million to $13.2 million higher total cost to the government in fiscal year 1997, an increase of from 8.5 to 33 percent over the organic depot alternative. The report estimates that the most probable increase will be close to $6.7 million—a 17 percent higher cost. We reviewed the Air Force analysis and found that this figure does not reflect increased material usage by the contractor. The contractor has ordered significantly higher quantities of material than were used by the organic depot for comparable workloads. While the contractor’s material usage report does not clearly indicate whether actual consumption has increased along with increased material orders, we observed that the increased material orders are consistent with increased usage of government-furnished material experienced with other contracts of a similar type. Further, a lack of accountability over government-furnished material has hindered attempts to reconcile actual material consumption, and is a condition we identified in our review of other depot maintenance contracts. Given the evidence of increased material orders, we believe the $6.7 million Air Force Materiel Command estimate is more likely to represent the low end of the cost range. The Oklahoma City Air Logistics Center analysis is not yet completed. We collected cost data from Oklahoma Air Logistics Center and Headquarters Air Force Materiel Command to compute an estimate of fiscal year 1997 organic and contract costs to repair the aircraft guidance workload currently on contract at BGRC. Based on that data, we estimate that the cost for repairing Oklahoma City managed aircraft guidance items will likely be between $6.5 million to $10 million more for fiscal year 1997 than the organic depot alternative. This represents an increase of from 19 to 29 percent more than the organic alternative. Similarly to the Ogden analysis, our low range does not include increased contractor usage of material. There are similar indications of increased government-furnished material orders. Workload allocation between the public and private sector has a long history of congressional interest and is affected by various statutes. With the downsizing of the military and associated reductions in the depot maintenance workload, DOD, the Congress, and the defense industry have a heightened interest in the issue. In fiscal year 1996, the Congress directed DOD to develop policies with a goal of eliminating legislation related to depot maintenance workload allocations. While DOD developed policy proposals, the Congress did not agree with them, and no legislative changes were made. Key concerns raised by congressional committees involved the need to allow public depots to compete for noncore workloads and the imprecise definition of core workloads. Consequently, DOD’s policy is still evolving. DOD Directive 4151.18, “Maintenance of Military Materiel,” (Aug. 12, 1992) establishes policy and assigns responsibility for DOD maintenance at all levels. It establishes a source-of-repair process, requires the maintenance of core capabilities within military depots to meet contingency requirements, and provides for competition between public and private sources to achieve economies and efficiencies. Section 2464 of title 10 requires that a “core” logistics capability be identified by the Secretary of Defense and maintained by DOD unless the Secretary waives DOD performance as not required for national defense. Core is defined as the capability, including personnel, equipment, and facilities, to ensure timely response to a mobilization, national contingency, or other emergency requirement. The composition and size of this core capability are at the heart of the depot maintenance public-private mix debate. Section 2466 of title 10 prohibits the use of more than 40 percent of the funds made available in a fiscal year for depot-level maintenance or repair for private sector performance and is often referred to as the 60-40 rule. Section 2469 of title 10 provides that DOD-performed depot maintenance and repair workloads valued at not less than $3 million cannot be changed to performance by another DOD activity without the use of merit-based selection procedures for competitions among all DOD depots and that such workloads cannot be changed to contractor performance without the use of competitive procedures for competitions among public and private sector entities. The Congress has over the years consistently supported the need for public depots and the retention of core capability requirements as essential to national security. Section 311 of the National Defense Authorization Act for Fiscal Year 1996 reiterated that support and required DOD to articulate known and anticipated core requirements, to organize its resources to meet those requirements economically and efficiently, and to determine what work should be done in the private sector and how it should be managed. Section 311 directed the Secretary of Defense to develop a comprehensive depot maintenance policy that, among other things, should (1) provide for core capabilities properly sized to meet security requirements and assign sufficient workloads for cost efficiency and technical proficiency, (2) provide for public-private competitions for noncore workloads, (3) address technical data issues, and (4) provide for the organic performance of maintenance and repair for any new weapon systems defined as core. DOD submitted its report Policy Regarding Performance of Depot-Level Maintenance and Repair to the Congress in April 1996. The report discussed DOD’s revised methodology for determining core capability requirements and the workloads necessary to sustain them. The new methodology included an assessment of private sector capability to determine whether mission-essential workloads could be outsourced at acceptable risk and a best-value assessment (generally through competition within the private sector) of noncore workloads. The report also stated DOD’s intent to size the organic sector to minimum core requirements plus additional workloads for which the public depots were the last source of repair and where private industry costs were clearly prohibitive. The report limited public-private competitions to noncore workloads where there was inadequate competition in the private sector. The report also affirmed DOD’s plans to support new or developing weapon systems in the private sector based on its revised acquisition policy (DOD Directive 5000.2-R, para. 3.3.7). The directive requires that support concepts for new and modified systems maximize the use of long-term total life-cycle contractor logistics support that combines depot-level maintenance with wholesale and selected retail materiel management functions. We evaluated DOD’s policy report and its report Depot Maintenance and Repair Workload, as required by section 311 of the National Defense Authorization Act for Fiscal Year 1996, and had concerns in several areas. The policy report provided a framework that was vague in several areas—including core determinations and support for new systems—and was inconsistent with congressional direction calling for public-private competition for noncore workloads. The stated policies provided wide latitude regarding implementation, which made it difficult to assess its impact and expected results. Also the data in the workload report was not comprehensive and projections of future workloads were not consistent or comparable with the reported historical figures. Congressional committees also criticized DOD’s policy report and revised acquisition guidance. The House National Security Committee found the policy report to be “seriously deficient and nonresponsive in a number of areas,” particularly in providing for core capabilities, identifying specific weapon systems and equipment supporting national military strategy, sufficiently workloading public depots, providing for public-private competitions, addressing technical data issues, and providing for organic support of new weapon systems defined as core. The Committee also found that the companion workload report did not provide all the mandated data and appeared to skew comparisons of past and future workload allocations by its treatment of costs for contractor logistics support and interim contractor support. The Senate Armed Services Committee had many of the same concerns and found the policy report “not well thought out in general and not responsive to Congressional guidance on several important issues, such as the requirement to provide for full and open competition for all non-core workloads”. This Committee also found DOD’s revised source of support policy as inconsistent with current law and congressional direction in section 311 and possibly inconsistent with national security interests. For several years, the Congress has asked DOD to better define core capability requirements and specifically identify the workloads and weapon systems that must be maintained in DOD depots to satisfy core requirements. Establishing and justifying firm core requirements is a fundamental prerequisite for determining minimum depot workloads and supporting outsourcing decisions. DOD’s response to the Congress in its policy report again failed to meet congressional expectations. DOD has yet to firmly define and establish minimum core capability requirements. However, some policy changes have been made in response to concerns about the policy proposal. Since the issuance of the policy and workload reports, an interservice team has further refined and improved the core methodology to permit best-value comparisons of both public and private sources in determining allocation of noncore workloads. In response to our recommendation, DOD also developed a standard set of evaluative factors that the services are to consider in their private sector risk assessments. However, each service can add individual factors, establish factor weights, and develop the specific evaluative process for its risk assessments. In reviewing the quantification of core requirements in the services, we noted that each service applies the methodology differently based on its operating requirements and support concepts. For example, the Air Force views core as a capability to manage and oversee a particular commodity class or type of repair rather than a specific weapon system or component. The Air Force risk assessment assigns a low weight to the risk from sole-source contracts and allows an item to be outsourced to a sole-source provider, given an acceptable total risk score. The Navy, on the other hand, relates core capabilities to specific peacetime workloads on mission-essential systems and plans to maintain some organic workload for each weapon system as tasked by the Joint Chiefs of Staff scenario. According to a Navy official, completely supporting a tasked workload on a sole-source contract is considered an unacceptable risk to the Navy. DOD revised Directive 5000.2-R to better reflect core considerations and to eliminate the need for a waiver to justify selection of an organic source of support. However, some program offices tell us they believe that outsourcing depot maintenance for new systems is still the preferred option. They noted that informal guidance from senior Air Force acquisition leadership emphasizes that life-cycle management by the original equipment manufacturer be used. Additionally, although two draft depot maintenance policy letters were distributed in December 1996 and January 1997, it is uncertain when, or if, these policy statements will be issued. The first memorandum, from the Office of the Deputy Under Secretary of Defense Logistics, discussed DOD’s current positions on principal policy issues. Among other things, it (1) stated DOD’s commitment to maintain a robust organic depot maintenance capability sized to support core requirements; (2) directed the services to submit public-private workload allocations through fiscal year 2002, but not to include interim contractor support and contractor logistics support costs in estimating compliance with the 60-40 statute; (3) established service goals to achieve a minimum of 75-percent capacity use in each remaining depot upon completion of BRAC actions; (4) identified downsizing through divestiture, mothballing, and demolition as the preferred approach to increasing capacity use; (5) directed improvements in cost accounting and internal controls; (6) revised public-private competition policy to provide for competitions involving repair workloads valued at more than $3 million; and (7) provided for maximum use of total contractor logistics support arrangements for new and modified systems that are determined to be noncore. The second memorandum, from the Deputy Under Secretary of Defense (Industrial Affairs and Installations), provided the draft guidance on depot maintenance public-private competitions in the following key areas: Workload determination. Only noncore-related depot-level maintenance and repair workload will be available for competition. However, workload previously defined as core may be determined to be noncore as a result of the redetermination process. Eligible new workloads will be evaluated to determine if viable potential public and private sector sources exist, and a formal public-private competition will be conducted for any package valued at $3 million or more. Competition formulation. For each work package under consideration, the applicable DOD component will determine which government candidate would compete, and the Defense Depot Maintenance Council will make the final determination regarding which depot can compete. Proposal evaluation and source selection. Best-value principles will be used when evaluating proposals and selecting a source of repair. Appeals by military depots will be resolved internally within the DOD rather than by GAO. DOD’s “Cost Comparability Handbook” will be modified to adjust military depot offers by federal income taxes, cost of facilities capital, and liability insurance. Cost estimation and accounting. The Defense Contract Audit Agency will (1) review each public depot maintenance activity to determine if it has well-documented procedures for handling direct and indirect costs, (2) audit the cost-estimating systems of the public depot offerors, (3) ensure that each military department’s depot cost-estimating and accounting systems are in compliance in a timely manner, and (4) assess the accuracy and completeness of incurred costs on depot awards. The guidance provides for no comparable scrutiny for a private sector offeror. Both the private sector and some depot supporters in the Congress have raised concerns regarding aspects of these documents. It is uncertain whether these letters will ultimately become DOD policy. Since there is no approved DOD competition guidance, the Air Force is conducting the competitions at Sacramento and San Antonio using its own guidance. In response to our reports, DOD has consistently stated that it intends to comply with existing statutes relating to depot maintenance workload allocations. As we look at the services’ current actions related to (1) privatization-in-place, (2) assessments of existing organic workloads, and (3) assessments of where to perform new weapon system depot maintenance, we see significant movement of depot maintenance workload to the private sector. While we are continuing work in this area, we are concerned that, due to a lack of clear policy and direction, some maintenance strategies are being delayed and others are being selected that may not be the most cost-effective. As previously discussed, privatizing organic workloads at closing depots rather than transferring and consolidating work at remaining depots further exacerbates DOD’s excess depot capacity problem and increases depot maintenance costs. DOD officials are examining workloads now at organic depots with a view to increase outsourcing. Service officials are utilizing the new core methodology and risk assessment process to review mission-essential workloads and reclassify existing organic core work as noncore for outsourcing. The Air Force has assessed seven workloads to date and determined that the risks from outsourcing were acceptable; that is, adequate DOD capability remains, and available commercial sources can capably do the work. The Air Force plans to assess its entire workload to determine minimum core capabilities and identify outsourcing candidates. The Army and the Navy are also beginning to reassess their current workloads to identify core. The hydraulics workload at the Air Force’s Sacramento Center illustrates the impact the new risk assessment process will have on DOD core capabilities. The Air Force determined that all of this large workload—currently about 420,000 hours per year—was required to support a core capability based on its necessity to support mission aircraft during contingencies. This was a key factor used by the Air Force to support its position that Sacramento should not be closed during the 1995 BRAC process. A recent risk assessment subsequently determined that the entire workload could be outsourced and would no longer be classified as core. The Defense Depot Maintenance Council agreed with the Air Force recommendation. A critical assumption, however, is that current Army and Navy hydraulic workloads must continue to be maintained in military depots in the future to provide the minimum DOD organic core capability requirement. Additionally, there is some question regarding whether the Navy and the Army could support Air Force workloads. If future hydraulic workloads increase or decrease, or if the Army and the Navy desire to outsource their workloads, the retention of minimum core could be jeopardized. In concept, the Council would be the arbitrator and determine whether the additional risk would be acceptable. DOD is also looking to expand the use of private contractors to assume total contractor logistics support of fielded weapon systems. In what is viewed as a model for other systems, the Air Force plans to reduce the F-117 program office from 226 to 20 employees and greatly expand the prime contractor’s role in logistics support of the F-117 fleet, to include materiel management, systems integration, modifications, and subcontractor management, as well as continuing depot repairs and systems engineering responsibilities. The Air Force is also considering contractor-provided, integrated systems management for its specialized C-130 fleet and some strategic missiles, while the Army expects to issue an integrated fleet management contract for the Paladin. DOD’s revised acquisition policies and privatization plans establish a clear preference for contractor support of new weapon systems and upgrades. Citing in particular the guidance to maximize contractor-provided, total life-cycle logistics support, acquisition program officials from all services are actively planning or strongly considering contractor logistics support of both depot maintenance and materiel management functions, much more so than in the past. Of the programs we have reviewed thus far, few have made final formal decisions on the source of repair. However, of those systems offices that have decided or are nearing a decision, most are planning to outsource. The decisions on many systems, especially the largest dollar ones, have been delayed and the programs will rely on contractor support for a number of years as options are evaluated. Officials cited several reasons for delaying decisions, including uncertainties about DOD core policies, the status of efforts to lift statutory workload restrictions, and the time needed to obtain better cost and performance data. Only the Black Hawk will continue organic support like that used for its predecessor models. Officials plan on a fairly even split of the AC-130U gunship workloads to public and private sources but have not yet determined plans for airframe maintenance, the gunship’s largest workload. Table 3 summarizes the projected source of repair plans on systems we have reviewed. As indicated, for many programs, including the largest systems in terms of acquisition costs, the final support decisions have not yet been made. At the request of higher headquarters, several programs reconsidered and, in at least one case, reversed earlier decisions to rely on organic support. The Office of the Secretary of Defense tasked the C-17 program office to reevaluate its organic depot support strategy when the fleet size decreased, and the Air Force Chief of Staff directed the F-22 program office to consider privatizing logistics support as a means to cut costs. The F/A-18E/F system office decided to revisit its plans for organic support when the program was restructured as a major acquisition. In 1995, the Under Secretary of Defense for Acquisition and Technology reversed organic support plans for the B-2 aircraft. Air Force cost analyses and core assessments showed that a relatively equal mix of public and private support was most cost-effective and would maintain core capabilities for the stealth technologies. Based on a consultant study, the Under Secretary directed that most work be instead outsourced to the manufacturer, citing as reasons, a high level of complexity and the B-2’s still maturing design. Our new systems work is continuing. We have some preliminary observations based on our work to date. Guidance on making source-of-repair decisions is still evolving, and program officials are unsure how or whether to address noncost factors, particularly core requirements. Some programs are moving ahead with support plans without establishing a solid, comprehensive business case to justify the decision. Cost benefit analyses comparing public and private options often do not indicate a clear cost advantage for either sector. In the past, this would have usually justified selecting an organic depot based on core requirements and the perceived lower risk in using the public depots as a ready and controlled source. Today, the same inconclusive analyses are being used to justify delays in making final decisions. Programs delaying final support decisions will rely on interim contractor support and similar arrangements to provide logistics support for 3 to 10 years. Past experience on the B-1B and other programs shows that interim contractor support can be an expensive, extended support method and that unreasonable delays in finalizing support decisions can increase costs and degrade readiness. DOD policy establishes total contractor logistics support as the preferred model for new systems, but this may not be appropriate for most systems. Air Force managers have found contractor logistics support to be cost-effective for commercially derived systems with established competitive repair sources. These conditions are not often present for military-unique systems and cutting edge technologies. Privatizing total support on new and future weapon systems can also make it difficult for the organic depots to acquire and sustain technical competence on new systems, leading edge technologies, and critical repair processes. This is necessary to maintain future core capabilities and provide a credible competitive repair source. The services and the Defense Logistics Agency are also testing and implementing innovative, alternative contractor-provided support arrangements—including repair warranties, partnering, modernizing through spares, and prime vendor programs—that are expected to decrease organic workloads. We are continuing to evaluate these concepts and impacts on DOD depots. Facing large shortfalls in its modernization accounts, DOD plans to reduce costs and generate savings for modernization through the outsourcing of support activities, including depot maintenance. DOD’s projected savings level is based on estimates made through studies by the CORM and the DSB. The CORM and DSB studies maintain that through competition in the private sector, depot maintenance costs can be reduced by 20 to 40 percent. While we believe some savings may be achieved from outsourcing some depot maintenance workloads, our work shows that savings estimates of this magnitude are questionable for several key reasons. As already discussed, they assume that existing legislation relating to depot maintenance workload allocation will be repealed. In addition, the highly competitive environment assumed in the studies does not exist in the depot maintenance market place. As the basis for its outsourcing savings assumption, DOD cites data from the CORM’s report, Directions for Defense (May 24, 1995), which claimed that 20-percent savings could be achieved through outsourcing. The report rejected the idea of core requirements and recommended that DOD (1) outsource all new support requirements, particularly the depot-level logistics support of new and future weapon systems and (2) establish a time-phased plan to transfer essentially all depot maintenance to the private sector. DOD agreed with the report’s recommendation to outsource a significant portion of its depot maintenance work, but believed that it should retain a limited capability to meet essential wartime surge demands, promote competition, and sustain institutional expertise. Based on our prior work in the area of savings from outsourcing, we question whether DOD can achieve the level of savings it is claiming. We initially questioned the data cited by DOD to support its savings assumptions in April 1996 testimony before this Subcommittee. We stated that the CORM’s assumptions on savings were generally based on reports of projected savings from public-private competitions for various commercial activities as part of the implementation of Office of Management and Budget Circular A-76. In reviewing the A-76 competitions and DOD’s public-private competitions for depot maintenance, we found that the conditions under which A-76 competitions resulted in lower private sector prices often were not present or applicable to depot maintenance. The weaknesses in extrapolating the results of these reported savings to depot maintenance included the following: The support functions used for the A-76 studies were dissimilar to the depot maintenance function. Substantial savings occurred when competition was introduced into the noncompetitive environment; however, the reported savings were based on the difference between precompetition costs and the prices proposed and did not reflect the subsequent cost overruns, modifications, or add-ons. Public activities were allowed to compete for workloads and won about half of the competitions by reengineerng their operations to provide the work cheaper. The A-76 competitions were conducted in a highly competitive private sector market. Further analysis of the CORM savings assumptions in our July 1996 report showed that projected savings were often not achieved due to cost growth and other factors. We concluded that outsourcing essentially all depot maintenance under current conditions would not likely achieve expected savings and, according to the military services, would result in unacceptable readiness and sustainability risks. As additional support for outsourcing, DOD cites data from the DSB’s November 1996 report, Achieving an Innovative Support Structure for 21st Century Military Superiority. DSB claimed savings up to 40 percent through outsourcing of DOD support activities, including depot maintenance, and recommended that DOD use the private sector for logistics and maintenance in the continental United States. From a preliminary analysis of DSB’s report, we determined that the savings projections were based on primarily the same assumptions as those used by the CORM—although DSB’s study expanded the functions and activities that it recommended for outsourcing and claimed savings up to 40 percent. Our March 1997 testimony before the Subcommittee showed that, while we agreed that outsourcing can sometimes provide savings, we questioned whether the magnitude of savings anticipated by DSB is attainable within the current strategy and force structure. Our April 1996 testimony and July 1996 CORM report noted that much of the depot work contracted to the private sector was awarded sole source and that obtaining competition for remaining noncore workloads may be difficult and costly. For example, to test for the extent of competition, we sampled 240 contracts, totaling $4.3 billion, that 12 DOD buying commands had open during 1995. Of these 240 contracts, 182, about 76 percent, were awarded on a sole-source basis—about 45 percent of the total dollar value. Recently, we asked the DOD buying commands to classify as competitive or sole source all the new contracts awarded from the beginning of fiscal year 1996 to date. As shown in table 4, of the 15,346 contracts totaling $2.2 billion, 13,930—about 91 percent—were awarded sole source. The sole-source contracts totaled about $1.5 billion, or about 68 percent of the total dollars awarded. Table 5 compares the services’ use of competition for contracts we sampled in 1995 with that used in contracts awarded since the beginning of fiscal year 1996. The Air Force had the greatest percent of competitive contracts in 1995 and 1996. The Army’s use of competition decreased, and the Navy’s use was low for both periods. Our work also showed that, for existing weapon systems, obtaining a competitive market may be costly for DOD because it has not acquired the technical data rights for many of its weapon systems. In examining the reasons for sole-source contracting, we observed that the justification most often cited was that competition was not possible because DOD did not own the technical data rights for the items to be repaired. Command officials told us that DOD would have to make costly investments in order to promote full and open competition for many of its weapon systems. Also, we have found that savings through competition may be adversely affected by private businesses that choose not to bid for maintenance workloads that have (1) small volumes, (2) obsolete technology, (3) irregular requirements, and (4) unstable funding. DOD may be able to encourage more competitive bidding through bundling common work and offering contracts with terms and conditions such as multiple options and multiyear performance periods. In conclusion, the inefficient operation of depot maintenance activities results in a reduction in the military services purchasing power through its operations and maintenance funds. DOD faces difficult decisions in outsourcing depot maintenance workloads to create a balanced, cost-effective system. Depot maintenance privatization should be approached carefully, allowing for evaluation of the economic, readiness, and statutory requirements that surround individual workloads. If not effectively managed, the privatization of workloads, including the downsizing of remaining DOD depot infrastructure, could exacerbate existing excess capacity problems and the inefficiencies inherent in underused depot capacity. We believe DOD needs to develop an overall plan for addressing its key management issues, including its proposed management structure for depot maintenance, for review by the Congress and other affected parties. The services’ maintenance depots have primary responsibility for maintaining, overhauling, and repairing most major systems and system components, including aircraft, helicopters, ships, tanks, artillery, support vehicles, missiles, and ammunition. The maintenance depots are a controlled source of technical capability for repairing and manufacturing mission-essential equipment and components that support peacetime operations or a surge capability in the event of total mobilization or some other national defense contingency. The depots also provide engineering services for the production and development of hardware design changes, and develop and maintain computer software. Furthermore, they furnish technical teams to provide field maintenance of equipment in emergencies, as needed. From the Revolution until World War II, the Army’s equipment maintenance needs were mostly contracted out. During the 19th century, in-house maintenance work, consisting mostly of rifle and other gun repair and carriage repair, was done in the Army’s arsenals—which also manufactured guns. The number of arsenals tended to rise and fall according to the various wars and other military actions that occurred in the 19th and early 20th centuries. About the time of World War I, the Army began to acquire larger equipment, such as trucks and tanks, which typically require more maintenance than rifles, guns, and carriages. Still, most maintenance work between World War I and II continued to be contracted out. Finally, during and after World War II, large-scale, in-house equipment maintenance began in earnest when the Army acquired massive quantities of new, modern equipment. By the 1970s, the Army’s depot maintenance work was centralized at a limited number of depots compared to previous years. In 1976, 10 depots performed maintenance work in the continental United States and 2 in Europe. Between 1983 and 1985, Army depot maintenance personnel strengths increased to over 20,000, their highest level ever. At that time, the organic program represented approximately 67 percent of the total Army direct depot maintenance program funding. During the mid-1980s, the Army lost some of its organic depot maintenance workload, staffing, and capacity. By 1988, only eight depots were still performing maintenance work in the United States and only one in Europe. Sierra and New Cumberland depots had stopped maintenance work in the United States and in Europe, the Mainz Depot was closed. However, as its in-house maintenance capability was declining, the Army increased its reliance on commercial sources, reversing a long trend. Although the Department of Defense’s (DOD) input to the 1995 the base closure and realignment (BRAC) recommended closing the Red River Army Depot and transferring the light combat vehicle maintenance mission to Anniston Army Depot, the BRAC Commission disagreed. The Commission found that while Anniston had the capacity to accept ground combat vehicle depot maintenance workload from Red River, closing Red River would place too much risk on readiness. It recommended realigning Red River Army Depot by moving all maintenance missions, except for those related to the Bradley fighting vehicle series, to other depot maintenance activities, including the private sector. In addition, the 1995 BRAC Commission agreed with the Secretary of Defense’s recommendation to realign depot-level maintenance at the Letterkenny depot to other depots or the private sector. It recommended the (1) transfer of towed and self-propelled combat vehicle maintenance workloads to the Anniston depot and missile guidance system maintenance workload to the Tobyhanna depot or the private sector and (2) retention of an enclave for conventional ammunition storage and tactical missile disassembly and storage at Letterkenny. In 1799, the Congress authorized five naval shipyards to be located at Portsmouth, New Hampshire; Boston, Massachusetts; New York, New York; Philadelphia, Pennsylvania; and Norfolk, Virginia. The Mare Island and Puget Sound shipyards were authorized in 1852 and 1891, respectively. The last four naval shipyards were authorized in this century: Charleston, in 1901; Pearl Harbor, in 1908; San Francisco (Hunters Point), in 1919; and Long Beach, in 1940. From the earliest years through World War I, naval shipyards were the principal logistics support element in the Navy’s shore establishment. In addition to building and repairing ships, naval shipyards provided many support activities, such as supply support, medical and dental care, and training facilities. During the period between the World Wars, additional shore facilities were established to support the fleet and provide a wide range of support services. Naval shipyards were thus able to focus on their industrial mission of building, maintaining, and modernizing Navy ships. Employment peaked at over 380,000 personnel during World War II. In 1968, naval shipyards stopped building ships in order to concentrate on repairing an increasingly complex fleet. This enabled the private sector to focus more on new construction. From the mid-1960s to the mid-1970s, the Navy closed three nonnuclear shipyards—New York, Boston, and Hunters Point—leaving six nuclear capable and two nonnuclear naval shipyards. These closure decisions were made after careful studies indicated that there was excess capacity for the foreseeable peacetime and mobilization workloads. During the post-Vietnam years, naval shipyards’ employment peaked at 80,000 in 1983. Since then, naval shipyard employment levels have declined due to improved ship design techniques, reduced force levels, changes in maintenance philosophy, and austere budgets. As a result, the Philadelphia Naval Shipyard was selected for closure by the 1991 BRAC Commission and the Mare Island and Charleston naval shipyards were selected for closure by the 1993 BRAC Commission. All three shipyards were closed in 1996. The 1995 BRAC Commission recommended closing the Long Beach Naval Shipyard, and retaining the sonar dome government-owned, contractor-operated facility and family housing units needed to fulfill Navy requirements. The shipyard ceased operations in July 1996 and will close in September 1997. The employment level of the remaining four naval shipyards is projected at 22,771 by the end of fiscal year 1997. The first naval aviation maintenance depot was established in 1917 at Norfolk, Virginia, and was named the Construction and Repair Department. In 1923, this unit and two others formed by then—one at North Island and one at Pensacola—were redesignated as Assembly and Repair Departments. In 1948, their names were changed to Overhaul and Repair Departments. Prior to 1967, the aviation depots were under the cognizance of their respective air stations. The status of Overhaul and Repair Departments at the six Navy and one Marine Corps Air Stations was changed in 1967 to that of separate commands, each called a Naval Air Rework Facility and directed to report to the Commander of the Naval Air Systems Command instead of the air station commanding officer. In 1987, the name Naval Aviation Depot replaced the name Naval Air Rework Facility to more accurately reflect the range of its activities. In 1973, the Naval Air Rework Facility, Quonset Point, Rhode Island, was closed under the Navy Shore Establishment Realignment Program. This was the first naval aviation depot to close in recent history. The 1993 BRAC Commission called for closing three more naval aviation depots—those located in Norfolk, Virginia; Pensacola, Florida; and Alameda, California. The depots remaining open are located at the Marine Corps Air Station at Cherry Point, North Carolina; the Naval Air Station at North Island, San Diego, California; and the Naval Air Station at Jacksonville, Florida. The naval aviation depots went from a high of 35,690 employees in 1967 to 14,797 employees in 1995. Further planned reductions from closures and downsizing are projected to reduce the number of employees to 10,543 by 1999. DOD did not recommend additional aviation depot closures as a result of the 1995 BRAC process. The two Marine Corps maintenance depots are now called multicommodity maintenance centers. The oldest, in Albany, Georgia, was established as the Repair Branch of the Marine Corps Supply Center in 1954. The other, located in Barstow, California, was established in 1961 as the Yermo Complex. The facilities have grown over the years as a result of additional mission responsibilities and the expansion of their industrial production capabilities. Today, each facility has just under 1,000 civilian employees and 10 military personnel. Each generally supports the same systems and commodities, except that Albany also supports the Marine Corps Maritime Prepositioning Forces Program. Both Albany and Barstow perform a combination of intermediate and depot maintenance activities. From 1918 to 1939, the Army Air Corps, from which the Air Force was created after World War II, operated four air depots. With the threat of global conflict in 1939, two additional depots were constructed. During World War II, the number of depots increased to 12. After the war, three depots were deactivated. In the early 1950s, during the Korean Conflict, the Air Force invested $1.8 billion to upgrade the remaining nine depots, which became part of the Air Materiel Command. A 10th depot was activated in 1961 to house laboratories and management activities for the Air Force’s metrology and calibration program and depot repair of inertial navigation systems for intercontinental missile systems and aircraft. The Air Force entered the 1960s with over 145,000 personnel at 10 logistics centers, including 62,000 depot maintenance personnel. In 1963 and 1964, 4 of the 10 depots were closed. The remaining six became the base of the Air Force Logistics Command in support of the Vietnam Conflict. Five of the six were located on multifunction logistics bases called air materiel areas, which were responsible for both wholesale supply and depot maintenance activities for Air Force weapon systems and equipment. By the end of the 1960s, the Air Force Logistics Command had been reduced to 112,000 employees, including 50,000 depot maintenance personnel. During the 1970s, the Air Force consolidated individual repair activities at its 6 depots, reducing the number from 52 to 20. This realignment eliminated duplicate repair sources for many commodity items. During the early 1980s, Air Force logistics operations grew as U.S. military forces were increased. The Air Force undertook a major capitalization improvement program to modernize the depot industrial base with modern plant equipment and technological advancements. The Air Force Logistics Command employed 40,800 depot maintenance personnel in 1986. In the 1990s, downsizing, consolidations, and cuts were made to the Air Force depot system, and the Air Force Logistics Command merged with the Air Force Systems Command to form the Air Force Materiel Command. Depot maintenance manning was reduced by 17 percent between 1990 and 1991. In 1995, the Air Force Materiel Command had 29,004 depot maintenance personnel. The type of depot maintenance work done at each of the Air Force depots includes the following: (1) Ogden Air Logistics Center— strategic missiles, aircraft, air munitions, photo/reconnaissance, and landing gear; (2) Oklahoma City Air Logistics Center— aircraft, engines, and oxygen equipment; (3) Sacramento Air Logistics Center— space/ground communications-electronics, aircraft, hydraulics, and instruments; (4) San Antonio Air Logistics Center— aircraft, engines, nuclear equipment; and (5) Warner Robins Air Logistics Center— aircraft, avionics, propellers, and life support systems. The 1993 BRAC Commission recommended closing the Aerospace Guidance and Metrology Center, Newark, Ohio, which has been privatized-in-place. This privatized facility, which is currently known as the Boeing Guidance Repair Center (BGRC), does repairs, overhauls, and upgrades for inertial guidance and navigation systems and components and displacement gyroscopes for intercontinental missiles and most Air Force aircraft. It also houses the management of the Air Force’s metrology and calibration program. Although DOD did not recommend any additional depots for closure in 1995, the BRAC Commission recommended closing the San Antonio and Sacramento Air Logistics Centers, which the Air Force also plans to privatize-in-place using competitive procedures that include a military depot. The Air Force also has one depot-level activity in Colorado Springs, Colorado, which maintains the software on Air Force space systems. This activity is not funded using depot maintenance funds and is not officially categorized as a depot. It is staffed with a combination of government and contractor personnel. The five existing naval weapons stations are descendants of the naval ammunition depots of World War II. However, these depots are no longer the major providers and maintainers of naval ordnance that they were in the past. In the 1970s, the Army, under the single manager concept, was assigned responsibility for producing and maintaining most of the Navy’s high-volume conventional munitions and missiles. The naval weapons stations now maintain only small volume, miscellaneous items. The Naval Surface Warfare Center, Crane Division, supports the development, production, evaluation, and maintenance of electronic and mechanical products integral to combat weapon systems. The Crane Division employs about 470 depot maintenance personnel as of fiscal year 1997. Commissioned in 1941 as a naval ammunition depot, Crane was one of four inland activities constructed to load, store, and issue ammunition to the fleet. Today, the Center serves as a modern sophisticated leader in diverse and highly technical product lines such as microwave devices, acoustic sensors, and microelectronic technology. The Louisville, Kentucky, site of the Crane Division was commissioned by the Navy in 1941 to produce ordnance material and munitions for World War II. Louisville employed 4,480 personnel at its peak during World War II. The 1995 BRAC Commission urged the Navy to allow privatization of the facility, which occurred in August 1996. At the time of the BRAC recommendation, the depot employed 1,600 civilian personnel. It provides overhaul and engineering support for naval gun and missile launching systems, and produces small weapon system parts using flexible computer-integrated manufacturing technologies and methods. The Navy’s undersea warfare munitions capability was originally established in 1914. In recent years, depot maintenance for undersea warfare systems has been consolidated at the Naval Undersea Warfare Center, Keyport, Washington. The consolidation was done to recognize the inherent efficiencies of having a single national depot maintenance center for the Navy’s family of torpedoes. Among the Center’s assigned duties, is the maintenance and repair of undersea weapons and systems, underwater targets, and countermeasure devices. Since the end of the Cold War, workload at the Center has followed a downward trend. Direct workload has declined from a peak of 821 work years in the late 1980s to 417 work years in fiscal year 1997, representing a 51-percent decline. This report addresses the difficult process of reducing DOD’s infrastructure. It focuses on the need for infrastructure reductions and obstacles that have hindered DOD’s ability to achieve significant cost savings in this area. It describes DOD’s future years funding plan for infrastructure and discusses areas in which we have identified opportunities for reductions. It also discusses the need for DOD to give greater structure to its reduction efforts by developing a strategic plan and involving the Congress. Deciding the future of DOD’s depot system is difficult. Depot maintenance privatization should be approached carefully, allowing for evaluation of the economic, readiness, and statutory requirements that surround individual workloads. Privatizing workloads in place at two closing Air Force depots does not reduce the excess capacity in the remaining depots or the private sector and consequently is not a cost-effective approach to reducing depot infrastructure. Private industry representatives generally agree with this statement. Although the Air Force’s privatization initiative for the Sacramento and San Antonio depots has not progressed far enough for us to estimate precise costs and savings, consolidating depot maintenance workloads at remaining underused depots could result in a net savings in 2 years or less. Transferring the workloads to other depots could yield additional economy and efficiency savings of over $200 million annually, in addition to the $268 million annual savings the BRAC Commission estimated. Moreover, if the workload consolidation does not occur, the remaining Air Force depots are likely to become more inefficient and more costly. Plans to delay many closure-related actions until 2001 will substantially reduce future savings envisioned by the BRAC Commission. We found that the Navy’s plan for privatizing the workloads in place at the Louisville depot will not reduce excess capacity in the remaining public depots or the private sector, may prove more costly than transferring the work to other depots, and does not appear to be consistent with an existing requirement for public-private competitions. The Navy’s preliminary cost analysis that privatization-in-place is cost-effective is based on limited cost data that overstates the cost of relocating the workloads by at least $66 million and on the general assumption that privatizing workloads will save 20 percent. The projection was based on conditions that are not relevant for most of the depot maintenance workloads and does not reflect the cost of excess capacity in the public sector. The goal of reaching 20 percent savings is not likely to be reached. Furthermore, we were unable to find any element of the Navy’s plan for privatization of the Louisville depot that addresses 10 U.S.C. 2469, which requires competition between the public and private sectors before privatizing DOD workloads valued at not less than $3 million. If not effectively managed, the privatization of depot maintenance activities, could exacerbate existing capacity problems and the inefficiencies inherent in underuse of depot maintenance capacity. Tentative plans to transfer some workloads from realigned depots to remaining depots should improve capacity use and lower operating costs to some extent, but they will not resolve the Army’s extensive excess depot capacity problems. Since the Army is not effectively downsizing its remaining depot maintenance infrastructure, privatization initiatives outlined in DOD’s March 1996 workload analysis report to Congress will increase excess capacity in Army depots and increase Army depot maintenance costs. Privatizing workloads in place will also aggravate excess capacity conditions in the private sector. In the absence of further downsizing, the Army can significantly reduce depot maintenance costs by transferring, rather than privatizing-in-place, workloads from closing and downsizing depots. Pursuant to a congressional request, we examined the Commission on Roles and Missions (CORM) privatization assumptions to determine whether privatization would adversely affect military readiness and sustainability. The CORM’s depot privatization savings and readiness assumptions are based on conditions that do not currently exist for many depot workloads. Privatizing essentially all depot maintenance under current conditions would not likely achieve expected savings and, according to the military services, would result in unacceptable readiness and sustainability risks. The extent to which DOD’s long-term privatization plans and market forces will effectively create more favorable conditions for outsourcing is uncertain. The CORM assumed a highly competitive and capable private market exists or would develop for most depot workloads. However, we found that most of the depot workloads contracted to the private sector are awarded non-competitively. Further, the CORM’s privatization savings do not reflect the cost impact of excess capacity in the public depots. The CORM’s privatization assumptions are based primarily on reported savings from public-private competitions for commercial activities. These activities were generally dissimilar to depot maintenance activities because they involved relatively simple, routine, and repetitive tasks that did not generally require large capital investments or highly skilled and trained personnel. The CORM report stated that the services’ organic depot maintenance requirements exceed the real needs of the national military strategy and that private contractors could provide essentially all of the depot maintenance services. The CORM assumed that public-private competitions would be used only in the absence of private sector competition and would be limited to only a few cases. We found that public-private competitions have resulted in savings and benefits and can provide a cost-effective way of making depot workload allocation decisions for certain workloads. Our analysis of depot maintenance workloads currently contracted to the private sector shows, for the most part, that contractors were responsive to their requirements for delivery and performance. Historically, the services have determined that the risks of privatizing most workloads are too high and have retained them in the public depots. We found that DOD’s risk assessment methodology does not include guidance or criteria for the services to use in making such assessments and involves subjective judgments. The services are reassessing their previously designated core workloads with a view toward privatization. Our analysis of DOD’s workload report shows that the use of more comprehensive and consistent data would provide Congress and DOD decisionmakers a more accurate picture of historical and future projections of depot maintenance workload allocations between the public and private sectors. Without such data, the reports are of limited use to Congress and defense decisionmaker when considering public and private sector workload allocation policy. Although DOD’s workload report primarily justifies eliminating the 60-40 rule, our work shows that, with few exceptions, the rule has not affected past public-private workload allocation decisions. However, if not repealed, the 60-40 rule would restrict DOD’s plans for large-scale privatization. The workload report’s projections of public-private depot workloads for fiscal years 1997-2001 are not consistent and comparable to historical data. The future data does not include certain types of private sector depot maintenance costs, including interim contractor support and contractor logistics support. We include a matter for congressional consideration for improving the methodology and process DOD uses to collect, analyze, and report depot maintenance workload data for the public and private sectors. The DOD policy report calls for a greater reliance on private sector maintenance capabilities than the current projection. The policy provides wide latitude regarding how certain policies and concepts will be implemented. For example, each service is implementing differently the policy’s new process for risk assessments to determine which mission-essential maintenance requirements should be privatized. Thus, it may be impossible to estimate the future depot maintenance workload mix. The DOD policy also shows a preference for maintaining new systems in the private sector. However, it is unclear that this is the most cost-effective long-term approach for military-unique defense systems. In addition, the policy excludes DOD depots from competing for non-core work except when private sector competition is inadequate. This is inconsistent with congressional direction for competition between public-private entities. Responding to a congressional request, we testified on the privatization of defense depot maintenance activities. We noted that (1) DOD’s evolving depot maintenance policy includes a public-private mix and shifts work to the private sector where feasible; (2) depot privatization could worsen excess maintenance capacity and inefficiencies if not carefully managed; (3) the DOD policy report provides an overall framework for managing depot maintenance activities and substantial implementation flexibility, but the policy is not consistent with congressional guidance on public-private competition for noncore workloads; (4) privatizing depot maintenance is not likely to achieve the 20-percent savings DOD projects, since most savings have come from competition rather than privatization; (5) about half of depot maintenance private-public competitions have been won by the public sector; and (6) DOD plans to privatize-in-place and delay downsizing and closure of two Air Logistics Centers will probably cost more than closing them and relocating their workloads to underutilized defense or private facilities. Our analysis of base support costs in the future year defense plan and at nine closing installations indicates that BRAC savings should be substantial. However, DOD’s systems do not provide information on actual BRAC savings. Therefore, the total amount of actual savings is uncertain. If DOD does not fully achieve estimated BRAC savings, DOD’s ability to fund future programs at planned levels will be affected. DOD has complied with the legislative requirement for submitting annual cost and savings estimates, but there are limitations to the submissions’ usefulness. Consequently, the Congress does not have an accurate picture of the savings achieved by the BRAC process. The rationale and requirement for maintaining some capability in the public depot system derive both from statutory requirements and from the recognition that some public depot capability is needed to mitigate cost and readiness risks where private sector capabilities are limited or inadequate. Private sector capabilities generally make commercial counterpart engines ideal candidates for privatization. However, DOD has about 45 percent excess capacity for engine depot maintenance. Additional privatizations of commercial counterpart engines at a time of decreasing depot workload—without first decreasing the excess capacity in DOD’s depots—would increase the per-unit repair cost of work remaining in DOD’s depot system. It is not yet known how DOD plans to implement its privatization initiatives or how it will address statutory provisions such as 10 U.S.C. 2469—which require competitions that include public depots before privatizing depot maintenance workload valued at $3 million or more. DOD has substantially reduced its initial estimates of net savings resulting from depot closures during the 6-year implementation period allowed by law and, to a lesser extent, of the annual savings after the implementation period has been completed. Although DOD believes its new estimates are more accurate, they still do not accurately reflect potential savings because (1) some closure-related costs are not included and (2) some estimates have not been updated to reflect major changes in such areas as the expected cost of doing work after it is transferred to new sources of repair. As a result, the magnitude of the savings is uncertain. DOD is offering displaced employees a comprehensive and costly outplacement program that provides assistance, benefits, and separation incentives, thus limiting the number of employees involuntarily separated. Military services can increase savings by (1) conducting public-public and public-private competitions for the work or (2) analyzing the cost-effectiveness of moving the work to other service depots. In addition, they can improve operations through reengineering. However, DOD has not taken action to maximize these savings. Instead, the services have (1) discontinued public-public and public-private competition programs in May 1994, (2) implemented a privatization-in-place plan that will likely increase maintenance costs, (3) rarely considered interservicing alternatives, and (4) not required the depots to reengineer transferred workloads. Navy public-private competitions generally resulted in savings and benefits, although precise quantification of such savings is not possible. Due to the time and cost of performing such competitions, a rapidly declining depot maintenance workload, and a private sector concern about fairness, much less maintenance work was subjected to public-private competition than had been projected. The issue of fairness centers on private sector concerns that military depot prices have not reflected the total cost to the government of performing this work, including the labor and material to be applied to competition work as well as an appropriate share of overhead. Congressional direction to reinstitute public-private competitions together with recommendations by the Commission on Roles and Missions to privatize most depot maintenance work has resulted in DOD’s reexamining its depot workload with a view toward moving more work to the private sector. While DOD maintains it has reinstituted its public-private competition program, in practice no competitions have been held since DOD terminated the program in 1994. A number of factors may limit or impede a major competition program in the current environment. They include (1) the cost and difficulties of such competitions and (2) the amount of work available for competition under current law and policies limiting the mix of public and private depot maintenance work. Initiatives, such as improving cost accounting systems for depot work, can be taken to improve public-private competitions to ensure their future usefulness in identifying the most cost-effective source of repair for depot maintenance workloads. Comparing F/A-18 Modification, Corrosion, and Paint Program cost and performance at the North Island and Ogden depots was complicated because a number of data judgments and adjustments were required. The Navy’s analysis did not always use the most current and complete information available and did not make adjustments for all known differences in work completed at each depot. Our analysis, using more current and complete information, showed that Ogden’s costs were slightly lower. Nevertheless, given DOD’s decision to retain F/A-18 repair capability at the Navy’s North Island facility, it appears consolidation of the workload at that location is the most cost-effective approach. There is no clear statutory or DOD guidance that defines the steps, processes, analyses, and validation procedures required for a merit-based selection process. Such guidance is needed if DOD intends to base future depot maintenance workload allocation decisions on merit-based analyses. The DOD annually spends about $15 billion for depot maintenance, modifications, and upgrades to support aircraft, combat vehicles, wheeled vehicles, ships, and other equipment. DOD is downsizing and must consider how to cost-effectively acquire needed depot maintenance activities while supporting industrial base needs in both the public and private sectors. We discussed (1) the share of DOD’s depot maintenance program spent in the public and private sectors; (2) the use of public-private competition as a tool for allocating the depot maintenance workload; (3) observations on the Defense Science Board Depot Maintenance Task Force findings and recommendations; and (4) DOD’s transfer of employees, workload, equipment, and facilities at closing maintenance depots. We have concerns about the implementation of the public-private competition, and the amount of savings is hard to quantify. Nevertheless, we believe that the depot maintenance costs can be cut. We support many of the task force’s findings and recommendations but disagree on some issues. For example, we agree that a rational maintenance core policy needs to be identified but believe that this should be done throughout DOD rather than on a service-specific basis. None of the maintenance depots targeted for closure have shut down yet. DOD appears to have an effective program to help employees find new jobs, although some workers may have to settle for lower-paying positions. Concerns have also been raised about other aspects of the depot closures. We were asked to determine (1) the extent to which the current DOD depot maintenance system has excess capacity, (2) the basis for current DOD allocations of depot work between the public and private sectors, (3) whether the private sector’s role in the performance of depot maintenance activities is changing, (4) the status of the public-private competition initiative, and (5) the action needed to ensure that future defense maintenance requirements can be managed more cost-effectively. We testified that substantial excess capacity exists within DOD’s depot maintenance system. Conservative estimates put excess capacity at 25 to 50 percent. Because depot maintenance costs are significantly influenced by overhead, elimination of this excess capacity will be critical to reducing future depot maintenance costs. DOD needs to closely review its capital equipment acquisitions before acquiring new or replacement capability for workload that may be allocated to the private sector. Cost-effective future management of the defense depot maintenance system is first dependent on determining what workload capability must be retained within DOD—commonly referred to as core requirements—and what can or should be contracted out to the private sector. In addition, the services have not defined their minimum essential core requirements. In the past, the private sector’s role in depot maintenance remained relatively consistent at about 33 percent of the annual depot maintenance budget and is aggressively seeking additional workload. However, DOD does not have a comprehensive strategy for determining what depot maintenance work should be done by the private sector. Public-private competitions have been implemented to varying degrees among the services. The current DOD depot management structure does not appear to be conducive to making interservice decisions that are essential to developing a more effective and efficient depot maintenance system. Percentage excess of available capacity (31) 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 Department of Defense's (DOD): (1) plans for eliminating costly depot maintenance excess capacity; (2) progress in finalizing a new depot workload allocation policy; (3) current approach for allocating maintenance workloads for new and existing systems; and (4) estimates that billions can be saved by outsourcing depot maintenance. GAO noted that: (1) it is important to note that the waste and inefficiency in DOD's logistics system, including the management of its $13 billion depot maintenance program, is one of the key reasons GAO identified DOD's infrastructure activities as 1 of 24 high-risk areas within the federal government; (2) costly excess capacity totalling about 50 percent remains in the DOD depot system, which actually comprises four systems; (3) as the services seek to privatize a greater share of their depot maintenance, the cost of maintaining excess capacity will increase unless additional capacity reductions are made; (4) the Navy has made the greatest progress in dealing with this through consolidation and expedited closures of facilities affected by the base realignment and closure process; (5) the Army and, even more so, the Air Force have been less successful; (6) all three military departments to some extent are implementing actions that will privatize-in-place costly excess capacity; (7) GAO's work shows that DOD's plans and policies for outsourcing depot maintenance are still evolving; (8) last year, the Congress received and ultimately rejected DOD's proposed policy regarding depot-level maintenance and repair; (9) provisions in the policy were predicated on relief from the existing statutes that influence depot workload allocations between the public and private sectors; (10) some changes have been made based on congressional concerns about certain aspects of the policy report, but DOD has not finalized its new policy to address all of these concerns; (11) however, core capability requirements have not yet been quantified and no time frame has been established for finalizing key draft depot maintenance policy letters issued in December 1996 and January 1997; (12) GAO's ongoing work shows that for both existing and new systems, assessments are being made to determine what portion of the current workload could be outsourced with acceptable risk; (13) the absence of clear policy on how to proceed in this area has caused some delays in choosing maintenance sources and raised some concerns about whether the most cost-effective strategies are being selected; (14) DOD's projected savings are based on estimates cited by the Commission on Roles and Missions (CORM) and the Defense Science Board (DSB); (15) GAO believes that in some cases outsourcing can reduce maintenance costs, but not to the extent being estimated by the CORM and DSB; and (16) if not effectively managed, privatizing depot maintenance activities could exacerbate existing capacity problems and the inefficiencies inherent in underutilization of depot maintenance capacity. |
In August 1983, DOD established a joint task force called Joint Task Force-Bravo (JTF-B) of about 1,100 Army and Air Force personnel at Soto Cano (formerly, Palmerola Air Base), the Honduran military installation that houses the Honduran Air Force Academy. The presence was established to support various U.S. political and military objectives that demonstrated U.S. commitment to its allies against the increasing communist threat in the region. JTF-B and the other U.S. military units at Soto Cano were assigned missions to coordinate and support U.S. counterinsurgency and intelligence operations, and military training exercises in the region. When directed, JTF-B provides support for disaster relief, search and rescue, and contingency-type missions in Central America. JTF-B was established as a subordinate unit of the U.S. Southern Command (USSOUTHCOM), headquartered in Panama. The United States funded construction projects and infrastructure upgrades at Soto Cano, such as a F-16 capable runway, semipermanent barracks, offices and recreational facilities, 22 miles of roads, and upgrades of the water, sewer, and electrical systems. The annual cost for the United States to maintain the U.S. military presence at Soto Cano has grown steadily from about $24 million annually in the mid-1980s to a projected $38 million for 1994. (See table 1 for a breakdown of the costs.) Since 1991, the average annual cost of new construction and upgrades has been about $2.5 million. U.S. operations at Soto Cano are funded from the Army’s and the Air Force’s Operations and Maintenance accounts. In addition to JTF-B, other U.S. military units are stationed at Soto Cano to support JTF-B’s missions, such as an aviation battalion and a military police platoon. About two-thirds of the U.S. military personnel assigned to Soto Cano are on temporary duty, usually from 4 to 6 months. The remainder serve a 1-year tour. In April 1994, authorized U.S. military personnel at Soto Cano was reduced to 780 (see app. I). At the time of our fieldwork, DOD officials told us that the level of personnel was scheduled to increase to about 900 in October 1994 due to the relocation of helicopter personnel and three helicopters stationed in Panama. DOD officials informed us that this move was being made to keep aircraft assets in the theater due to the drawdown of U.S. forces in Panama. However, during discussions on a draft of this report, DOD officials told us that the level is now scheduled to decrease to about 500 personnel in October 1995 due to the deactivation of a helicopter battalion, which will reduce the number of helicopters from 31 to 11. In addition, all U.S. aviation operations and support at Soto Cano will be consolidated with JTF-B facilities, and the current main air facility, Camp Pickett, will be closed. According to DOD documents, the U.S. military presence at Soto Cano contributes about $14 million annually to the Honduran economy in the form of contracts and services to support the U.S. military presence. This includes the U.S. military personnel estimated spending on the Honduran local economy. With the resolution of military conflicts and greater political stability in Central America, the focus of U.S. interest in the region has shifted from political/military objectives to economic growth and democracy building. The U.S. government officials we met with said that the continuing U.S. military presence contributed to U.S. democracy objectives, but that the contribution was incidental to their presence to perform other missions. Since 1990, Central America has experienced new political stability as the conflicts in El Salvador and Nicaragua have been resolved, and the overall threat of communist expansion has diminished. As a result, U.S.-directed counterinsurgency and intelligence activities have ended. The changed political condition from the time that JTF-B was established is reflected in the April 1994 congressional testimony of the Assistant Secretary of State for Inter-American Affairs. The Assistant Secretary stated “the United States is no longer compelled to base foreign policy strategy on defending the United States and its neighbors from external aggression. Instead, foreign policy can now be focused on encouraging democracy and promoting economic growth.” When questioned about the continuing need for a military presence in light of new U.S. goals and the relative stability in the region, military officials at Soto Cano and the Southern Command said that the military presence at Soto Cano contributes to U.S. efforts to promote democracy. According to these officials, the military personnel at Soto Cano serve as an example of a military force that is subordinate to civilian control, a main tenet of democracy. However, the officials stated that the influence exerted by the U.S. military at Soto Cano was incidental and difficult to quantify. According to State Department officials, the principal U.S. programs to promote democratic initiatives and military professionalism are administered by other U.S. agencies such as the State Department, the Agency for International Development, the Department of Justice, and the Defense Security Assistance Agency. Further, the continuing U.S. military presence at Soto Cano appears inconsistent with the current goal of the U.S. Embassy in Honduras—which is to reduce the overall size and scope of U.S. activities in Honduras in recognition of declining U.S. funding and increased political stability in the region. Moreover, the United States is also encouraging the government of Honduras to implement military reforms, which include reducing its armed forces. Since the end of the Cold War, the primary missions of JTF-B are to support joint, combined and interagency operations, and provide logistical support for military training exercises, and to maintain and operate an all-weather, C-5 capable airfield. While the U.S. military presence at Soto Cano is useful and convenient, it is not essential to support military training activities in the region. U.S. military personnel are routinely deployed throughout Latin America for training missions without a dedicated, semipermanent U.S. logistics and support base like Soto Cano. According to DOD records, in 1993 over 60,000 U.S. active and reserve military personnel were deployed from the United States and other locations to conduct a variety of training and civic assistance activities throughout Latin America. About 5,500 of the 60,000 participated in training activities conducted in Honduras. In discussions on a draft of this report, DOD officials provided us with figures for fiscal year 1994 training. These figures show that JTF-B provided support to 10,665 personnel, which is 89 percent of the total deployed in Central America. However, the types and levels of support provided by JTF-B to the various training exercises were not available. According to DOD officials, the number of personnel trained in Central America is approximately 17 percent of all personnel deployed from the United States and other locations to Latin America. Training activities conducted in Latin America included engineering exercises to drill wells, build roads, schools, and medical clinics; medical exercises to provide basic medical, dental, and veterinary care; and combined exercises with host nation forces, such as computer-simulated war exercises and counterterrorist training. JTF-B and the other U.S. military units stationed at Soto Cano provide support to these types of training exercises conducted in Honduras. For example, in support of an engineering exercise conducted in Honduras in 1993, U.S. military personnel at Soto Cano performed liaison functions with Honduran military and local government assisted U.S. reserve units in awarding contracts to procure services and supplies on the local economy, and transported and accompanied advance teams to identify suitable locations for base camps and inspected training sites during the exercise. The U.S. military at Soto Cano also often provides limited support (such as supplies and communication support) to training exercises in Belize, Guatemala, and El Salvador. For example, military personnel at Soto Cano provided and transported tents to a National Guard training site in Guatemala when the Guard’s shipment of tents was delayed. Currently, assets from Soto Cano are being used to support demining training under the operational control of the U.S. Military Group (USMILGP) in Honduras for Brazilian, Costa Rican, and Honduran troops. JTF-B also recently provided assistance to the USMILGP in El Salvador in the coordination of air operations for the Fuertes Caminos exercise. Officials from the U.S. Army Reserve and National Guard said that the support they receive from U.S. military forces at Soto Cano makes training more convenient but that the training can be accomplished without a U.S. military presence. Since 1992, the Army National Guard and Army Reserve have increased their training deployments to other Central American countries, especially El Salvador and Guatemala. In these countries, intergovernmental coordination for logistical support is provided by U.S. military personnel attached to the Embassy; personnel deployed in advance of the training; post-exercise evaluation teams; and in some cases, the host nation military, according to U.S. Army Reserve and National Guard officials. In a March 1994 memorandum on the review of the requirement for JTF-B, to the Chief of Staff of the Army (CSA), the Army staff concluded that training activities in the region could continue without support from U.S. military personnel at Soto Cano. According to the memorandum training exercises in the region can be supported from bases located in the United States without the support of an “expensive, semi-permanent, logistics base.” The memorandum states that the costs to support training exercises in Honduras exceed the benefits and the resources could be better used elsewhere to meet other Army operational requirements. Further, the Army Chief of Staff indicated to the Commander in Chief (CINC), USSOUTHCOM, and the Chairman of the Joint Chiefs of Staff, in a message, that reducing or eliminating the Army’s support requirement for JTF-B would represent an important savings to the Army. Furthermore, we reported in November 1993 and testified in April 1994 that some DOD humanitarian and civic action projects were not designed to contribute to foreign policy objectives, did not appear to enhance U.S. military training, and either lacked the support of the country or were not used. According to DOD officials, the CINC, USSOUTHCOM, considered the CSA’s concerns about the need for JTF-B. The CINC’s position is that JTF-B could be reduced, but that access to Soto Cano, with its C-5 capable airfield and a U.S. presence, is needed to accomplish USSOUTHCOM’s mission, which includes conducting various military and humanitarian operations, training, and providing support for exercises in the Central American region. U.S. military personnel at Soto Cano provide support to the U.S. Customs Service, the U.S. Navy, and the DEA counterdrug programs in the region. However, the level of support is minimal and involves only a small portion of the U.S. military personnel and equipment at Soto Cano. U.S. Customs, U.S. Navy, and DEA officials characterized the support they receive from the U.S. military at Soto Cano as useful and convenient, but not critical to their counterdrug programs. Honduras is an ideal location for U.S. Customs to intercept and track suspect drug-trafficking aircraft. The U.S. Customs Service has two airplanes and eight personnel stationed at Soto Cano to intercept and track planes suspected of carrying drugs in the Central American region and over the eastern Pacific Ocean. Customs provides housing for its personnel at the base and its mechanics maintain their counterdrug planes, but receives utilities and other support services through the U.S. military and can use U.S. military facilities, such as the dining hall. In addition, Customs purchases airplane fuel from U.S. military supplies and receives ground and air operations support, such as air traffic control and weather reports from U.S. military at Soto Cano. The U.S. military presence at the base provides Customs with a secure environment and operational capability 24 hours a day, 7 days a week. According to the U.S. Air Force commander at the base, about 130 personnel are involved in airfield operations. However, Customs counterdrug flights accounted for only a small percentage of the total flights handled by these personnel. For example, Customs’ aircraft accounted for about 8 percent of total U.S. fixed-wing flights from Soto Cano between July 1993 and May 1994—an average of 16 times per month. During the 9-month period, April to December 1993, Interagency Counterdrug Assessment data shows that Customs’ aircraft based at Soto Cano participated in intercepting/tracking 32 trafficking aircraft, which resulted in 13 cocaine seizures. Customs officials said their counterdrug operations could continue at Soto Cano without assistance from the U.S. military if support were obtained from the Honduran military and/or contractors. Additionally, Customs officials told us that if they did not have access to Soto Cano, they could use aircraft based in Panama, Mexico, or other locations to monitor areas now covered by the aircraft at Soto Cano. However, the officials also said that this option would decrease the effectiveness of operations because Customs’ aircraft would always be in a “catch-up” mode rather than an intercept mode. We note that Customs carries out similar activities in Mexico and other locations without a U.S. military presence. Notwithstanding the current Customs’ arrangement with USSOUTHCOM for use of the Soto Cano Base facilities, arrangements to provide for Customs use of civilian airport facilities for antidrug activities—without a U.S. military presence—may be possible as has been done in Mexico according to Customs officials. This would require the governments of the United States and Honduras to negotiate and establish appropriate arrangements. The Navy uses Soto Cano in its counterdrug operations, which involve detecting and monitoring suspected drug planes. U.S. military flight records at Soto Cano showed that Navy counterdrug planes landed at Soto Cano on average 11 times a month from July 1993 through May 1994. Two Navy P-3 counterdrug planes based in Panama sometimes use Soto Cano for refueling or as a temporary base for their operations. The aircraft refuel at Soto Cano and receive ground and air operations support similar to the support provided to Customs. Navy personnel are sometimes housed at Soto Cano during 2- to 3-day stopovers. Navy officials said that due to intercept geometry limitations, in order for the Navy P-3 aircraft to provide a constant air intercept capability, they must be staged at a Central American site. The optimum location for staging is north of Costa Rica but south of Mexico. Currently, Soto Cano is the only air base with U.S. aviation support that fits that description. These officials further added that due to excessive transit distance from other P-3 bases, a Central American base is required to conduct maritime patrols in the southwestern Caribbean and eastern Pacific. When Howard Air Force Base closes, Soto Cano will be the only base in Central America that has U.S. aviation support. According to DOD officials, if the U.S. presence at Soto Cano is discontinued, P-3s could potentially continue to stage out of there or other bases in the region if the appropriate operating agreement can be made with the host nation. However, in considering options associated with the possible elimination of the U.S. presence at Soto Cano, the effectiveness of the Navy’s P-3 interdiction efforts should be considered. Our prior work has raised serious questions about the cost-effectiveness of DOD’s surveillance efforts in the drug war. A part of DEA’s mission is to assist local law enforcement agencies with counterdrug investigations, intelligence, and other activities. The 4th Battalion, 228th Aviation Regiment, at Soto Cano occasionally provides helicopter transport to DEA agents and Honduran law enforcement officers for counterdrug operations. These missions have involved transporting agents to investigate drug seizures (post-seizure investigation), reconnaissance, drug eradication, and training for Honduran law enforcement officers. At the time of our fieldwork, the helicopter battalion had 33 helicopters: 15 Blackhawk, 10 Huey, and 8 Chinook helicopters. From October 1992 through March 1994, the battalion provided transportation support to DEA about once a month, typically transporting two DEA and three Honduran agents. This accounts for only a small portion of the helicopter battalion’s total flying hours. For example, during fiscal year 1993, DEA air transport totaled 91.3 flying hours, or only 1.2 percent of the helicopter battalion’s total flying hours. The remaining 98.8 percent of the helicopter flying hours went for a variety of missions such as pilot proficiency training, humanitarian and civic action exercises, and general support for U.S. military groups and embassies in the region. DEA officials characterized the helicopter battalion’s flight support as convenient. They said that DEA operations in Honduras could be conducted with one Chinook and two Blackhawk helicopters. However, DEA officials noted they have other options to meet their needs for air transportation. These include chartering planes, which they have done in the past, or using U.S. helicopters based in Guatemala. U.S. military and diplomatic officials told us that another reason to maintain a U.S. presence at Soto Cano is the pending U.S. withdrawal from Panama by the end of 1999, that will result in the loss of Howard Air Force Base. These officials stated that it is important to retain access to an airfield in the region that is operated by U.S. military personnel. Without a U.S. military presence at Soto Cano or Panama, officials said the United States would no longer control or have immediate access to an airfield in Latin America for contingency purposes. They stated, however, that this is not reason enough to justify continuing the U.S. presence. They also acknowledged that it was unlikely that the United States would become involved in a major military conflict in Latin America. Maintaining a U.S. military presence at Soto Cano does not guarantee continued access to the base because the United States has no base rights or status of forces agreements with the government of Honduras. According to some Honduran officials we met with, the Honduran constitution prohibits the permanent basing of foreign troops in Honduras, which would limit U.S. options with respect to future missions at Soto Cano. The 1954 Military Assistance Treaty between the United States and Honduras was the basis for military cooperation and assistance during the Cold War. Subsequent annexes and protocols to the 1954 agreement provided for the establishment of U.S. military presence at Soto Cano. U.S. and Honduran officials characterize the agreement allowing a U.S. military presence at Soto Cano as a “handshake” agreement, which either side could decide to break at any time. In fact, the current U.S. presence has become a source of political controversy. Some Honduran government officials question the need for the U.S. military at Soto Cano and the adequacy of the arrangement for this presence. The Honduran President, the Chief of the Armed Forces, and leaders of the Honduran Congress have called for an examination of the terms and conditions of the U.S. presence because the reasons for its establishment no longer exist. Finally, continuation of the U.S. military presence at Soto Cano will require recurring renovation and upgrade construction of some facilities and environmental issues will need to be addressed. For example, the waste water treatment system is not adequate for the current U.S. presence. We did not attempt to establish firm estimates of cost savings that would result from discontinuing the U.S. presence at Soto Cano because there were too many unknowns. For example, we did not know how current activities at Soto Cano would be dispersed to other DOD installations and whether they would continue at the same level. Similarly, we did not have a firm basis for estimating the costs that Customs would incur with a different support arrangement for its mission. However, since about 83 percent of training exercises in the region take place without assistance from U.S. forces at Soto Cano, there are other DOD units and bases that provide similar support and they could take on the support role currently performed by JTF-B. Thus, we infer that DOD resources (i.e., human, financial, supplies and equipment, and contracts and fees) associated with base operations and maintenance could be eliminated and costs would either decline and/or shift to other agencies. Table 1 shows the direct costs associated with maintaining the U.S. military presence for fiscal year 1994. The reason that the U.S. military presence at Soto Cano was established no longer exists and this presence is not critical to current missions. In light of budget constraints and current efforts to increase the cost-effectiveness of DOD’s worldwide operations, we question whether the U.S. military presence at Soto Cano is justified. Therefore, we recommend that the Secretary of Defense reduce U.S. military personnel at Soto Cano to the level necessary to support counterdrug activities, pending the development of other arrangements to support those counterdrug activities; the Commissioner of the U.S. Customs Service, the Administrator of DEA, the Secretaries of State and Defense, in conjunction with the Director of the Office of National Drug Control Policy, develop a plan to conduct their operations without U.S. military units at Soto Cano; and the Secretary of Defense withdraw the remaining U.S. military personnel at Soto Cano once the interagency plan is developed and implemented. In its comments on a draft of this report, DOD stated that they have already begun reducing U.S. military personnel at Soto Cano to the levels necessary for USSOUTHCOM to carry out JTF-B’s restructured mission, which was formally approved on November 18, 1994, after the completion of our audit work. DOD plans to reduce the number of helicopters from 33 to 11 and personnel from the April 1994 level of 780 to 499 by October 1995. DOD said that if JTF-B were eliminated, it would cost units deploying to the region about $8.2 million per year to provide the command and control and logistics support for most exercises in the Central American countries at the fiscal year 1993-94 level. No details were provided as to how the $8.2-million estimate was established or its relevance to the total cost of the U.S. presence at Soto Cano. DOD stated that continued U.S. military operations at Soto Cano are important to ensure effective forward presence and to execute peacetime operations in the Central American region. They responded that any further restructuring of DOD activities at Soto Cano should await decisions that are pending on the relocation of USSOUTHCOM headquarters. DOD’s response and comments are in appendix II. The Department of State generally agreed with the information in the draft report but expressed concern about its timing and the political signal that might be perceived by the Latin American region if JTF-B were to be terminated. The U.S. Customs Service, DEA, and the Office of National Drug Control Policy generally agreed with the information contained in the draft report. Informal comments received from the agencies during discussions on a draft of this report have been included where appropriate. We interviewed officials from the Office of the Secretary of Defense, the Office of the Joint Chiefs of Staff, the State Department, the U.S. Customs Service, DEA, and the Army National Guard Readiness Bureau, all in the Washington, D.C., area. We also met with the Army Reserve Command Headquarters in Atlanta, Georgia, and the U.S. Atlantic Command in Norfolk, Virginia. We obtained additional information related to the costs of maintaining the presence at the base from Air Force Air Combat Command Headquarters in Langley, Virginia, and the Army Forces Command Headquarters in Atlanta, Georgia. In Panama, we met with officials from the USSOUTHCOM, including U.S. Army South, and the U.S. Customs Service and DEA. In Honduras, we visited the U.S. military installation at Soto Cano and interviewed the Commander, JTF-B; the Commander, 4th Battalion, 228th Aviation Regiment; and other military personnel assigned to the base. We also met with the U.S. Ambassador to Honduras and other embassy officials, including the Commander of the USMILGP, the Defense Attache, and the DEA Country Attache. Additionally, we interviewed former and present Honduran government and military officials regarding the U.S. military presence in Honduras. We did not assess the effectiveness of the programs that are supported by JTF-B and the other U.S. military units at the base. We conducted our review between October 1993 and June 1994 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretaries of Defense, State, and Treasury; the Attorney General; the Commissioner of U.S. Customs; the Administrator of DEA; the Directors of the Office of National Drug Control Policy and the Office of Management and Budget; and interested congressional committees. Copies will also be made available to others upon 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 III. Mario L. Artesiano, Regional Assignment Manager Nancy T. Toolan, Evaluator-in-Charge Daniel E. Ranta, Evaluator Sara L. Bingham, Reports Analyst 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 whether the U.S. military presence at Soto Cano Air Base in Honduras is critical to current U.S. activities and objectives in the region, focusing on: (1) the cost of maintaining U.S. forces at the base; (2) U.S. objectives for regional economic growth and democratic reform; (3) drug interdiction activities; and (4) the withdrawal of U.S. forces from an air base in Panama. GAO found that: (1) the U.S. military presence at Soto Cano provides useful but minimal support to some U.S. government activities in the region, but there is not sufficient justification for maintaining the presence; (2) U.S. forces are to support military training exercises, humanitarian and civic assistance exercises, and U.S. counterdrug activities in Honduras; (3) the Army acknowledges that training can be conducted in the region without a semipermanent logistics support base; (4) federal agency officials believe that they can continue their regional operations without support from the U.S. military at Soto Cano; (5) Soto Cano provides minimal support to U.S. counterdrug activities; (6) Soto Cano's potential as a support facility for military operations in Latin America is limited by the lack of a base rights agreement with Honduras, its limited capacity, and political issues; and (7) eliminating the U.S. military presence at Soto Cano would have a minimal impact on current U.S. missions and would potentially result in budgetary savings. |
Started in 1996, the Coast Guard’s Deepwater Capability Replacement Project is potentially the most significant and largest acquisition project in the agency’s history. The Coast Guard’s deepwater missions—that is, those missions beyond the normal operating range of shore-based small boats—include such actions as enforcing fisheries laws, intercepting drug smugglers, and conducting search and rescue operations far out at sea. Cutters, patrol boats, airplanes, and helicopters are all critical to meeting these responsibilities. Through the Deepwater Project, the Coast Guard is considering how to best meet these missions in the future—and in the process, how to replace or modernize this fleet of ships and aircraft. The Coast Guard’s preliminary estimates put the Deepwater Project’s cost at $9.8 billion over a 20-year period. The Coast Guard’s deepwater missions are met by four classes of ships and four classes of aircraft, including the Coast Guard’s largest cutters, airplanes, and helicopters. (See table 1.1.) The ships and aircraft are spread throughout the maritime areas of the nation, including the Pacific and Atlantic coasts, Alaska, Guam, and Hawaii. The Coast Guard uses its deepwater ships and aircraft to carry out a number of maritime missions and responsibilities. On the basis of data for fiscal year 1997, the primary missions are in search and rescue operations and three categories of law enforcement: protecting fisheries, interdicting illegal migrants at sea, and controlling the flow of drugs. Together, these activities account for about 80 percent of the operational hours of deepwater ships and 50 percent of the operational hours of aircraft. (See fig. 1.1.) Usage varies considerably by the type of ship or aircraft. For example, 378-foot cutters are used mainly in fisheries enforcement, while 110-foot patrol boats are used mainly in search and rescue activities and drug control efforts. HC-130 aircraft have their greatest usage in fisheries enforcement, and helicopters spend much of their time in search and rescue activities and drug control activities. Appendix I provides a more detailed breakout for the usage of each type of ship and aircraft. The Coast Guard estimates that it spent about $589 million to operate its deepwater ships and about $662 million to operate its deepwater aircraft in fiscal year 1997. The costs are broken out into three major areas: direct expenditures (e.g., the personnel costs of ship and aircraft operators), direct support expenditures (e.g., the cost of maintenance), and overhead (e.g., the cost of training). Direct expenditures account for the largest portion of operating costs. (See fig. 1.2.) Appendix II provides more detailed information on the cost to operate and maintain each type of ship and aircraft. The Deepwater Capability Replacement Project is intended as an integrated system of ships, aircraft, command, control, communications, intelligence, surveillance, and reconnaissance equipment to replace or modernize the Coast Guard’s current assets. According to the Coast Guard’s justification for the project, the existing deepwater ships and aircraft are at or approaching the end of their service life. The agency hopes to replace or upgrade them and end up—through the use of innovative technology, such as satellites—with a smaller number of ships and aircraft. By doing so, the Coast Guard hopes to lower total ownership costs by acquiring a system of assets that requires fewer staff to operate and maintain. As presented, the project will potentially be the largest procurement effort in the Coast Guard’s history. As it proceeds with the Deepwater Project, the Coast Guard will be required to follow the acquisition process outlined in Office of Management and Budget (OMB) Circular A-109, which is the principal guidance for acquiring major systems in the federal government. To avoid the problems commonly experienced in acquiring major systems, such as cost overruns and delays, OMB Circular A-109 specifies five major phases that agencies must complete when making large acquisitions: (1) determine mission needs, (2) identify and explore alternative design concepts, (3) demonstrate alternative design concepts, (4) undertake full-scale development and limited production, and (5) commit to full production. To secure the involvement of the agency’s top management in reviewing a project’s progress, problems, and risks, Circular A-109 establishes a key decision point between each phase. The Coast Guard has already moved beyond the first phase of the A-109 process: it has examined mission needs as they relate to the need to replace or modernize its fleet of deepwater ships and aircraft. This first phase is critical because it justifies the project and identifies the deficiencies that need to be resolved. The Department of Transportation (DOT), the Coast Guard’s parent agency, does not allow its agencies to request funds for a project unless DOT has reviewed and approved a well-documented statement of mission needs. In the first phase of the Circular A-109 process, the Coast Guard assembled and obtained DOT’s approval of a Mission Needs Statement. This statement is based on the Coast Guard’s Deepwater Mission Analysis Report (DMAR), which was issued in November 1995. The DMAR determined that the Coast Guard’s ships and aircraft were aging and that future demand exceeded the number of operational hours provided by the ships and aircraft. The DMAR also determined that capability improvements were needed in such matters as speed, boarding capacity, and the ability to classify targets. The DMAR concluded that as a result of these findings, there was a need to begin a project for acquiring new ships and aircraft. The Coast Guard is now in the second phase, or concept exploration, of the Circular A-109 process. During this phase, the Coast Guard or its contractors will develop key program documents, such as project baselines, requirements documents, acquisition plans, and evaluation criteria. Alternative concepts for correcting the deficiencies identified in the DMAR must also be explored as part of this step. For this acquisition, the Coast Guard is using a novel systems approach to examining its mission, its existing assets, and how best to accomplish its mission. Rather than using the traditional approach of considering the replacement of an individual class of ships or aircraft, the Coast Guard will use a “system of systems” approach that integrates ships, aircraft, sensors, and communication links together as a system to accomplish mission objectives. Through this approach, the Coast Guard hopes to avoid “stovepiping” the acquisition of ships and aircraft, which has led to a situation where they could not operate optimally together. According to the Coast Guard, the process incorporates multiple controls, which will maximize existing resources in an efficient manner. These controls include the use of multiple teams of contractors in a competitive environment to identify the most cost-effective set of equipment. Also, the Coast Guard has hired an independent contractor, who is prohibited from gaining any potential production contracts, to provide a check on the results from the industry teams. From August 1998 through December 1999, the Coast Guard will pay three teams of contractors to develop competing proposals for the Deepwater Project. Their development contracts, costing about $7 million each, call for the contractor teams to develop a proposal for maximizing the Coast Guard’s ability to carry out its missions while minimizing total ownership costs. The proposals could include replacing existing ships, aircraft, and other equipment; upgrading them; or some combination of the two. Besides submitting their proposals, the contractors will be required to provide other products such as cost estimates for implementing their proposals, a schedule for acquiring or upgrading any new ships and aircraft, and an implementation plan for integrating the new or upgraded equipment into the Coast Guard. Once the contractors submit their initial proposals, the Coast Guard will go through a series of steps designed to refine its concept of the system of systems. When the Coast Guard has selected a system that it wants from the proposals submitted, it will ask the contractors to submit additional final proposals for the system for the Coast Guard to evaluate. At the end of this process, the Coast Guard intends to award a contract to one of the contractor teams to build the system, which the Coast Guard calls the Integrated Deepwater System. The initial procurement of ships and/or aircraft is anticipated to begin in fiscal year 2002. In August 1996, the Coast Guard estimated that the cost of the Deepwater Project would range from $7.25 billion to as much as $15 billion. This estimate was based on replacing the existing fleet of 92 ships and 209 aircraft currently involved in deepwater missions. The Coast Guard cautioned that the estimate reflected a rough order of magnitude and that future estimates would be more accurate as the types and numbers of ships and aircraft are determined. The agency suggested that its estimate may portray the worst-case scenario because, through the use of technology, the Coast Guard intends to reduce the number of ships and aircraft required. When the Coast Guard supplied guidance for contractors to use in deciding how to develop proposals for the new system, it proposed a budget target that was consistent with the August 1996 estimate. For planning purposes, the Coast Guard told contractor teams to develop proposals that assume a cost of $9.8 billion over a 20-year period, or roughly $500 million a year starting in fiscal year 2002. The agency cautioned, however, that funding levels are ultimately contingent upon congressional approval. The Coast Guard is planning for substantial funding increases for the Deepwater Project over the next 4 years. In fiscal year 1998, the Coast Guard spent $5 million on the Deepwater Project. The Coast Guard estimates that this cost will grow to an estimated $500 million by fiscal year 2002. (See table 1.2.) The Subcommittee on Transportation, Senate Committee on Appropriations, asked us to review the Deepwater Project’s justification and the planning process that the Coast Guard was following. We focused our review on the following questions: To what extent does the current justification for the Deepwater Project accurately depict the Coast Guard’s need to modernize or replace its ships and aircraft? To what extent are projected costs for the Deepwater Project consistent with the Coast Guard’s overall budget for its capital projects? To answer the first question, we examined three main areas covered in the Deepwater Project’s justification: the condition of current assets, projected capability needs, and projected demand for services. We analyzed the Coast Guard’s documents depicting this need, such as the Deepwater Mission Analysis Report and the Mission Needs Statement, and compared the information that these documents presented with other Coast Guard data, such as engineering studies on the condition of Coast Guard ships and aircraft, planned upgrades for extending the service life of ships and aircraft, and records of actual usage. In those instances where the Coast Guard had relied on contractors to develop data for the project’s justification, we interviewed contractor officials and obtained information on the procedures and methodology they used. We interviewed Coast Guard and DOT acquisition and planning officials in headquarters to understand the process used by the Coast Guard to justify the Deepwater Project. We also interviewed (1) staff in the Coast Guard’s Pacific Area office in Alameda, California; Atlantic Area office in Norfolk, Virginia; and the district office in Miami, Florida; (2) engineering and maintenance managers at the Coast Guard’s headquarters; (3) Coast Guard staff in the Maintenance and Logistics Command in Norfolk, Virginia, and Alameda, California; (4) Coast Guard staff in the Engineering Logistics Center in Baltimore, Maryland; and (5) staff in the Coast Guard’s Aircraft Repair and Supply Center in Elizabeth City, North Carolina, to obtain information on the agency’s deepwater missions, the condition of ships and aircraft, and maintenance practices. We also reviewed OMB Circular A-109 and DOT’s and the Coast Guard’s policies on and procedures for major acquisitions. Finally, we judgmentally selected locations for site visits that gave us the full mix of deepwater air and ship fleets and mission responsibilities. On the basis of this selection, we visited and interviewed ship crews in Seattle, Washington; Norfolk, Virginia; Miami, Florida; St. Petersburg, Florida; and Alameda, California, and air crews in Elizabeth City, North Carolina; Miami, Florida; Clearwater, Florida; and Kodiak, Alaska, to obtain information on the condition, capability, and operations of deepwater assets. To answer the second question, we reviewed OMB’s budget targets for the Coast Guard’s budget for its capital projects, budget reports issued by the Congressional Budget Office, the Coast Guard’s Capital Investment Plan, the Deepwater Project’s funding and acquisition strategy, and other Coast Guard budget documents. We also interviewed Coast Guard, DOT, and OMB officials on the affordability of the Deepwater Project. We performed our work from October 1997 through September 1998 in accordance with generally accepted government auditing standards. When it initially proposed the Deepwater Project in 1995, the Coast Guard indicated that most classes of deepwater ships and aircraft would begin reaching the end of their service life within the next 2 to 9 years and would largely need to be phased out by 2010. Information developed since the initial proposal indicates, however, that many of these assets, particularly aircraft, have a service life that extends considerably beyond what the Coast Guard projected at the time. In the 1995 proposal, the Coast Guard also asserted that the capabilities of existing ships and aircraft were inadequate to meet current and future demand. We were unable to verify whether these assertions were correct because the Coast Guard did not have sufficient supporting evidence. The Coast Guard and DOT now recognize that the 1995 justification did not adequately reflect the condition of deepwater ships and aircraft or their ability to meet future needs. The Coast Guard is conducting a number of internal studies that will update the condition and capabilities of its ships and aircraft as part of the next phase of the acquisition process. This phase began in August 1998, when the Coast Guard awarded contracts to three teams of contractors for developing competing proposals for the future deepwater system. Delays in providing updated information to the contractor teams could adversely affect the quality of the proposals submitted, in that, the teams could be disadvantaged in developing the most effective economical proposals for the Deepwater Project. The 1995 project justification was inadequate in part because of the Coast Guard’s relative inexperience in preparing a mission analysis this complex and in part because of certain weaknesses in the system for developing and approving such studies. More specifically, the system’s weaknesses included not accumulating complete data, not having specific guidance for preparing the analysis, and not having a review process that was thorough enough to identify weaknesses in the methodologies and the data used. The Coast Guard’s justification of the need for the Deepwater Project was presented in the DMAR, issued in 1995. The DMAR based its determination of how long ships and aircraft could operate on the estimate made when they were built or when they last underwent substantial modification. However, such estimates are not always reliable predictors of actual service life, according to industry sources and officials in the Coast Guard who operate and maintain deepwater ships and aircraft. Instead, the estimates are benchmarks signaling the need for a more thorough engineering reevaluation of the condition and remaining life of the ships and aircraft. Since 1995, a number of these reevaluations have been conducted. They show that for deepwater aircraft, service lives can be extended significantly beyond the initial estimates through a combination of maintenance, safety, and capability upgrades. The reevaluations of deepwater ships have been more limited than reevaluations of the aircraft, but the ships studied thus far show that they are also likely to have a longer service life. According to the DMAR, most of the Coast Guard’s deepwater aircraft and ships will have reached the end of their service life by 2010. The estimated service lives were generally 20 years for aircraft and 30 years for ships unless substantial modifications had been conducted. Because these ships and aircraft were acquired over a period of years, the DMAR indicated that the oldest of these would need replacement or modernization generally starting from 1998 through 2003. The estimates used were based on industry standards, according to a Deepwater Project official. The DMAR’s depiction of the service life of each type of aircraft and ship is shown in table 2.1. Studies by the Coast Guard and other independent groups show that Coast Guard aircraft can operate significantly beyond their 20-year design life, assuming that proper maintenance and upgrades are done. Since the DMAR was issued, the Coast Guard has completed a new study of its aircraft. A draft of this study, prepared in May 1997, concluded that the Coast Guard’s aircraft are capable of operating safely until at least 2010 and likely beyond. This conclusion substantially affects the estimated service life of aircraft presented in the DMAR. As figure 2.1 shows, on the basis of estimated service life alone, no aircraft would need to be replaced before 2010, and the final phaseout of most types of aircraft could stretch until 2020 and beyond. The study’s conclusion was predicated on three main factors. Condition of aircraft is good—and independently corroborated. According to the Coast Guard’s engineering officials, outside assessments have been conducted on three of the four types of aircraft. Like the Coast Guard’s assessment, these independent studies found the aircraft to be in good condition and capable of operating far beyond the estimates used in the DMAR. Capabilities of existing aircraft can be upgraded to better meet the Coast Guard’s missions. The study identifies several projects that can further the life or upgrade the capability of each aircraft. For fiscal year 1999, for example, the Coast Guard is requesting $37 million in acquisition, construction, and improvements (AC&I) funding for projects to upgrade individual types of aircraft. In addition to projects related to specific aircraft, other current AC&I projects are improving the flow of communication and information for all aircraft—for example, a $21.5 million project is providing secure and reliable communications for command and control through commercial satellite communications. In all, according to a Coast Guard engineering official, the study identified about $200 million in AC&I projects benefitting deepwater aircraft. (For more detailed information on the projects, see app. III.) A rigorous maintenance program is in place. According to the Coast Guard Aircraft Repair and Supply Center (ARSC) official responsible for maintaining the agency’s aircraft, a rigorous maintenance program for aircraft, as well as periodic assessments of the condition of each aircraft, allow the aircraft to operate beyond original service life estimates. The Coast Guard uses a two-level maintenance system that includes maintenance performed at the air stations (servicing, component replacement, and inspection for corrosion and fatigue cracks) and more extensive maintenance performed periodically at the ARSC, which can take several months to be completed. At the four air stations we visited, we asked 37 Coast Guard flight crew members what they thought about the condition and capability of their aircraft and their ability to carry out their missions. (These flight crews also conduct maintenance on their own aircraft.) Overall, most crew members said that they were satisfied with the condition and performance of their aircraft but noted shortcomings in sensors and communication equipment that hampered their ability to fully carry out their missions. For example, Coast Guard crew members stated either that existing night vision capabilities are totally absent or that they are making due with equipment designed for other purposes. Although the Coast Guard has not yet performed all of the engineering studies necessary to evaluate the entire fleet of deepwater ships, recently completed assessments of some of its deepwater ships show that they can operate beyond the service life estimates used in the DMAR. These engineering assessments, performed from 1994 through 1997 by the Coast Guard’s Ship Structure and Machinery Evaluation Board and referred to as SSMEBs, have been conducted for a limited number of three of the four types of ships. Each has shown that the ships are in good condition and that, in two of three instances, the service life estimates are longer than those presented in the DMAR. The Coast Guard established the SSMEBs as a way of assessing the condition of ships and determining if their service life can be extended. The assessments are supposed to be conducted on one or more ships of each type 10 years after the commissioning of the lead ship and at each 5-year interval thereafter. SSMEBs on the 378-foot high-endurance cutter have not been performed because of budgetary constraints, according to the Coast Guard’s Chief Naval Engineer. In light of information needs for the Deepwater Project, the Coast Guard is initiating assessments on one 378-foot and one 270-foot cutter and expects to complete them in fiscal year 1999. The most recent SSMEBs or other evaluations have indicated that the service life of the evaluated vessels is longer than that indicated in the DMAR. 270-foot cutter. In 1994, an SSMEB showed the evaluated cutter to be in excellent condition and a potential for extending the cutter’s service life through the replacement of equipment or modifications to be done during maintenance periods. A recommended mid-life maintenance, similar to that done on the 210-foot cutters, would add an additional 15 years to the service life of the vessels—well beyond the service dates shown in the DMAR. 210-foot cutter. SSMEBs conducted on two cutters in 1997 showed that their service life was longer than that shown in the DMAR (at least 2 additional years for one cutter evaluated and at least 5 years for the other). 110-foot patrol boat. The three SSMEBs conducted on these patrol boats since 1995 were consistent with the service life estimates used in the DMAR. However, other studies conducted by the Coast Guard have estimated the remaining service life to be up to 6 years beyond the dates cited in the DMAR. As with aircraft, maintenance and upgrades are key factors that help extend the service life of Coast Guard surface vessels, according to Coast Guard naval engineering officials. A number of upgrades are scheduled, and the Coast Guard takes preventive and corrective action on a continual basis to ensure that a vessel’s condition is maintained. For example, the Coast Guard has been replacing surface search radars on many of its cutters since 1994 and has requested $12.9 million for fiscal year 1999 to continue this project. During the course of our work, we visited cutter crews at four locations to discuss the capabilities of the Coast Guard’s deepwater ships and specific on-board systems for such functions as detecting and classifying targets and communicating with other Coast Guard assets and land units. Like their aviation counterparts, most of the ships’ crew members were satisfied with the performance of their vessel. However, many said that outdated sensors and communication equipment limited their abilities to fully perform their missions. Similar to Coast Guard pilots, crew members cited the need to improve night vision capabilities, which could improve target detection capabilities and the ability of helicopters to land on cutters at night. Also, they noted the difficulty of launching small boats from cutters during rough seas, which could be improved if the ships had better launching systems; the inefficiency of the gas turbine engines on the high-endurance cutters was mentioned as well. As ships and aircraft continue to age, rising operations and maintenance costs can become one factor in deciding whether to keep equipment or replace it. For example, studies have shown that the cost to operate and maintain aircraft can rise as they age. This occurs as equipment wears out and needs to be replaced or maintained more frequently. So far, the studies showing that the agency’s ships and aircraft have a longer life than originally thought have presumed that proper maintenance and upgrades will be carried out. Several of the studies note that upgrades are more likely to be a lower-cost solution than replacing the entire ship or aircraft. As the Coast Guard proceeds with the Deepwater Project, it is developing information on the cost to operate and maintain its ships and aircraft over time. Such information may provide the agency with additional insights on the most cost-effective solutions to carrying out its deepwater missions. DOT’s and the Coast Guard’s acquisition requirements emphasize the need to document any gaps between the capability of current ships and aircraft and future performance expectations as part of the mission analysis. Specifically, the Transportation Acquisition Manual says that a mission analysis “identifies capabilities needed to perform required functions, highlights deficiencies in the functional capability, and documents the results of the analysis.” Likewise, the Commandant’s instruction setting the Coast Guard’s policy on mission analysis states that mission analysis is to “identify deficiencies in current and projected capabilities.” The instruction also states that mission analysis should include a “baseline of current mission performance and asset capabilities.” However, we found that the justification presented in the DMAR was not backed up by quantifiable analyses demonstrating that a capability shortfall existed. While the DMAR asserted that a gap in capabilities existed, we found no evidence that the Coast Guard had conducted an analysis comparing the current capabilities of aircraft and ships with current and future requirements, as required by DOT’s and the Coast Guard’s guidance. For example, the DMAR stated that “A comparison between mission requirements and current asset capabilities indicate that Coast Guard assets are very capable, but will not meet all requirements for the future.” According to the Coast Guard official heading the team responsible for preparing the DMAR, the Coast Guard did not perform any specific analyses or comparisons to support this statement. Rather, the statement was based on an informal comparison conducted by the project team and based on its experiences with the deepwater aircraft and ships. Coast Guard officials told us that they plan to complete a comparative assessment of the current capabilities and functional needs of the future deepwater system by November 1998. Coast Guard officials told us that the proposed comparative assessment would involve a baseline determination of current deepwater ships and aircraft and an evaluation of how well they meet future functional requirements. As of August 1998, a contractor for the Coast Guard had collected data on the performance standards and measures for deepwater missions, as well as the capabilities of ships and aircraft. These data will be used in the comparative assessment to be conducted by the Coast Guard. DOT’s and the Coast Guard’s acquisition requirements call for developing an estimate of the future need and demand for major systems before they request funds from the Congress. According to the DMAR, the Coast Guard’s deepwater ships and aircraft were able to meet only about one half the actual need for surface and air hours. In future years, as existing ships and aircraft reach the end of their useful life, the gap between available resources and actual need was projected to become even greater. (See fig. 2.2.) The unmet need, according to the Coast Guard, affects primarily the drug interdiction and fisheries missions. For example, the Coast Guard said that it had to reduce drug interdiction missions in the Caribbean below desired levels and that it had to reduce fisheries patrols in areas off the Northeast coast that had been closed to fishing. The unmet need also reflected cutting operations in low-priority areas; areas that would typically receive little attention would not be patrolled. We attempted to verify the Coast Guard’s estimates of surface and aviation hours needed for deepwater law enforcement missions, which constitute over 95 percent of the total estimated mission-related hours for ships and about 90 percent of the total estimated mission-related hours for aircraft. The Coast Guard and its consultant who studied this area could not provide us with the information they used to make these estimates. We could not verify the reasonableness of surface demand hour estimates because the data sources used were not documented or available. The Coast Guard had contracted with a private company to develop the demand analysis. Contractor officials responsible for the analysis told us the analysis was based on data obtained from Coast Guard officials. However, the contractor did not document any details regarding the data, such as which Coast Guard officials provided the data and what they were based on. Coast Guard officials told us that the demand analysis was based on two main sources: fiscal year 1992 data from the Law Enforcement Information System and information supplied by working groups at the Coast Guard’s headquarters, who based their estimates on recent field experience. To verify these data, we judgmentally selected 24 data items and asked Coast Guard officials to provide support for them. The Coast Guard was unable to provide us with sufficient support for any of the 24 items. One of the data items that we examined—the estimated demand for drug interdiction hours—provides an example of the lack of clearly verifiable information, as well as an example of the possible errors introduced into the analysis. The demand analysis based its estimates of drug interdiction hours, in part, on intelligence reports showing 400 suspected narcotraffickers per year in one district. Coast Guard officials were unable to provide support for these data and said that they presumed that the analysts had access to intelligence lists and that they had counted approximately 400 different suspect vessels for fiscal year 1992. In addition, we found that the estimated surface demand hours for drug interdiction may have been substantially overstated because the number of possible suspect vessels may have been double-counted. For example, two Coast Guard performance standards task the Coast Guard to (1) board 10 percent of the targets of interest within high-threat areas and (2) apprehend, assist in the apprehension of or hand-off to another counter-drug law enforcement agency, every known narcotrafficker intercepted. To accomplish both standards, the Coast Guard must identify and board vessels. However, the contractor did not adjust its methodology to eliminate the problem of identifying and boarding the same vessel twice. Our analysis indicates that the resulting overstatement could be as much as 21 percent of the total demand estimate for drug interdiction, depending on the extent of the duplication. We could not verify the reasonableness of the Coast Guard’s estimate of needed aircraft hours because the source and quality of the data used in the study were not fully supported. The estimate was based on a 1992 Coast Guard study that used fiscal year 1991 aviation data. The Coast Guard told us that the fiscal year 1991 aircraft usage totaled about 40,000 hours. However, the 1992 study indicated that about 75,000 hours were needed—35,000 more than could be supported by actual usage on the basis of the prior year’s usage. Coast Guard officials were unable to provide support for the additional 35,000 hours other than to explain that for its 1992 study, the Coast Guard directed its district offices to base their estimates of needed aircraft hours on historical data for fiscal year 1991 and to add hours for unmet and future requirements. The district offices did not provide support for their unmet and future requirements. The Coast Guard’s guidelines for mission analysis require the disclosure of assumptions that underlie the analysis. However, the Coast Guard did not disclose a key assumption in the analysis that the demand for services was based on the Coast Guard’s having unlimited resources to accomplish every task within its missions. In other words, the Coast Guard based the demand on fully meeting every responsibility assigned to the agency and with the assumption that it would have enough staffing, support, and equipment to meet all of these responsibilities. A Coast Guard official said that the agency assumed unlimited resources because the agency sets its sights on providing a high level of service and strives to achieve it. Not making this assumption clear, however, can present a distorted picture of the demand for services. While the Coast Guard may believe it is appropriate to base its estimates on the underlying assumption that unlimited resources will be available, not disclosing this fact can leave decisionmakers with an unclear picture of what is being presented. In January 1998, the Office of Management and Budget told the Coast Guard and DOT to withdraw the DMAR and the Mission Needs Statement as justification for the Deepwater Project. This occurred because OMB officials were concerned that more data were needed before the Coast Guard formally submitted information to contractor teams on the extent of the Coast Guard’s resource needs. To address this concern, the administration plans to create a Presidential Roles and Missions Commission to review and validate the Coast Guard’s roles and missions. More specifically, the Commission will identify the Coast Guard’s statutory and regulatory missions and evaluate whether the agency continues to be the most appropriate organization to carry out these assignments. The results of the Commission’s work would then be used as input to the project. The Coast Guard plans to replace the DMAR after the Presidential Commission completes its work in October 1999. As of August 1998, the Coast Guard planned to revise the DMAR by January 2000. In the meantime, the Coast Guard’s plans call for the contractors themselves to assess the condition of ships and aircraft as part of the next phase of the acquisition process. In August 1998, the Coast Guard awarded contracts to three contracting teams to develop proposals for an integrated deepwater system. By February 1999, these contractors must submit a description of the alternatives they are considering for the system. By December 1999, they must submit their proposal for the system, including life-cycle cost estimates of the system and its assets and an implementation schedule for acquisition and deployment. We expressed concerns to senior Coast Guard and DOT officials about proceeding without the kind of clear understanding of the condition and capabilities of vessels and aircraft and service demands envisioned in a well-substantiated DMAR. Our concern mirrored a similar concern expressed in a November 1997 internal Coast Guard study, which concluded that the DMAR and the Mission Needs Statement needed to be revalidated. According to a December 1997 memo from the Assistant Commandant for Operations, “Industry will extensively use these documents . . . to develop a system of systems and it is critical that our projected missions and the stated levels/standards of performance are still accurate.” Without clear knowledge of whether current ships and aircraft are clearly deficient in their capabilities or when they are likely to reach the end of their useful life, contractors may develop proposals that call for buying ships and aircraft that are unnecessary or, if necessary, are brought into service too early or too late. This is of particular concern when the potential cost of new aircraft and ships is considered. Even if contractors receive this updated information, receiving it too late could mean that they would be disadvantaged in developing workable proposals for the next step of the acquisition process. For example, they may already have eliminated alternatives that, in the context of the additional information, are more cost-effective. Coast Guard officials agreed that it is essential to provide contractors with updated information on the condition of ships and aircraft as soon as possible, but they said that it was also important to move forward with the contract awards because the contractors had already formed their teams and were ready to begin work. They noted that long procurement lead times require that the agency initiate actions now without delay. According to agency officials, the Coast Guard has learned the importance of having sufficient time for advance planning to ensure that it has adequate ships and aircraft to accomplish its mission while ensuring that they are available at minimal cost. Coast Guard officials also said they plan to provide the information on the condition and capabilities of its ships and aircraft as contractors proceed with their work. What follows is a listing of the relevant types of information, together with Coast Guard officials’ statements about the degree to which contractors would be provided with such information during this phase of the acquisition process. The Coast Guard plans to provide contractor teams with available data on its existing ships and aircraft at a meeting with them in September 1998, according to Coast Guard officials. As of August 1998, several studies of ships had not been finalized. The specific studies under way or completed and their status follow: Internal evaluation of aircraft (the Near Term Support Strategy study). This study, which establishes a baseline of the condition of all four types of deepwater aircraft, was essentially completed in May 1997 and issued in final form on August 19, 1998. A Coast Guard Deepwater Project official said that project officials expected to provide contractors with the results of this study in September 1998. He said the contractors will also be able to visit the Aircraft Repair Supply Center and other Coast Guard locations to obtain additional information on aircraft condition. Internal evaluations of ships (SSMEBs and related studies). SSMEBs and related studies conducted since the DMAR was published provide the most up-to-date indications of vessels’ conditions. In addition to the SSMEBs and studies already completed, the Coast Guard’s Boat Engineering Branch plans to issue an engineering report soon on the remaining useful service life of the 110-foot patrol boats. A Coast Guard Deepwater Project official said that the completed SSMEBs and studies would be released to contractors when completed. Several additional SSMEBs are scheduled for completion in June 1999, well after the contractors have started their work. The Coast Guard official added that for SSMEBs under way, as well as for any other information on ships’ conditions, contractors will be able to visit Pacific and Atlantic Logistics Centers to obtain their own information. During our review, the Coast Guard began planning to study the capabilities of its current deepwater aircraft and ships and comparing these capabilities with the future functional requirements of the deepwater system. This work will be done by a private contractor. The information from such a study would appear to be critical to contractors in developing proposals for the most cost-effective way to fill such gaps. This analysis is scheduled for completion in November 1998. A Coast Guard Deepwater Project official told us that project officials plan to make the study and its underlying data available to contractors at that time. As part of the ongoing planning for the Deepwater Project, the Coast Guard attempted to recalculate its estimates of future demand for services. According to the staff involved, the reliability of the underlying database did not permit such a recalculation. OMB expects that the Presidential Roles and Missions Study will be issued by October 1999 and that it will provide additional information on the future demand for Coast Guard services. A Coast Guard Deepwater Project official said that the Coast Guard plans to recalculate the demand estimate as part of revising the DMAR. According to the Coast Guard’s current plan, as of August 1998, the DMAR and the Mission Needs Statement will not be revised until January 2000, or after contractors have submitted their initial proposals on the project. Decisions made by the Presidential Commission formed for studying the Coast Guard’s roles and missions could also have a direct bearing on the eventual shape of the Deepwater Project. The Commission was proposed out of concern that more information was needed on the Coast Guard’s resource needs. However, by July 1998, the future of the proposed Commission had become more uncertain. In that month, the Subcommittee on Transportation, House Committee on Appropriations, expressed concerns about the Commission and proposed replacing it with a blue-ribbon panel to study not only the Coast Guard’s roles and missions but its capital needs as well. But even if the Presidential Commission is formed in the fall of 1998, the results of its work are not anticipated until at least October 1999. As a result, the results of the Commission’s study will not be available for the contractors to consider as they develop their blueprints for the agency’s future deepwater system. The timetable for a report by the congressionally proposed blue-ribbon panel shows that its report would be issued by January 2001. A number of factors contributed to the data weaknesses we noted in the DMAR and ultimately resulted in the Coast Guard’s proceeding with the project before it had established a fully sound justification. One reason, Coast Guard officials pointed out, was that nothing as comprehensive as the Deepwater Project had ever been covered in a mission analysis report. For example, it was the first time the Coast Guard had dedicated staff to produce a mission analysis, and it was the first time the Coast Guard had ever tried to document the demand for the ships and aircraft being studied. In many respects, the agency was learning as it went through the process, since the staff were not familiar with mission analysis techniques. We also noted weaknesses in DOT’s and the Coast Guard’s internal guidance for preparing mission analyses and the processes for reviewing such documents. Three aspects of the process merit attention: more specific requirements and guidance for assessing the condition of current assets, more thorough disclosure of how information supporting the justification was developed, and more structured and thorough review of the project justification itself. DOT and Coast Guard policies provide limited guidance for assessing current assets as part of developing a mission analysis report, such as the DMAR, on which the project’s justification is based. The closest thing to a requirement for assessing the condition of current assets is a statement in the DOT Acquisition Manual that the mission analysis should be “based on the continuous monitoring of performance, supportability, and maintenance trends of operational systems to determine when they will no longer be able to meet current or emerging needs.” The Coast Guard’s guidance generally outlines the types of analyses and information to be included in the mission analysis but does not specifically mention an assessment of the current condition of the assets scheduled for replacement. In reviewing the information on which the decisions about an acquisition as large as the Deepwater Project will be based, it is important that decisionmakers in the Coast Guard and the DOT are able to understand how planners arrived at their conclusions. For example, it is important for decisionmakers to know about any limitations in the approach for collecting information, limitations in the reliability of the underlying data, or other factors that would affect the credibility of the information in supporting a major capital expenditure. Such explanations of how planners arrived at their conclusions is an important part of minimizing the possibility for errors and erroneous conclusions. The Coast Guard’s and DOT’s guidance for developing a mission analysis are silent on disclosing methodologies and data sources. We found several instances in which not knowing this information could result in assigning too much credibility to the conclusion being drawn. For example, in its presentation on capability shortfalls, the DMAR stated that deepwater ships and aircraft had capability deficiencies but did not explain the information on which this conclusion was based. According to a Deepwater Project official, to make this assertion, the Coast Guard relied on the opinions of a few personnel who were working on the Deepwater Project. No database was developed, nor was any systematic approach used to collect information on capability deficiencies from a cross-section of personnel who actually operated and maintained these assets. Similarly, the DMAR did not include an explanation for how planners had determined the substantial gap between future demand and current operating levels, which was presented in the DMAR. In developing this estimate, planners relied in part on a survey of a small number of Coast Guard units—not enough to provide statistical validity. This limitation was not disclosed. We recognize that in some instances, it may be difficult to develop information as thoroughly or systematically as might ideally be desired. However, ensuring that explanations for how information was obtained and what information is used for conclusions would provide a more solid foundation for the Coast Guard when it develops mission analysis reports in the future. After the justification for the Deepwater Project was developed, it went through a number of reviews inside and outside the Coast Guard. None of these reviews included any systematic checks of the underlying information. As a result, these reviews did not disclose the data weaknesses that we later found, including the fact that some basic acquisition requirements—such as documenting the capability deficiencies of current assets—were not met. For example, the DMAR’s primary internal review, which was coordinated by the Director of Resources’ office, involved a review of the document by a number of senior managers within the Coast Guard. However, this review did not involve any verification of the underlying data on which the DMAR’s findings and conclusions were based. This same focus was found in additional reviews that took place. Before an acquisition as large as the Deepwater Project can proceed past the first main decision point and into the concept exploration phase of OMB Circular A-109’s acquisition process, the Coast Guard’s System Acquisition Manual calls for it to be reviewed by two councils—one within the Coast Guard (the Coast Guard Acquisition Review Council) and one within DOT (the Transportation Systems Acquisition Review Council). The Coast Guard Acquisition Review Council is an advisory body on major acquisitions for the agency’s acquisition executive. It reviews major acquisitions at each key decision point and serves as a forum for discussing project-related issues and resolving problems that need to be handled by the Coast Guard’s top management. According to the Coast Guard’s Systems Acquisition Manual, the Council shall review a project’s documentation, ensure that the project manager is ready for DOT’s review, and ensure top management’s commitment to the project’s acquisition strategy and plans. However, this review did not include a check of the underlying information. As a result, the data problems that eventually surfaced were not revealed by this review. When a project moves to a review by the Transportation Systems Acquisition Review Council, members presume that the sponsoring agency has presented complete and valid data, according to the Council’s Executive Secretary. In reviewing the Deepwater Project, Council members did ask the Coast Guard to clarify its schedule and estimated costs, clarify the mission activities, and identify the remaining service life of assets. However, the level of review did not extend to examining the completeness of the data. Our review suggests that at one or more points in the process of reviewing a proposal of this size and complexity, additional steps should be taken to help ensure that acquisition requirements are adequately carried out. For example, reviewers of proposals might require that preparers of documents like the DMAR complete checklists or certify that requirements have been met. Alternatively, one or more of these levels of review could employ a checklist or some other approach to ensure that a certain level of testing and verification is conducted as part of the review. For the DMAR, such steps would likely have identified the absence of a formal analysis for comparing required capabilities with the capabilities of existing assets. The remaining useful life of the Coast Guard’s deepwater aircraft and ships may be much longer than the Coast Guard originally estimated. While this development could be a justification for slowing down the project, it should be weighed against the long lead time needed for a procurement of this magnitude. If the Coast Guard ensures that the contractors that are developing the initial deepwater proposals have current, complete information on the condition and capabilities of the agency’s ships and aircraft, potential problems in this area could be minimized and the project could proceed as planned. This information is critical for ensuring that contractors have the opportunity to develop the most cost-effective proposals as possible, as well as ensuring that the Coast Guard is able to make the best use of existing, upgradable ships and aircraft. The development of the initial justification for the Deepwater Project was the most complex mission analysis the Coast Guard has ever undertaken, according to Coast Guard officials. As they continue to refine its acquisition-planning process, the Coast Guard and DOT can also apply the lessons learned to future acquisitions as well. In particular, the agencies can look to (1) strengthening the guidance for determining how to establish the remaining useful life of assets, (2) providing better data and documentation on how information supporting an acquisition was developed, and (3) ensuring that reviews of proposals include checks that will help ensure the completeness and accuracy of the information behind a proposal. We recommend that the Secretary of Transportation direct the Office of the Assistant Secretary for Administration and the Coast Guard to expedite the development and issuance of updated information from internal studies to contractors involved in developing proposals for the Deepwater Project. Information should include, but not necessarily be limited to, the remaining service life of ships and aircraft, gaps between current and needed capabilities, and future service levels. We recommend that the Secretary of Transportation direct the Office of the the Assistant Secretary for Administration and the Coast Guard to carry out the following additional actions: Revise acquisition guidelines to better ensure that mission analysis projects for future projects are based on accurate and complete data on the condition of current assets, as appropriate for the assets or systems in question. Such revisions should stress the importance of using rigorous engineering or other data-based evaluations to estimate the remaining service life of assets rather than using estimates made when the assets were produced or modified. Revise acquisition guidelines to ensure that mission analysis reports and mission needs statements disclose the methodologies and data sources used. Also, expand the guidelines and emphasize the importance of using more systematic data collection techniques, such as structured interviews, sampling techniques, and empirical data. Develop a method to better ensure that existing acquisition requirements are carried out, such as documenting the gap between current and needed capabilities. Such actions could include the use of tools like checklists of key requirements or certification that requirements have been met. The Coast Guard has told contractors developing proposals for the Deepwater Project to develop their plans on the assumption that the project will cost $9.8 billion over 20 years—$300 million starting in fiscal year 2001 and $500 million per year thereafter. At this size, the budget would take virtually all of the Coast Guard’s projected spending for its capital projects, thus leaving little room for ongoing and future projects that amount to at least $300 million a year. Unless the Congress grants additional funds, which, under existing budget laws could mean reducing funding for some other agency or program, these other capital projects could be severely affected. Furthermore, the Coast Guard proposes that about one-third of the project’s funding come from proposed user fees for navigational and domestic ice-breaking services. Such fees have proven controversial when proposed in the past, and the Subcommittees of the Senate and House Committees on Appropriations with jurisdiction over the Coast Guard’s budget have already expressed their opposition to such fees. Absent such fees, the money would most likely need to come from additional appropriations. This would place the Deepwater Project in competition with other budget priorities, both inside and outside the Coast Guard. If budget realities force a readjustment in the Coast Guard’s acquisition plans for the Deepwater Project, the agency will likely face one of two choices: reducing the project’s scope or buying the same amount but over a longer period of time. Department of Defense (DOD) agencies seeking to procure several such items at once under restricted budgets have often tried to deal with the situation through the latter approach. However, this approach ultimately drives up costs because of such factors as higher administrative costs and the loss of quantity discounts. Now that the Coast Guard has found that many of its ships and aircraft will have a longer useful life than originally thought when the Deepwater Project was proposed, it can reassess the project’s strategy and scope and avoid this problem. Funding for the Coast Guard’s capital needs is affected by efforts to balance the federal budget. These efforts have resulted in limits on discretionary spending through fiscal year 2002. These limits are translated into budget targets developed by OMB for individual agencies. The budget targets set by OMB are then subject to change as the President and the Congress consider trade-offs involved in changing the distribution of available funds among programs and agencies. Overall, OMB’s budget targets call for an increase in the Coast Guard’s Acquisition, Construction, and Improvements account—the account used to fund the agency’s capital projects—over the next 5 years, from about $398 million in fiscal year 1998 to about $518 million in fiscal 2003. The higher target presumes that $165 million in new user fees will be available. The estimated cost for the Deepwater Project that the Coast Guard put forth in its initial spending plan would soon take up nearly the entire AC&I budget target established by OMB. By fiscal year 2002, when capital spending for the Deepwater Project is anticipated to reach $500 million, the Deepwater Project will have consumed 97 percent of the projected AC&I account. If the Coast Guard receives the target levels set by OMB, they will leave little room for the Coast Guard’s other ongoing capital expenditures. The Coast Guard’s capital plan shows that at least $300 million a year in other capital needs is scheduled from fiscal year 1999 through fiscal 2003. Many of these projects, such as the buoy tender projects and shore infrastructure improvements, are ongoing projects that have been in progress for years. Taken together, all current and projected capital spending would dwarf OMB’s target by fiscal year 2002. (See fig. 3.1.) Expenditures for the Deepwater Project alone will have risen to the point where they are nearly as great as OMB’s target, while expenditures for projects already approved, other future projects, and AC&I personnel bring the total to more than $300 million higher than the OMB target. The spending targets set by OMB presume funding from two main sources—annual appropriations from the Congress and new user fees. As proposed, the portion that would come from appropriations would drop from $407 million in fiscal year 1999 to $353 million in fiscal 2003. To augment these funds, the administration is proposing $165 million per year in new user fees beginning in fiscal year 2000. The fees are for navigational services (such as vessel traffic services in busy harbor areas or maintaining other aids to navigation) and ice-breaking services in domestic waters. The Coast Guard currently provides these services but does not charge for them. If past experience is any indication, the new fee will likely create controversy. The administration has proposed such fees before, and they have met with strong opposition. Groups who would have to pay the fees, such as ship and barge companies, have argued that singling out such a function for additional charge is unfair. For example, the administration’s proposed fiscal year 1998 budget mentioned the possibility of collecting a fee to recover the Coast Guard’s cost of providing ice-breaking services in the Great Lakes and the Northeast. However, in its deliberations on the Coast Guard’s budget, the Congress did not endorse this user fee. Obtaining this additional capital funding through user fees would also require congressional approval of a change with regard to earmarking—that is, allowing an agency to keep at least a portion of the fees collected to pay for providing the service. Currently, the Coast Guard is not allowed to keep fees collected; the revenues are sent to the Department of the Treasury, and the agency is reimbursed for its collection costs only. In July 1998, in their deliberations on the Coast Guard’s fiscal year 1999 budget request, the Subcommittees of the Senate and House Committees on Appropriations with jurisdiction over the Coast Guard’s budget cited their opposition to the new user fees proposed by the administration, and in addition, the House and Senate have prohibited the Coast Guard from planning or implementing any new user fees. This restriction will require the Coast Guard to seek out alternative sources of financing. The limits on discretionary spending set by the Deficit Control Act, as amended, will make it difficult for the Coast Guard to increase the level of funding for its AC&I account without taking funds away from another agency or budget account. Within the context of this act, as amended, increasing the level of appropriated funding in the future can be done only by reducing the level of another account, since discretionary spending is limited to the same nominal amount from fiscal year 1999 through fiscal 2002. These conditions—the reality of deficit reduction efforts and the uncertainty of a yet to be implemented user fee—point to the potential for a “double squeeze” on the Coast Guard’s AC&I account. Now that the Coast Guard knows that many of its deepwater ships and aircraft will have a longer useful life than originally thought, it may be in a position to reassess whether the funding strategy for the Deepwater Project should be changed. Such a reassessment may be needed to avoid the procurement mistakes often made by federal agencies in the past. If budget realities dictate the procurement of deepwater ships and aircraft at a much lower level than $500 million a year, this could result in the Coast Guard’s being able to obtain considerably less value for the dollars expended. Agencies that plan procurements that are too large for available funding budgets are left with essentially two choices: they can reduce the scope of the project at that point or they can adjust by using schedule stretch-outs—that is, buying smaller quantities of each item and lengthening the period over which the assets are acquired. Our work on DOD’s acquisition projects shows that costs can expand dramatically when this latter approach is adopted as a solution to acquisition plans that are not closely aligned with probable funding levels. For example, in a study of DOD’s acquisition strategy, we found that an attempt to purchase too many weapon systems at once had the effect of driving up costs, even when the weapons being produced were proven systems that were beyond the testing stage. When DOD was faced with funding limitations and had to stretch out the procurement period for 17 such weapons systems, the systems had cost increases totaling $10 billion. The Coast Guard has already used schedule stretch-outs as a way to deal with tight budgets—and with the same consequences. For example, the Coast Guard stretched procurement of 11 seagoing buoy tenders to 5 years instead of the planned 3-year period. Because of the loss of quantity discounts and higher administrative costs, the acquisition cost increased by an estimated $20 million to $30 million, according to the Coast Guard. As the Coast Guard proceeds with the project, the better-than-anticipated life of current deepwater ships and aircraft may provide the agency with an opportunity to adopt a more effective approach. It is now clear that many deepwater assets—especially aircraft—can operate many years beyond earlier estimates, assuming they receive the proper maintenance and upgrades. If many of these ships and aircraft can be upgraded and used for a much longer period of time, replacement needs—particularly in the short term—could be considerably less than the $500 million a year the Coast Guard has asked contractors to design their proposals around. Instead of being in a situation that commits the Coast Guard to replacing several kinds of deepwater ships and aircraft at once, the improved outlook would appear to allow the Coast Guard to focus on acquiring those ships and aircraft clearly in need of immediate recapitalization. This, in turn, would allow the Coast Guard to focus more dollars on completing other nondeepwater acquisition projects in the near term, thereby avoiding the waste that can occur under stretched-out schedules. Coast Guard managers pointed out that their planning approach to the Deepwater Project permits adjustments to the acquisition strategy and projected funding stream if projected levels of funding are not appropriated. Agency managers indicated that decisions on the schedule and options for procurement—ranging from the replacement of the entire system to the renovation and modernization of the existing system—will be made as the Coast Guard proceeds with the project. According to agency managers, proceeding to the next phase of the acquisition—demonstration and validation—will be contingent on the availability of funds. In the likelihood that $500 million a year is not received, they said, the agency will make adjustments and call on its contractors to revise their proposals and plans. We acknowledge that the Coast Guard has the flexibility to adjust the project later, but we question the advisability of continuing to ask contractors to develop a proposal so expensive that its funding appears doubtful. Our concern is that the planning assumption on which the Deepwater Project’s development is currently being based (a funding stream of $500 million a year) make the options for later adjustments expensive. If proposals must be extensively redone to make them less expensive, the government will have spent time and money in funding work that may be of limited value, and if the decision is made to adopt an expensive proposal but stretch out the procurement period to make it affordable, the Coast Guard could repeat the money-wasting scenario we have identified in so many other DOD scenarios. By contrast, using a strategy that is based on probable funding levels would appear to leave the Coast Guard in a better position to continue with the rest of the acquisition process. In a global sense, the Coast Guard is correct in beginning now to explore future systems to modernize deepwater ships and aircraft, especially given the long lead times often associated with procurements of this magnitude. The agency’s “system of systems” approach seems logical as a way to avoid a costly one-for-one replacement of assets, and its use of multiple contractors is an attempt to leverage technology and to identify cost-effective alternatives. However, despite these efforts, the proposed cost of the Deepwater Project threatens to overwhelm the Coast Guard’s AC&I account, which already rests on an uncertain premise that new user fees will be approved. By directing contractor teams to base their proposals on a funding amount nearly equal to its entire projected budget for its AC&I account, the Coast Guard is at risk of receiving Deepwater Project proposals that either (1) must be redone once funding levels become known or (2) result in expensive, stretched-out procurements. Contractors have just begun work on developing their proposals for the Deepwater Project. To align these proposals more realistically with the agency’s budget constraints and other capital needs, the Coast Guard would need to move as quickly as possible in changing the funding assumptions on which the project is based. We recommend that the Secretary of Transportation direct the Commandant of the Coast Guard to evaluate whether contracting teams should be instructed to base their proposals for the Deepwater Project on the assumption that the funding level will be lower than $500 million a year. We also recommend that the Commandant be directed to submit his decision on this matter to DOT’s Transportation System Acquisition Review Council and/or other appropriate offices within DOT for approval. We provided DOT and the Coast Guard with a draft of this report for review and comment. DOT and the Coast Guard generally concurred with the information in the report, and DOT indicated that they would consider the report’s recommendations. The Coast Guard generally concurred with the recommendations and said it will strive to improve the acquisition process. In addition, DOT and the Coast Guard provided several comments that clarified information on the DOT acquisition process, the cost of operating deepwater ships and aircraft, and the goals of the Deepwater Project, which we have incorporated into the report as appropriate. | Pursuant to a congressional request, GAO reviewed the extent to which the Coast Guard has: (1) accurately depicted the need to replace or modernize its deepwater ships and aircraft; and (2) aligned the estimated cost of its Deepwater Project with its overall budget for capital projects. GAO noted that: (1) although the Coast Guard is correct in starting now to explore how best to modernize or replace its deepwater ships and aircraft, the Deepwater Project's only formal justification developed to date does not accurately or fully depict the need for replacement or modernization; (2) this justification concluded that most deepwater ships and aircraft would need to be phased out starting in the next 2 to 9 years; (3) however, subsequent analyses by the Coast Guard and others have shown that deepwater aircraft likely have a much longer life; (4) the justification asserted that these ships and aircraft were incapable of performing future missions or meeting future demand, but GAO was unable to validate these assertions from the information available; (5) the Coast Guard withdrew the justification on the basis of concerns expressed by the Office of Management and Budget and is now developing more accurate and updated information; (6) several of these studies are still under way, even as contracting teams have already begun work on developing their initial deepwater proposals; (7) any delays in communicating this updated information to the contractors could adversely affect the quality of the proposals submitted; (8) while the Coast Guard's acquisition approach seems an appropriate way to avoid a costly one-for-one replacement of ships and aircraft, the agency could face major financial obstacles in proceeding with a Deepwater Project costing as much as initially proposed for planning purposes; (9) at a projected $500 million a year, expenditures for the project would take virtually all of the Coast Guard's projected spending for all capital projects, which currently include the construction of new buoy tenders and motorized lifeboats; (10) the Coast Guard expects more than $165 million of the annual funding to come from new user fees for domestic ice-breaking and navigational services that the Coast Guard currently provides; (11) however, the congressional subcommittees with jurisdiction over the Coast Guard's budget have expressed opposition to such fees, and the House and Senate have prohibited the Coast Guard from planning or implementing any new user fees; (12) if hoped-for funding does not occur, the Coast Guard may be left having either to reduce the scope of the project or to stretch out the procurement period; and (13) many other government procurement projects have demonstrated that when agencies attempt to address a problem by stretching out the procurement period, administrative and other costs increase, resulting in lower value for the amount of money spent. |
TEA-21 authorized a total of $36 billion in “guaranteed” funding through 2003 for a variety of transit programs, including financial assistance to states and localities to develop, operate, and maintain transit systems. One of these programs, the New Starts program, provides funds to transit providers for constructing or extending certain types of mass transit systems. A full-funding grant agreement (FFGA) establishes the terms and conditions for federal participation, including the maximum amount of federal funds available for the project, which cannot exceed 80 percent of its estimated net cost. The grant agreement also defines a project’s scope, including the length of the system and the number of stations; its schedule, including the date when the system is expected to open for service; and its cost. To obtain a grant agreement, a project must first progress through a local or regional review of alternatives, develop preliminary engineering plans, and obtain FTA’s approval for final design. TEA-21 requires that FTA evaluate projects against “project justification” and “local financial commitment” criteria contained in the act. FTA assesses the project justification or technical merits of a project proposal by reviewing the project’s mobility improvements, environmental benefits, cost-effectiveness, and operating efficiencies. In assessing the stability of a project’s local financial commitment, FTA assesses the project’s finance plan for evidence of stable and dependable financing sources to construct, maintain, and operate the proposed system or extension. In evaluating this commitment, FTA is required to determine whether (1) the proposed project’s finance plan incorporates reasonable contingency amounts to cover unanticipated cost increases; (2) each proposed local source of capital and operating funds is stable, reliable, and available within the timetable for the proposed project; and (3) local resources are available to operate the overall proposed mass transportation system without requiring a reduction in existing transportation services. Although these evaluation requirements existed prior to the enactment of the act, TEA-21 requires FTA to (1) develop a rating for each criterion as well as an overall rating of “highly recommended,” “recommended,” or “not recommended” and use these evaluations and ratings in approving projects’ advancement to the preliminary engineering and final design phases and approving grant agreements; and (2) issue regulations on the evaluation and rating process. TEA-21 also directs FTA to use these evaluations and ratings to decide which projects to recommend to the Congress for funding in a report due each February. These funding recommendations are also reflected in the Department’s annual budget proposal. In addition, TEA-21 requires FTA to issue a supplemental report to the Congress each August that updates information on projects that have advanced to the preliminary engineering or final design phases since the annual report. In April 1999 and 2000, we reported that FTA had made substantial progress in developing and implementing an evaluation process that included the individual criterion ratings and overall project ratings required by TEA-21. Before TEA-21 was enacted, FTA had already taken steps to revise its evaluation process for the New Starts program because most of the evaluation requirements contained in the act were introduced by the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA). FTA uses the results to approve projects for the preliminary engineering and final design phases, to execute grant agreements, and to make annual funding recommendations to the Congress. In May 2001, FTA issued its New Starts report for fiscal year 2002, which included project evaluations and ratings based upon the revised process. FTA’s final rule, issued in December 2000, formalized the evaluation and rating process. Next year’s process will use the procedures set forth in the final rule. FTA’s current New Starts evaluation process assigns projects individual ratings for each TEA-21 criterion in order to assess each project’s justification and local financial commitment. The process also assigns an overall rating that is intended to reflect the project’s overall merit. FTA considers these overall ratings to decide which projects will proceed to the preliminary engineering and final design phases, be recommended for funding, and receive full-funding grant agreements (see fig. 1 for an illustration of the process). A project’s overall rating is a combination of the project justification and local financial commitment ratings. With respect to project justification, FTA provides individual ratings for the four criteria identified by TEA-21— mobility improvements, environmental benefits, operating efficiencies, and cost-effectiveness—as well as for transit-supportive land-use policies. According to FTA, the agency also considers a variety of other factors when evaluating the project’s justification, including the degree to which policies and programs are in place as assumed in the forecasts, the project’s management capability, and additional factors relevant to local and national priorities. To evaluate a project’s local financial commitment, FTA rates the project on its capital and operating finance plans and the local share of its costs. After analyzing the documentation submitted by the project’s sponsors, FTA assigns a descriptive rating (high, medium-high, medium, medium- low, or low) for each of the project justification and local financial commitment criteria. (App. I summarizes the performance measures that FTA uses in applying the criteria to develop these ratings.) As figure 1 shows, once the individual criterion ratings are completed, FTA assigns summary project justification and local financial commitment ratings by combining the individual criterion ratings. In developing the summary project justification rating, FTA gives the most weight to the criteria for transit-supportive land use, cost-effectiveness, and mobility improvements. For the summary local financial commitment ratings, the measures for the proposed local share of capital costs and the strength of the capital and operating finance plans are given equal consideration. FTA combines the summary project justification and local financial commitment ratings to create an overall rating for the project of “highly recommended,” “recommended,” or “not recommended.” To receive a “highly recommended” rating, a project must have summary ratings of at least medium-high for the project justification and local financial commitment. To receive a rating of “recommended,” the project must have summary ratings of at least medium. A project is rated as “not recommended” when either summary rating is lower than medium. In preparing its New Starts proposal each year, FTA gives first preference to projects with existing grant agreements. Following that, consideration is given to projects with an overall rating of “recommended” or higher. However, some projects rated as “highly recommended” or “recommended” may not meet FTA’s “readiness” test for funding; FTA uses a number of milestones to determine whether a project is sufficiently developed for a grant agreement. For example, FTA determines whether the necessary real estate has been acquired, utility arrangements have been made, and local funding sources are in place. According to an FTA official, this ensures that there are no “red flags” signaling that the project has outstanding issues it must address. In addition, FTA has considered the following issues in evaluating grantees: the degree to which the transit agency has a satisfactory plan to manage an existing bus fleet to ensure no degradation of service for users of the current system; compliance with the Americans with Disabilities Act of 1990, including financial commitments necessary to maintain accessible service, make necessary improvements, and comply with key requirements for stations; and compliance with air quality standards in the region. For its New Starts report for fiscal year 2002, FTA evaluated a total of 40 projects and provided overall ratings for 26 of these projects. Of the 26 projects that were rated, 21 were rated as “recommended,” 2 projects were rated as “highly recommended,” and 3 projects received “not recommended” ratings. According to FTA, fewer projects received “highly recommended” ratings this year because FTA set the bar higher for such ratings. FTA believes that fewer projects received “not recommended” ratings because project officials have a better understanding of the evaluation and rating process and criteria used to assess a project’s justification and local financial commitment. In assigning overall project ratings, FTA emphasized the continuous nature of project evaluation. Throughout the report, FTA underscored the fact that as candidate projects proceed through the final design stage, information concerning costs, benefits, and impacts will be refined. Consequently, FTA updates its ratings and recommendations at least annually to reflect this new information, changing conditions, and refined financing plans. Thus, a project that is rated as “not recommended” in the fiscal year 2002 report could receive a rating of “recommended” or “highly recommended” in the fiscal year 2003 report to reflect changes in the project. For example, in the report for fiscal year 2001, the New Orleans Canal Streetcar project received a “not recommended” rating. However, this year the project received a “recommended” rating and was proposed for a grant agreement. FTA attributed the project’s improved rating to an improved finance plan—specifically, firmer financial commitments. Although the criteria and measures in the New Starts evaluation and rating process have not changed, FTA’s final rule, issued in December 2000, made a number of refinements to the process. The final rule will be used as FTA considers its New Starts proposal for fiscal year 2003. The refinements in the final rule reflect public comments on FTA’s proposed rule, which was issued in April 1999. Comments on the proposed rule were accepted through July 1999. A total of 41 individuals and organizations provided comments. Comments were submitted on virtually every aspect of the proposed rule, but most centered on four key issues: the measure of cost-effectiveness, the continued use of a no-build and Transportation System Management (TSM) alternative for evaluation purposes, the overall project rating, and the measure for mobility improvements. Twenty-three comments were received on FTA’s use of the historical “cost per new rider” measure to indicate the cost-effectiveness of a proposed project. The consensus of the commenters was that the focus on new riders ignores benefits provided to other riders, which may bias the measure against cities with “mature” transit systems, where the focus of a proposed project may be to improve service, not attract new riders. In response, the final rule replaced the “cost per new rider” measure with a new measure of “transportation system user benefits.” According to FTA, this measure is based on the basic goals of any major transportation investment—to reduce the amount of travel time and out-of-pocket costs that people incur for taking a trip (i.e., the cost of mobility). This approach de-emphasizes new riders by measuring not only the benefits to people who change modes but also benefits to existing riders and highway users. The need to evaluate a New Starts project against a no-build and TSM alternative was also the subject of substantial public comment. Commenters believed that evaluating proposed New Starts projects against both a no-build and a TSM alternative was unnecessarily burdensome, noting that certain incremental system improvements will occur whether the New Starts project is constructed or not—that is, it is no longer appropriate to view the no-build alternative as a “do nothing” scenario. In response to comments submitted on this issue and to simplify the New Starts process, the final rule eliminates the need to evaluate a proposed project against both a separate no-build and TSM alternatives. Instead, the final rule requires that the proposed New Starts projects be evaluated against a single “baseline alternative” agreed upon by project sponsors and FTA. The baseline alternative involves transit improvements that are lower in cost than the proposed New Starts project, resulting in a better ratio of measures of transit mobility compared to the no-build alternative. The purpose of the baseline comparison is to isolate the costs and benefits of the proposed major transit investment. Comments on the overall project rating focused on the possibility that a rating of “not recommended” would be misinterpreted to mean that a proposed project had no merit, resulting in the erosion of local support and funding. In response to these comments, the final rule added one- letter indicators to the “not recommended” rating that explain where improvement is needed: “j” for project justification, “o” for the operating funding plan, and “c” for the capital funding plan. Thus, in future New Starts reports, a proposed project that was found to need improvement in the capital plan would be rated as “not recommended (c).” Finally, public comment on the proposed rule recommended that the measure for mobility improvements be refined. The proposed measure was based on (1) projected savings in travel time and (2) the number of low-income households within a half-mile of the proposed stations. The majority of commenters specifically addressed the measure’s focus on low-income households. Many recommended that the measure include the destinations to be served by the proposed project as well as the number of households near boarding points, arguing that a system that is located near low-income households is of little use to residents unless it can also provide access to employment and other activity centers. The final rule added a new factor to calculate destinations for jobs within a half-mile of boarding points on the new system, complementing the existing factor that measures low-income households within a half-mile of boarding points. Although FTA’s intent to develop performance measures to evaluate the New Starts program for purposes of the Government Performance and Results Act of 1993 (GPRA) did not generate significant comment, FTA believes that the need for them still exists. Toward that end, the final rule requires that future project applications include a two-step data collection process for determining the degree to which projects remain on schedule and on budget once commitments to fund them have been made (i.e., grant agreements have been executed); and for measuring the success of New Starts projects once they are in operation. For those New Starts projects with grant agreements, FTA will combine before and after data with planning projections to evaluate the projects in several areas, including capital costs, operating costs, and system utilization. FTA’s New Starts report and budget proposal for fiscal year 2002 requests that $1.14 billion be made available for the construction of new transit systems and expansions of existing systems through the New Starts program. After amounts for FTA oversight activities and for other purposes specified by TEA-21 are subtracted, a total of $1.11 billion would remain available for projects in fiscal year 2002. Of this amount, a total of $993.5 million would be allocated among 26 projects with existing grant agreements. An additional $121.2 million would be allocated to seven new projects. (See fig. 2.) Unlike prior years, FTA did not request funding for preliminary engineering activities. As described earlier, for fiscal year 2002 FTA evaluated 40 projects and prepared ratings for 26 of them. Of the 26 projects that received ratings, FTA rated 23 projects as “highly recommended” or “recommended” and proposed executing grant agreements for 4 projects that are expected to meet the readiness criteria by the end of fiscal year 2002. In addition, FTA is proposing three other projects for funding commitments for fiscal year 2002—for a total of seven projects. These three projects were not rated this year. Specifically, the Miami (South Miami-Dade Busway Extension) project plans to use less than $25 million in New Starts funds and therefore is exempt from the evaluation process. The Chicago (Metra Southwest Corridor Commuter Rail) and Baltimore (Central LRT Double Tracking) projects were proposed for grant agreements last year and are considered “pending federal commitments.” According to FTA, the ratings of these two projects from last year are still valid. (Table 1 shows the ratings for the seven projects recommended for New Starts funding in fiscal year 2002.) As table 1 shows, two of the seven proposed projects received “highly recommended” ratings on the basis of their strong cost-effectiveness, good transit-supportive land-use policies, and a demonstrated local financial commitment to build and operate the projects. For instance, the proposed San Diego County/Oceanside-Escondido Rail project received a medium- high rating in mobility improvements because it is expected to serve 15,100 average weekday boardings in 2015, including 8,600 new daily riders. According to FTA, it will also help to eliminate the heavy congestion of northern San Diego County along the Route 78 corridor, saving 700,000 hours of travel time a year compared to the TSM alternative. In addition, the high ratings for the proposed project’s capital and operating financing plans reflect the solid financial condition of the transit agency and the other funding partners, as well as the sufficient projected revenue growth and contingencies. Five of the seven projects proposed received overall ratings of “recommended” or were exempt from the rating process. Most were rated medium or medium-high on the project justification and/or local financial commitment criteria. For instance, the Baltimore/Central LRT double tracking project’s “recommended” rating was based on the project’s strong environmental benefits, cost-effectiveness, and demonstrated local financial commitment. According to FTA’s New Starts report, the proposed system would significantly reduce nitrogen oxide and carbon monoxide emissions and would cost $8.70 per incremental passenger. In contrast, the sponsor of a project that was not recommended for funding in 2002 estimated that the proposed project would annually increase carbon dioxide emissions by 4,360 tons and would cost $15.50 per passenger. Finally, the Baltimore project’s strong financial rating reflects FTA’s favorable assessment of state support of transit operating subsidies and the financial soundness of the agency’s operations. Nineteen other New Starts projects received “highly recommended” or “recommended” ratings but were not proposed for grant agreements. One of these projects—San Diego Midcoast Corridor—received a “highly recommended” rating based on the project’s strong cost-effectiveness, good transit-supportive land use, and strong local financial commitment ratings. FTA officials told us that this project met FTA’s evaluation and rating criteria as well as its “readiness test” but was not selected because completing the San Diego Mission Valley East LRT extension (an ongoing project) is the transit authority’s top priority. FTA also notes that the authority may not have the financial capacity to fund both projects at this time. The other 18 projects were rated overall as “recommended.” Many of these projects were not proposed for grant agreements in fiscal year 2002 because they are in the early stages of development and will not be ready for final design or construction for several years. Finally, FTA rated three proposed projects as “not recommended” primarily because of low local financial commitment summary ratings, reflecting the uncertainty of their local financial commitment or lack of committed local funding to build and operate the systems. For instance, one of the three projects received low ratings for the stability and reliability of its capital and operating finance plans, reflecting FTA’s concerns about the lack of progress in the commitment of nonfederal funds and the absence of a local entity to build and operate the project. Other reasons for receiving a low financial rating included the absence of a dedicated funding source for operating the project and the uncertainty of revenue sources for the project. According to FTA, it will have limited authority to make funding commitments to New Starts projects throughout the remainder of the TEA-21 authorization period—the end of fiscal year 2003—if it makes funding commitments to seven projects as proposed in fiscal year 2002. TEA-21 and other legislation provided FTA with almost $10 billion in commitment authority for the New Starts program from fiscal years 1998 to 2003. However, FTA reports that it has already committed about 90 percent of this amount. The projects proposed in FTA’s New Starts report and budget request for fiscal year 2002 would reduce its remaining commitment authority by over one-half, leaving it with about $462 million for new grant agreements in fiscal year 2003. This may not be enough to fund the 14 projects that FTA estimates may be ready for grant agreements during fiscal year 2003. In an effort to conserve commitment authority for future projects, FTA’s fiscal year 2002 proposal did not allocate New Starts funds for preliminary engineering activities—something FTA did routinely in recent years. However, FTA could significantly increase the commitment authority available for projects competing for New Starts funds by “releasing” amounts reserved for projects that have been suspended. As of today, two segments of a New Starts project in Los Angeles have been suspended for over 3 years, and FTA has informed project sponsors that it no longer has funding commitments for the suspended segments. However, FTA continues to reserve $647 million in commitment authority for the project. Releasing this amount would give FTA additional funding flexibility through fiscal year 2003. Furthermore, the Administration’s proposed 50- percent cap on New Starts funding could limit the amount of New Starts funding available to individual projects during the next surface transportation authorization period (after fiscal year 2003). FTA was authorized to make a record level of funding commitments— about $10 billion—for the New Starts program from 1998 through 2003. TEA-21 provided the majority of FTA’s commitment authority, authorizing $6.09 billion in “guaranteed” funding for the New Starts program. In addition, TEA-21 and the Department of Transportation appropriations act for fiscal year 2001 authorized FTA to make an additional $3.4 billion in contingent commitments, subject to future authorizations and appropriations. According to FTA, it has already committed approximately $8.9 billion for New Starts projects and program activities. Specifically, about $7.5 billion is committed to the 26 projects with grant agreements. After accounting for other requirements (such as the cost of project management oversight and preliminary engineering), which are expected to total about $1.4 billion, about $1 billion remains for new grant agreements in fiscal years 2002 and 2003. (Table 2 summarizes FTA’s commitment authority and funding commitments.) Implementing FTA’s New Starts report and budget proposal for fiscal year 2002 would reduce FTA’s remaining commitment authority by over one- half—leaving about $462 million for new grant agreements in fiscal year 2003. The budget proposes $84.0 million for five new projects and $37.2 million for the two projects with pending grant agreements for fiscal year 2002. However, the $121.2 million requested for these projects for 2002 will be only a “down payment” on what would amount to a total federal commitment of $569.3 million for these seven projects over the next several years, if no changes were made to the current project proposals. This would leave FTA with $462 million for new grant agreements, which may not be enough to cover the projects that could be ready for grant agreements during fiscal year 2003. For example, FTA estimates that about 14 projects will be in or ready to enter the final design phase at the end of fiscal year 2002—signaling that they are ready to execute grant agreements and begin construction. To preserve commitment authority for future projects, FTA did not request any funding for preliminary engineering activities in the fiscal year 2002 budget. According to FTA, it has provided an average of $150 million a year from fiscal year 1998 through fiscal year 2001 for projects’ preliminary engineering activities. However, FTA did not allocate any funds for preliminary engineering activities in fiscal year 2002, nor does it plan to do so for fiscal year 2003. According to a senior FTA official, this approach helps to conserve funds for existing and new grant agreements in fiscal year 2003 and to ensure that funds are provided only to projects that are ready to move forward. The official further noted that projects may use other federal funding for preliminary engineering activities, and no project should be negatively affected if New Starts funding was not provided for these activities in fiscal years 2002 and 2003. Officials from several transit projects in the preliminary engineering phase whom we contacted indicated that they would use other federal funds and/or state and local funds to pay for their preliminary engineering work. FTA could more than double the amount of commitment authority projected to be available for new projects in fiscal year 2003 by making some or all of the $647 million in commitment authority currently reserved for two suspended segments of the Los Angeles subway project available for all projects competing for New Starts funding. The Los Angeles project’s grant agreement, which was executed in May 1993, committed a total of $1.4 billion to the project’s three segments—North Hollywood, Eastside, and Mid-City. The North Hollywood segment began operations in June 2000. However, construction on the two other segments—Eastside and Mid-City—was suspended in 1998 due to the Los Angeles County Metropolitan Transportation Authority’s (MTA) financial difficulties. Since 1998, MTA has been studying alternative transit investment options for the Eastside and Mid-City segments. In October 2000, FTA approved the Eastside segment’s advancement to the preliminary engineering stage with a light rail line rather than a subway as originally planned. MTA is still conducting alternatives analyses for the Mid-City segment. The original grant agreement provided for a federal commitment of about $735 million to the Eastside and Mid-City subway segments. About $88 million of the $735 million has been appropriated for these segments through 2001. FTA advised MTA in July 1999 that FTA no longer had funding commitments for the Eastside or Mid-City segments and that it would evaluate projects once identified for these corridors under the New Starts criteria. However, FTA continues to reserve $647 million in commitment authority for these segments. Consequently, FTA is significantly understating its remaining commitment authority. An FTA official told us that FTA has not released the commitment authority reserved for this project because such authority was not needed to make funding commitments to other projects ready for grant agreements. FTA could also increase the remaining commitment authority available for projects competing for New Starts funds by “releasing” the $409 million committed to the Seattle (Central Link LRT MOS-1) project if the project is not ready to move forward before funding decisions for fiscal year 2003 are made. The grant agreement for the Seattle project, which was signed in January 2001, commits a total of $500 million in New Starts funds. A total of $91 million was appropriated to this project through fiscal year 2001, leaving a federal commitment of $409 million. However, this grant agreement is currently under review due to increases in the overall costs and delays in the project’s implementation schedule. In April 2001, DOT’s Inspector General recommended that the Secretary of DOT hold funds and funding decisions for this project until a specific set of actions related to cost estimation, project scope, cost control, and overall financing plans had been implemented. FTA and project officials have begun implementing these actions, and FTA did not propose New Starts funding for the project in 2002. “Releasing” the amounts committed to one or both of these projects would significantly increase FTA’s flexibility to execute grant agreements for projects ready to move forward and begin construction in fiscal year 2003 and provide funds for preliminary engineering activities. Such action would not preclude the Los Angeles or Seattle projects from securing New Starts funding in the future. Rather, these projects would be treated like all other projects—that is, they would compete in future New Starts evaluation processes to determine if they should be recommended for grant agreements. The President’s fiscal year 2002 budget recommends limiting New Starts funding to 50 percent of total project costs starting in fiscal year 2004.(Currently, New Starts funding—and all federal funding—is capped at 80 percent.) According to FTA, this proposal is consistent with its recent practice of seeking a local commitment of more than 20 percent in order to manage the increasing demand for New Starts funding. For example, as of February 2001, there were over 110 planning studies considering major transit capital investments, 28 New Starts projects in the preliminary engineering phase, and 13 projects in the final design stage. FTA estimates these projects would require about $80 billion in local, state, and federal funds to complete. According to FTA, limiting the New Starts funding to 50 percent will ensure that local governments play a major role in funding New Starts projects. Local governments will need to decide to apply either other federal funds or local funds to proposed New Starts projects based on their priorities. An FTA official also pointed out that a 50-percent cap would allow more projects to receive New Starts funding; however, the official also acknowledged that limiting New Starts funding may prevent some projects from being developed or moving forward because of limited local funding. The proposed cap could affect a number of projects currently being developed. For example, 15 of the 40 projects that were evaluated this year and currently in the final design or preliminary engineering stages plan to use New Starts funds to pay for over 50 percent of their total costs. The projected use of New Starts funds for these 15 projects ranges from 61 percent for Chicago (North Central Corridor Commuter Rail) to 80 percent for New Orleans (Canal Streetcar Spine). According to officials from several of these transit agencies, the impact of the proposed cap would vary. For example, an official from one project stated that the project would not be able to tap into any other funding sources to account for lower than planned New Starts funding. In contrast, an official from another project was confident that the project would be able to apply additional federal and local funds to make up for the reduced New Starts funding. As FTA approaches the end of the TEA-21 authorization period, it faces funding constraints for the New Starts program. The implementation of FTA’s fiscal year 2002 New Starts proposal would reduce its remaining commitment authority by over one-half, leaving less than $500 million for new projects in fiscal year 2003. This may not be enough to fund the 14 projects that FTA believes will be ready to begin construction in fiscal year 2003. Because of this impending “budget crunch,” it is important that FTA adopt the recommendation we made last year that it further prioritize among the projects it rates as “highly recommended” or “recommended” for funding purposes. This would ensure that the “best” projects receive New Starts funding and allow for a better understanding of why certain projects with similar ratings may receive funding while others do not. In addition, FTA could significantly increase its ability to make funding commitments to new projects through fiscal year 2003 and the next authorization if it adopted the practice of “releasing” commitment authority associated with projects for which it has withdrawn a funding commitment. For example, although two segments of the Los Angeles project have been suspended for over 3 years, have been or will be completely redesigned, and are not likely to be ready for construction by next year, FTA continues to reserve about $650 million in commitment authority associated with the original project—which significantly understates FTA’s remaining commitment authority. Similarly, when other projects with federal funding commitments do not move forward as expected, FTA needs to reconsider and adjust its commitment authority accordingly. Taking these actions would give FTA additional funding flexibility for the New Starts program. We recommend that the Secretary of Transportation direct the Administrator of FTA to make commitment authority allocated to projects for which the federal funding commitments have been withdrawn available for all projects competing for New Starts funding. Specifically, we recommend that FTA “release” the $647 million reserved for the Los Angeles project. We provided DOT with a draft of this report for review and comment. FTA did not provide any comments or technical clarifications on the draft. In addition, FTA indicated that further consideration will be necessary before a decision is made on the report’s recommendation. To address the issues discussed in this report, we reviewed the legislation governing New Starts transit projects, FTA’s annual New Starts reports for fiscal years 2001 and 2002, the new regulations for New Starts transit projects, and documents related to New Starts funding. We also interviewed appropriate FTA headquarters officials and officials from the Baltimore, New Orleans, Hartford, San Juan, Nashville, and Chicago New Starts projects. We performed our work in accordance with generally accepted government auditing standards from May through July 2001. We are sending copies of this report to the Secretary of Transportation, the Administrator of the Federal Transit Administration, the Director of the Office of Management and Budget, and other interested parties. We will make copies available to others upon request. If you have questions regarding this report, please contact me on (202) 512-2834 or at [email protected]. Key contributors to this report were Nikki Clowers, Helen Desaulniers, Susan Fleming, and Ron Stouffer. Table 3 presents a summary of each of the New Starts criteria and the related performance measures that the Federal Transit Administration (FTA) uses to appraise candidate New Starts projects as part of its evaluation and rating process. | The Federal Transit Administration's (FTA) New Starts program has provided state and local agencies with more than $6 billion in the last eight years to help design and construct transit projects. Although the funding for this program is higher than it has ever been, the demand for these resources is also extremely high. FTA was directed to prioritize projects for funding by evaluating, rating, and recommending potential projects on the basis of specific financial and project justification criteria. This report discusses (1) the refinements made to FTA's evaluation and rating process since last year, (2) how New Starts projects were selected for FTA's New Starts report and budget request for fiscal year 2002, and (3) FTA's remaining New Starts commitment authority. GAO found that FTA made several refinements to its rating process. For instance, potential grantees were more strictly assessed on their ability to build and operate proposed projects than in the past. FTA also made several technical changes and established new performance measures to evaluate the program. New Starts projects were selected by evaluating 40 new projects for 2002 and developing ratings for 26 of them. FTA then determined whether the projects rated "highly recommended" or "recommended" met its readiness criteria. Of these projects, FTA recommended four of them for funding commitments. FTA also recommended three additional projects--one that was exempt from the rating process and two that were rated last year. FTA reports that it will have limited authority to make funding commitments to new projects in fiscal year 2003 if it enters into the seven New Starts grant agreements in 2002 as proposed. |
Customs began ACE in 1994, and its early estimate of the cost and time to develop the system was $150 million over 10 years. At this time, Customs also decided to first develop a prototype of ACE, referred to as NCAP (National Customs Automation Program prototype), and then to complete the system. In May 1997, we testified that Customs’ original schedule for completing the prototype was January 1997, and that Customs did not have a schedule for completing ACE. At that time, Customs agreed to develop a comprehensive project plan for ACE. In November 1997, Customs estimated that the system would cost $1.05 billion to develop, operate, and maintain throughout its life cycle. Customs plans to develop and deploy the system in 21 increments from 1998 through 2005, the first four of which would constitute NCAP. Currently, Customs is well over 2 years behind its original NCAP schedule. Because Customs experienced problems in developing NCAP software in- house, the first NCAP release was not deployed until May 1998--16 months late. In view of the problems it experienced with the first release, Customs contracted out for the second NCAP release, and deployed this release in October 1998--21 months later than originally planned. Customs’ most recent dates for deploying the final two NCAP releases (0.3 and 0.4) are March 1999 and September 1999, which are 26 and 32 months later than the original deployment estimates, respectively. According to Customs, these dates will slip farther because of funding delays. Additionally, Customs officials told us that a new ACE life cycle cost estimate is being developed, but that it was not ready to be shared with us. At the time of our review, Customs’ $1.05 billion estimate developed in 1997 was the official ACE life cycle cost estimate. However, a January 1999 ACE business plan specifies a $1.48 billion life cycle cost estimate. At the time of our review, Customs was not building ACE within the context of an enterprise systems architecture, or “blueprint” of its agencywide future systems environment. Such an architecture is a fundamental component of any rationale and logical strategic plan for modernizing an organization’s systems environment. As such, the Clinger- Cohen Act requires agency Chief Information Officers (CIO) to develop, maintain, and implement an information technology architecture. Also, the Office of Management and Budget (OMB) issued guidance in 1996 that requires agency IT investments to be architecturally compliant. These requirements are consistent with, and in fact based on, information technology management practices of leading private and public sector organizations. Simply stated, an enterprise systems architecture specifies the system (e.g., software, hardware, communications, security, and data) characteristics that the organization’s target systems environment is to possess. Its purpose is to define, through careful analysis of the organization’s strategic business needs and operations, the future systems configuration that supports not only the strategic business vision and concept of operations, but also defines the optimal set of technical standards that should be met to produce homogeneous systems that can interoperate effectively and be maintained efficiently. Our work has shown that in the absence of an enterprise systems architecture, incompatible systems are produced that require additional time and resources to interconnect and to maintain and that suboptimize the organization’s ability to perform its mission. We first reported on Customs’ need for a systems architecture in May 1996 and testified on this subject in May 1997. In response, Customs developed and published an architecture in July and August 1997. We reviewed this architecture and reported in May 1998 that it was not effective because it was neither complete nor enforced. For example, the architecture did not 1. fully describe Customs’ business functions and their relationships, 2. define the information needs and flows among these functions, and 3. establish the technical standards, products, and services that would be characteristic of its target systems environment on the basis of these business specifications. Accordingly, we recommended that Customs complete its enterprise information systems architecture and establish compliance with the architecture as a requirement of Customs’ information technology investment management process. In response, Customs agreed to develop a complete architecture and establish a process to ensure compliance. Customs reports that its architecture will be completed in May 1999. Also, in January 1999, Customs changed its internal procedures to provide for effective enforcement of its architecture, once it is completed. Until the architecture is completed and enforced, Customs risks spending millions of dollars to develop, acquire, and maintain information systems, including ACE, that do not effectively and efficiently support the agency’s mission needs. Effective IT investment management is predicated on answering one basic question: Is the organization doing the “right thing” by investing specified time and resources in a given project or system? The Clinger-Cohen Act and OMB and GAO guidance together provide an effective IT investment management framework for answering this question. Among other things, they describe the need for 1. identifying and analyzing alternative system solutions, 2. developing reliable estimates of the alternatives’ respective costs and benefits and investing in the most cost-beneficial alternative, and 3. to the maximum extent practical, structuring major projects into a series of increments to ensure that each increment constitutes a wise investment. Customs did not satisfy any of these requirements for ACE. First, Customs did not identify and evaluate a full range of alternatives to its defined ACE solution before commencing development activities. For example, Customs did not consider how ACE would relate to another Treasury- proposed system for processing import trade data, known as the International Trade Data System (ITDS), including considering the extent to which ITDS should be used to satisfy needed import processing functionality. Initiated in 1995 as a project to develop a coordinated, governmentwide system for the collection, use, and dissemination of trade data, the ITDS project is headed by the Treasury Deputy Assistant Secretary for Regulatory, Tariff and Trade Enforcement. The system is expected to reduce the burden federal agencies place on organizations by requiring that they respond to duplicative data requests. Treasury intends for the system to serve as the single point for collecting, editing, and validating trade data as well as collecting and accounting for trade revenue. At the time of our review of ACE, these functions were also planned for ACE. Similarly, Customs did not evaluate different ACE architectural designs, such as the use of a mainframe-based versus client/server-based hardware architecture. Also, Customs did not evaluate alternative development approaches, such as acquisition versus in-house development. In short, Customs committed to and began building ACE without knowing whether it had chosen the most cost-effective alternative and approach. Second, Customs did not develop a reliable life cycle cost estimate for the approach it selected. SEI has developed a method for project managers to use to determine the reliability of project cost estimates. Using SEI’s method, we found that Customs’ $1.05 billion ACE life cycle cost estimate was not reliable, and that it did not provide a sound basis for Customs’ decision to invest in ACE. For example, in developing the cost estimate, Customs did not (1) use a cost model, (2) account for changes in its approach to building different ACE increments, (3) account for changes to ACE software and hardware architecture, or (4) have historical project cost data upon which to compare its ACE estimate. Moreover, the $1.05 billion cost estimate used to economically justify ACE omitted relevant costs. For instance, the costs of technology refreshment and system requirements definition were not included (see table 1). Exacerbating this problem, Customs represented its ACE cost estimate as a precise point estimate rather than explicitly disclosing to investment decisionmakers in Treasury, OMB, and Congress the estimate’s inherent uncertainty. Customs’ projections of ACE benefits were also unreliable because they were either overstated or unsupported. For example, the analysis includes $203.5 million in savings attributable to 10 years of avoided maintenance and support costs on the Automated Commercial System (ACS)--the system ACE is to replace. However, Customs would not have avoided maintenance and support costs for 10 years. At the time of Customs’ analysis, it planned to run both systems in parallel for 4 years, and thus planned to spend about $53 million on ACS maintenance and support during this period. As another example, $650 million in savings was not supported by verifiable data or analysis, and $644 million was based on assumptions that were analytically sensitive to slight changes, making this $644 million a “best case” scenario. Third, Customs is not making its investment decisions incrementally as required by the Clinger-Cohen Act and OMB. Although Customs has decided to implement ACE as a series of 21 increments, it is not justifying investing in each increment on the basis of defined costs and benefits and a positive return on investment for each increment. Further, once it has deployed an increment at a pilot site for evaluation, it is not validating the benefits that the increment actually provides, and it is not accounting for costs on each increment so that it can demonstrate that a positive return on investment was actually achieved. Instead, Customs estimated the costs and benefits for the entire system--all 21 increments, and used this as economic justification for ACE. Mr. Chairman, our work has shown that such estimates of many system increments to be delivered over many years are impossible to make accurately because later increments are not well understood or defined. Also, these estimates are subject to change in light of experiences on nearer term increments and changing business needs. By using an inaccurate, aggregated estimate that is not refined as increments are developed, Customs is committing enormous resources with no assurance that it will achieve a reasonable return on its investment. This “grand design” approach to managing large system modernization projects has repeatedly proven to be ineffective across the federal government, resulting in huge sums invested in systems that do not provide expected benefits. Failure of the grand design approach was a major impetus for the IT management reforms contained in the Clinger-Cohen Act. Software process maturity is one important and recognized measure of determining whether an organization is managing a system or project the “right way,” and thus whether or not the system will be completed on time and within budget and will deliver promised capabilities. The Clinger- Cohen Act requires agencies to implement effective IT management processes, such as processes for managing software development and acquisition. SEI has developed criteria for determining an organization’s software development and acquisition effectiveness or maturity. Customs lacks the capability to effectively develop or acquire ACE software. Using SEI criteria for process maturity at the “repeatable” level, which is the second level on SEI’s five-level scale and means that an organization has the software development/acquisition rigor and discipline to repeat project successes, we evaluated ACE software processes. In February 1999, we reported that the software development processes that Customs was employing on NCAP 0.1, the first release of ACE, were not effective. For example, we reported that Customs lacked effective software configuration management, which is important for establishing and maintaining the integrity of the software products during development. Also, we reported that Customs lacked a software quality assurance program, which greatly increased the risk of ACE software not meeting process and product standards. Further, we reported that Customs lacked a software process improvement program to effectively address these and other software process weaknesses. Our findings concerning ACE software development maturity are summarized in table 2. As discussed in our brief history of ACE, after Customs developed NCAP 0.1 in-house, it decided to contract out for the development of NCAP 0.2, thus changing its role on ACE from being a software developer to being a software acquirer. According to SEI, the capabilities needed to effectively acquire software are different than the capabilities needed to effectively develop software. Regardless, we reported later in February 1999 that the software acquisition processes that Customs was employing on NCAP 0.2 were not effective. For example, Customs did not have an effective software acquisition planning process and, as such, could not effectively establish reasonable plans for performing software engineering and for managing the software project. Also, Customs did not have an effective evaluation process, meaning that it lacked the capability for ensuring that contractor-developed software satisfied defined requirements. Our findings concerning ACE software acquisition maturity are summarized in table 3. To address ACE management weaknesses, we recommended that Customs analyze alternative approaches to satisfying its import automation needs, including addressing the ITDS/ACE relationship; invest in its defined ACE solution incrementally, meaning for each system increment (1) rigorously estimate and analyze costs and benefits, (2) require a favorable return-on-investment and compliance with Customs’ enterprise systems architecture, and (3) validate actual costs and benefits once an increment is piloted, compare actuals to estimates, use the results in deciding on future increments, and report the results to congressional authorizers and appropriators; establish an effective software process improvement program and correct the software process weaknesses identified in our report, thereby bringing ACE software process maturity to a least an SEI level 2; and require at least SEI level 2 processes of all ACE software contractors. In commenting on our February 1999 report, the Commissioner of Customs agreed with our findings and committed to implementing our recommendations. In April 13, 1999, testimony, the Commissioner outlined several actions Customs has underway to improve ACE project management and address our recommendations. In brief, Customs plans to acquire the services of a prime contractor that is at least SEI level 3 certified to help Customs implement mature software processes and plan, implement, and manage its modernization efforts, including ACE; plans to hire a Federally Funded Research and Development Center (FFRDC) to support solicitation, selection, contract award, contract management, and ongoing oversight of the prime contractor; has hired a contractor to update and improve the ACE life cycle cost has retained an audit firm to provide independent reviews of Customs’ methodology for estimating ACE costs and revised cost/benefit analysis; has engaged a contractor to update and improve the ACE cost/benefit analysis by addressing our concerns, including use of ITDS as the interface for ACE; plans to perform additional cost/benefit analyses of ACE increments and analyze alternative approaches to building ACE; and plans to ensure that each ACE increment is compliant with Customs’ enterprise systems architecture. Successful systems modernization is absolutely critical to Customs’ ability to perform its trade import mission efficiently and effectively in the 21st century. Systems modernization success, however, depends on doing the “right thing, the right way.” To be “right,” organizations must (1) invest in and build systems within the context of a complete and enforced enterprise systems architecture, (2) make informed, data-driven decisions about investment options based on expected and actual return-on-investment for system increments, and (3) build system increments using mature software engineering practices. Our reviews of agency system modernization efforts over the last 5 years point to weaknesses in these three areas as the root causes of their not delivering promised system capabilities on time and within budget. Until Customs corrects its ACE management and technical weaknesses, the federal government’s troubled experience on other modernization efforts is a good indicator for ACE. In fact, although Customs does not collect data to know whether the first two ACE releases are already falling short of cost and performance expectations, the data it does collect on meeting milestones show that the first two releases have taken about 2 years longer than originally planned. This is precisely the type of unaffordable outcome that can be avoided by making the management and technical improvements we recommended. To Customs’ credit, it fully recognizes the seriousness of the situation, has quickly initiated actions to begin correcting its ACE management and technical weaknesses, and is committed to each of these actions. We are equally committed to working with Customs as it strives to do so and with Congress as it oversees this important initiative. This concludes my statement. I would be glad to respond to any questions that you or other Members of the Committee may have at this time. The first copy of each GAO report and testimony is free. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO discussed the weaknesses of the Customs Service's Automated Commercial Environment (ACE) project. GAO noted that: (1) Customs is well over 2 years behind its original National Customs Automation Program prototype schedule; (2) Customs was not building ACE within the context of an enterprise systems architecture, or blueprint of its agencywide future systems environment; (3) Customs developed and published an architecture in July and August 1997; (4) GAO reviewed this architecture and reported in May 1998 that it was not effective because it was neither complete nor enforced; (5) in response, Customs agreed to develop a complete architecture and establish a process to ensure compliance; (6) Customs reports that its architecture will be completed in May 1999; (7) Customs did not identify and evaluate a full range of alternatives to its defined ACE solution before commencing development activities; (8) Customs did not develop a reliable life cycle cost estimate for the approach it selected; (9) Customs is not making investment decisions incrementally as required by the Clinger-Cohen Act and the Office of Management and Budget; (10) although Customs has decided to implement ACE as a series of 21 increments, it is not justifying investing in each increment on the basis of defined costs and benefits and a positive return on investment for each increment; (11) Customs lacks the capability to effectively develop or acquire ACE software; and (12) Customs lacked a software process improvement program to effectively address these and other software process weaknesses. |
With the enactment of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) in 1980, the Congress created the Superfund program to clean up the nation’s most severely contaminated hazardous waste sites. The program was extended in 1986 and in 1990 and is now being considered again for reauthorization. Under CERCLA, EPA investigates contaminated areas and then places the nation’s most highly contaminated sites on a priority list, called the National Priorities List (NPL), for investigation and cleanup. As of September 1995, EPA had 1,238 sites on the NPL. Of these sites, approximately 190 had PCB contamination and about 80 had dioxin contamination. After EPA puts a site on the NPL, the agency goes through an extensive process to determine what remedy or remedies for cleanup would be appropriate for that site. The remedy selected depends upon the characteristics of the individual site, such as the types and levels of contamination, the complexity of the site’s problem, the site’s risk assessment, and the cleanup standards. EPA weighs each potential remedy against a number of criteria set forth in federal regulations. These criteria include the long-term protection of human health and the environment; compliance with the applicable or relevant and appropriate federal and state laws; and the community’s acceptance of the remedy being considered. Using these criteria, EPA has generally selected incineration as the remedy for many large, complex Superfund sites contaminated with PCBs or dioxin—two compounds that pose significant threats to human health and the environment. (See app. III for a further discussion of incineration technology.) Under CERCLA, incinerators at Superfund sites must comply with applicable technical requirements contained in federal regulations. In particular, the incineration of dioxins is governed by regulations issued under the Resource Conservation and Recovery Act of 1976 (RCRA), as amended. Similarly, the incineration of PCBs is governed by regulations issued under the Toxic Substances Control Act (TSCA). EPA has established two offices to encourage the development and use of innovative technologies. One is the Superfund Innovative Technology Evaluation (SITE) program, which evaluates cleanup or waste removal technologies. The second is the Technology Innovation Office (TIO), which acts as a clearinghouse for information on innovative cleanup technologies. In addition, EPA has issued guidance that encourages the consideration of innovative technologies for cleaning up Superfund sites. These efforts do not focus on specific contaminants such as PCBs and dioxin but are designed to promote the development and use of innovative technologies for all types of contaminants. Overall, in 1994, EPA selected innovative technologies in about 20 percent of its decisions on remedies for all Superfund sites. For PCB- and dioxin-contaminated sites, EPA selected innovative treatment technologies to a lesser extent than at other Superfund sites. EPA established the Superfund Innovative Technology Evaluation program in 1986 to accelerate the development and encourage the routine use of innovative technologies. Under the SITE program, EPA enters into cooperative agreements with private technology developers who, after refining their technologies on a small scale, may demonstrate them, with support from EPA, at Superfund sites. The SITE program periodically publishes reports containing engineering, cost, and performance information for the technologies evaluated. For example, in fiscal year 1995, SITE spent about $12 million to demonstrate 11 technologies. None of these treated a PCB- or dioxin-contaminated site. Superfund officials involved in cleaning up sites stated that SITE’s reports on demonstrations often focus on the science of the innovative technologies and provide only limited information on potential implementation problems. For example, the Superfund site manager at one site we visited told us that SITE had initially been extremely positive about the scientific potential for one of its demonstrated technologies at that site. However, after learning about the site’s specific characteristics, SITE officials decided the technology was inappropriate for that site. These criticisms remain, although Superfund program officials stated that they had begun to work with SITE in 1993 to make its information more useful, and as a result, additional information has been added to SITE’s technology demonstration reports. SITE program officials noted that resource constraints require them to set priorities for the scope of demonstrations conducted and thus limit the information that can be provided. In 1990, EPA established the Technology Innovation Office to increase the use of innovative treatment technologies. TIO serves as an information clearinghouse to provide (1) prospective technology vendors with information on the extent and nature of sites needing cleanup and (2) cleanup officials with information on the availability of innovative technologies. In addition, TIO attempts to identify why innovative technologies are not being used more frequently. In fiscal year 1995, TIO spent about $2 million to carry out these responsibilities. To serve as an information clearinghouse, TIO maintains several databases containing information on innovative technologies and innovative technology vendors. However, Superfund officials told us that the cost and performance data contained in TIO’s database of innovative technology vendors is vendor-supplied and TIO does not validate it. TIO officials stated that these data are supposed to be only the starting point for identifying potential innovative technologies and that TIO does not have the resources to validate the data. In addition, TIO officials believe that requiring vendors to supply independently validated data might exclude some innovative technology vendors. TIO officials, however, recognize that those responsible for cleaning up hazardous waste sites need reliable cost and performance data and have taken actions to address this problem. For example, working through the Federal Remediation Technologies Roundtable, composed of major federal agencies that carry out remediation research and projects, a guide to documenting remediation projects’ cost and performance was developed. This guide, which all member agencies have agreed to use, provides project managers with standard procedures for collecting and reporting project information. TIO also attempts to encourage the use of innovative technologies by identifying why innovative technologies are not being selected more often at Superfund sites. For example, TIO published a study in April 1995 which showed that Superfund cleanup officials were often eliminating innovative technologies from the remedy selection process without fully considering them. That study, based on 205 sites, found that EPA conducted tests to assess the potential performance of innovative technologies at only 47 sites (less than 25 percent) of the 205 sites. When these tests were conducted, however, innovative technologies were used in about 45 percent of the remedies selected. Superfund officials said that even though guidance encourages the testing of innovative technologies, such tests were not performed in a large number of cases because of time constraints and funding limitations. TIO staff are now considering a number of actions to address these and other problems identified in the report. EPA has issued guidance encouraging greater use of innovative technologies at all Superfund sites where such remedies can provide a viable means for treatment. For example, in guidance issued in June 1991, EPA urged staff responsible for selecting Superfund remedies to consider innovative technologies in their technology evaluations for all sites (including those contaminated with PCBs and dioxin), even when the cost and performance of the innovative technologies were uncertain. The guidance also encouraged EPA project managers to use on-site tests to assess the potential performance of innovative technologies at sites. Furthermore, it provided for expedited funding to facilitate early testing of innovative remedies. EPA officials told us that they are considering revising the guidance to increase the use of on-site tests to determine the potential performance of innovative technologies. However, the officials stated that they want to avoid becoming too prescriptive because the testing of innovative technologies may not be appropriate for all sites. EPA’s most recent data show that EPA selected innovative technologies in about 20 percent of all decisions on remedies made in 1994, up from 6 percent in 1986. However, EPA is using fewer innovative technologies at PCB- and dioxin-contaminated sites than at Superfund sites overall. At sites with PCB contamination, EPA selected innovative technologies that fully treat the contamination at about 10 percent of the sites for which a cleanup technology was selected. In addition, EPA selected innovative technologies that extract the PCB contamination (but do not destroy it) at another 20 percent of the sites for which decisions on cleanup technologies have been made. For these sites, the PCB contamination will have to be treated further with another remedy—such as incineration. For dioxin-contaminated sites, EPA selected innovative cleanup technologies 3 percent of the time. Even though EPA has generally not used innovative technologies for PCB- and dioxin-contaminated sites, it has identified several technologies that have the potential to clean up PCBs and dioxin in the future. However, to be effective, some of these technologies may have to be used in combination. Accordingly, EPA has recently recognized that for some sites, previous decisions on cleanup technologies should be changed if new technologies that provide more efficient and cost-effective cleanups have been developed. EPA has identified technologies that have the potential to become alternatives to incineration for PCB and dioxin contamination in the future. However, EPA believes that these technologies are currently not viable options for cleaning up most PCB- and dioxin-contaminated sites because they are still at their early stages of development. Many of these technologies have been used only in laboratory studies designed to generate data on their potential. Other innovative technologies are relatively more advanced; they have been tested, selected, or actually used to treat PCBs or dioxin at some small, uncomplicated sites and have generated some cost and performance data. However, these technologies still lack the well-documented cost and performance data, under a variety of site conditions, needed to expand their consideration and use. Innovative technologies that could potentially clean PCB and dioxin contamination can generally be grouped into three categories: (1) those that destroy the contamination, (2) those that extract the contamination (which still must be treated), and (3) those that simply contain or immobilize the contamination in place. Innovative remedies that destroy contamination, such as dechlorination, destroy PCB and dioxin molecules by removing chlorine. Technologies that extract contamination may use, for example, a chemical solvent or heat to remove the contaminants from soil or other media. The remaining concentrated contaminants generally require further treatment—such as incineration—but the extraction process reduces the volume of waste that must be treated. Technologies that immobilize hazardous waste may, for example, stabilize the contaminant by using a substance, such as cement, that will bind with and solidify the contaminated media. (See app. IV for a further explanation of innovative technologies.) For many of these innovative technologies to be effective at complex sites, EPA must use a combination of different technologies, thus increasing the complexity and uncertainty of the cleanup. For example, to fully clean a site, an extraction technology, which removes and concentrates the contaminant, would have to be used in combination with a destruction technology, which destroys the concentrated contaminant. Also, because some innovative technologies work only on specific contaminants, a site with multiple contaminants would require the use of multiple innovative technologies to address each contaminant. The TIO study cited earlier found that innovative technologies were often being eliminated from consideration at sites because of the need to use combinations of technologies and the resulting uncertainty of success. In October 1995, as part of its administrative reforms, EPA proposed that the decisions on cleanup technologies at selected sites be reevaluated to take advantage of the cost savings made possible by new technologies. EPA’s proposal recognized that some remedies selected in the past, while correct at the time, may not be the cleanup method the agency would select now. In a September 1995 report, the Office of Technology Assessment (OTA) also concluded that EPA should reexamine some of its previous decisions on cleanup technologies on the basis of the availability of new technologies. Several factors, often inherent in any unproven technologies, have inhibited the further development and widespread use of innovative technologies at PCB- and dioxin-contaminated sites. These factors include (1) regulatory standards, (2) the technical limitations of technologies, (3) the lack of sufficient cost and performance data, (4) the lack of incentives for private industry to invest in innovative technologies, and (5) EPA’s general preference for technologies it believes to be effective. For the treatment of PCBs and dioxin, EPA sets standards that are based in part on the performance of incinerators. These standards are based on the effectiveness of incineration, not necessarily the health risk associated with the specified cleanup level. Generally, innovative technologies have been successful in meeting these standards only at certain smaller PCB- or dioxin-contaminated sites where the concentration levels of the contaminant were low and under relatively controlled conditions. Recognizing this barrier, EPA recently proposed amendments to its regulations for PCBs to allow more flexibility in the cleanup standards.Specifically, the proposal would allow, in addition to performance-based standards, other cleanup standards, including health-based ones, which may be potentially easier for innovative technologies to meet. EPA is currently reassessing the health risks from dioxin. EPA officials told us that any regulatory changes will occur after that reassessment is complete. Technical barriers have also limited the application of innovative technologies for PCBs and dioxin. Because most innovative technologies are at their early stages of development, they generally are not yet suited for cleaning up sites with highly toxic contaminants (such as PCBs or dioxin), large amounts of contaminated materials, high concentrations of the contaminants, or multiple contaminants. In addition, innovative technologies’ performance generally depends on the physical and chemical characteristics of the contaminated material, such as moisture levels, clay and silt content, and the presence of other chemical substances. As a result, EPA has generally used innovative technologies only at PCB- and dioxin-contaminated sites with low levels of contamination and uniform conditions. The use of innovative technologies at dioxin-contaminated sites has been even more limited than at PCB-contaminated sites because dioxin tends to be difficult to remove from soil and is typically present in a variety of contamination settings (i.e., different types of soils and environmental conditions). Many innovative technologies are still not fully developed or tested. Because most of these technologies have not gone through full-scale application, data on their cost, performance, and suitability under various site conditions are generally not available. EPA officials told us that they believe technologies must be used multiple times under a variety of conditions before their cost and performance data are reliable. EPA found that one of the reasons why innovative technologies are not selected more often is that the information necessary to make cleanup decisions is not readily available. As a result, EPA and private industry officials responsible for cleaning up PCB- and dioxin-contaminated Superfund sites have been reluctant to choose unproven innovative technologies. To overcome this reluctance, EPA entered into a cooperative agreement with Clean Sites to demonstrate full-scale applications of innovative technologies at several federal facilities. The goal of the agreement is to demonstrate innovative technologies at real sites in order to generate actual performance data. Seven demonstrations are currently under way; however, data are not yet available on their outcomes. Uncertainties about both the market for PCB and dioxin cleanups and future regulatory standards for cleanups also create a disincentive for private industry to invest in innovative technologies. The production of PCBs stopped in 1977, and the number of sites known to be contaminated with dioxin is relatively small. In addition, industry officials are uncertain how clean EPA will require PCB- and dioxin-contaminated sites to be in the future. Because the promulgation of new environmental standard often takes many years, investors often choose to wait rather than invest in innovative technology. They worry that if they invest money in a new technology, by the time the new standards come into effect, the technology might be obsolete. EPA officials said that in light of the above barriers, they have chosen to rely on incineration to clean up PCB-and dioxin-contaminated sites. EPA officials told us that they have selected incineration because it meets EPA’s existing regulatory standards, can perform under a variety of conditions, and has been successfully demonstrated in full-scale applications. They added that using a demonstrated technology becomes particularly important for PCB- and dioxin-contaminated sites because these two compounds are highly toxic and very difficult to treat. The existence of hazardous waste sites with threatening contaminants such as PCBs and dioxin requires EPA to make tough choices about appropriate remedies. EPA must attempt to clean up sites expeditiously while protecting human health and the environment. Faced with this task, EPA officials have come to rely on incineration, a remedy they trust, to clean up sites with contaminants as hazardous as PCBs and dioxin. However, EPA also must convince communities that incineration is safe to gain their acceptance of its use. While EPA’s attempts to develop innovative technologies have not yet identified any that can clean complex sites contaminated with PCBs and dioxin, it has identified several that have the potential for future use. Accordingly, we agree with EPA’s recent proposal to revisit its decisions on remedies at certain sites that could benefit from significant technological advancements. We provided copies of a draft of this report to EPA for its review and comment. On November 21, 1995, we met with EPA officials, including a Senior Process Manager from EPA’s Office of Emergency and Remedial Response and officials from EPA’s offices of Pollution Prevention and Toxics, Research and Development, and Solid Waste and Emergency Response, to obtain their comments on our draft. These officials generally agreed with the facts and findings in the report. They also suggested a number of technical corrections, which we incorporated into the report. You asked us to identify (1) what EPA has done to encourage the development and use of alternative, or “innovative,” technologies at all contaminated sites, including those contaminated with PCBs and dioxin; (2) whether EPA has identified innovative technologies that can be used at PCB-and dioxin-contaminated sites; and (3) what factors have limited the use of innovative technologies at PCB- and dioxin-contaminated sites. To address the three objectives, we interviewed EPA officials at SITE and TIO, Risk Reduction Engineering Laboratory, Air and Environmental Research, Regions I, VI, and VII, and the Offices of Solid Waste, Emergency and Remedial Response, Research and Development, and Pollution Prevention and Toxics. We contacted representatives of three major industry groups, environmental consulting firms, and academia. Also, as you requested, we visited three Superfund sites with PCB or dioxin contamination and their applicable EPA regional office in order to provide an illustration of EPA’s process for making decisions on remedies. In addition, we obtained and analyzed documents and data from EPA and the other individuals we contacted. Our work was performed in accordance with generally accepted government auditing standards between October 1994 and December 1995. As arranged with your offices, unless you publicly announce its contents earlier, we will make no further distribution of this report until 10 days after the date of this letter. At that time, we will send copies of the report to other appropriate congressional committees; the Administrator, EPA; the Director, Office of Management and Budget; and other interested parties. We will also make copies available to others upon request. Should you need further information, please call me at (202) 512-6112. Major contributors to this report are listed in appendix V. We visited three sites where both incineration and innovative technologies were considered during the remedy selection process. The Environmental Protection Agency (EPA) plans on using incineration at two of these sites—Texarkana, Texas, and Times Beach, Missouri. EPA had initially selected incineration at New Bedford, Massachusetts, but yielded to public pressure and is now searching for an alternative remedy. We did not evaluate whether EPA made the correct decisions, but we did discuss with the EPA regional officials responsible for each site why they, at least initially, chose incineration rather than an alternative technology. The Texarkana Wood Preserving Company Superfund site is a 25-acre abandoned wood preserving facility in Texarkana, Texas. (See fig. I.1.) EPA placed the site on its National Priorities List in 1986. The cleanup effort at Texarkana is led by the state of Texas and is primarily federally funded. The site is contaminated with chemicals that are commonly found at wood preserving sites. The contamination occurred when wood preserving chemicals were dumped into storage ponds used for the wood treating operations. Approximately 77,000 cubic yards of soil, sludge, and sediment and 16 million gallons of groundwater are contaminated primarily with dioxin, polynuclear aromatic hydrocarbons, and pentachlorophenol. The site contains some areas of heavy contamination, particularly in the sludge. Further complicating the cleanup efforts, the Texarkana site is in a floodplain. The site lies in a mixed-use residential, industrial, and agricultural area. Although there are no immediate risks, the site presents potential health risks in the future if left untreated. EPA determined that nearby residents are not currently at risk of adverse health affects—a residential community lies about one-third of a mile from the site. However, groundwater contamination is continuing to spread at the site. The spread could threaten drinking water if contamination reaches a deeper aquifer. In addition, surface run-off and leachate from the soil could potentially contaminate a nearby creek. EPA has estimated increased cancer risks for potential trespassers and for other persons if the site is used for other purposes in the future. In 1990, EPA chose incineration on the basis of its assessment that it would be the most effective remedy for the type and combination of contaminants at the Texarkana site. Although EPA analyzed other options, it believed that incineration was the only technology that would reduce the contaminants to a level below health-based standards. According to EPA regional officials, to reach the cleanup standards using other technologies would require combining two or more technologies. They added that using multiple innovative technologies would raise the uncertainty level associated with new technologies even further. These standards are based on ensuring the safety of future industrial workers on the site. In addition, EPA officials judged that incineration was the best remedy for high levels of dioxin and for wood treating chemicals in general. EPA considered the following alternative remedies for the Texarkana site: biological and chemical treatment, solidification, placing a protective cover over the site to reduce the spread of contaminants (capping), and off-site incineration. (See app. IV for a discussion of the innovative technologies.) EPA officials believed that chemical or biological remedies would not work successfully on all contaminants or achieve the agency’s cleanup goals. They were also concerned about the possibility that biological or chemical degradation could produce a more toxic form of dioxin. EPA eliminated solidification because the technology was not expected to reduce the volume or toxicity of the waste to the same degree as the other treatments and because of the difficulty in solidifying the type of contaminants present at the site. EPA eliminated capping because it would not provide a permanent treatment, and the site’s location on a flood plain increased the risk of continued release of contaminants. According to the EPA project manager, a cap at this site could be guaranteed only for about 6 years. In addition, the local community wanted the land usable for future industry, making solidification and capping inappropriate options because the contamination would still be on site. EPA decided against off-site incineration because of its high cost—the estimated cost was more than four times greater than on-site incineration. EPA estimates that the planned incineration project will cost approximately $43 million and take approximately 2-1/2 years to fully clean the site. According to the project manager, EPA is in the process of conducting an analysis of incineration at the site to determine the potential health risk of the cleanup to nearby residents. Currently, EPA is planning to take some measures to enhance safety at the site and to prevent the spread of contamination, in advance of full-scale cleanup efforts. According to the project manager, EPA plans to remove the structures on the site—the remnant of the wood preserving operation. It also plans to build a berm along the side of the site that borders a creek to prevent run-off from spreading, if necessary. These efforts by themselves, however, will not stem the spread of groundwater contamination. The Times Beach Superfund site is a 0.8 square mile area located approximately 20 miles southwest of St. Louis, Missouri, in a mixed-use residential and agricultural area. The contamination at Times Beach, a formerly incorporated town, resulted from spraying unpaved roads for dust control with waste oil contaminated with dioxin in the early 1970s. In 1982, after severe flooding of the adjacent Meramec River, EPA discovered elevated dioxin concentrations on the surface of the former town’s roadways. EPA paid approximately $30 million to buy the town and relocate its 2,240 residents. EPA placed Times Beach on the National Priorities List in 1983. In 1988, EPA estimated that dioxin levels in approximately 13,600 cubic yards of soil exceeded standards of 20 parts per billion (ppb) or less. Currently, the site is completely vacant and fenced. EPA decided to address Times Beach and 26 other sites in eastern Missouri with similar dioxin contamination as a single response action in its cleanup plans. The waste oil hauler who sprayed Times Beach with dioxin-contaminated waste oil also sprayed the other 26 sites, which included streets, parking lots, and horse arenas. Because the dioxin contamination at each of these locations originated from the same source, EPA decided that it can be destroyed effectively by the same treatment. In addition, all but 3 of the 27 sites lie in the St. Louis metropolitan area. As a result, EPA determined that a combined response action for all 27 sites would be cost-effective and protective of human health and the environment. EPA estimated that a total of approximately 100 thousand cubic yards of contaminated material from all 27 sites will require treatment. After analyzing several permanent cleanup options, EPA decided to excavate and incinerate the dioxin-contaminated material at Times Beach and the 26 eastern Missouri sites. For several years, EPA evaluated the effectiveness and safety of several different options and treatment technologies, including chemical and biological treatment. In 1988, EPA concluded that excavating and treating dioxin-contaminated material in a temporary incinerator at Times Beach was the most acceptable remedy of the various alternatives. EPA believed incineration would be protective of human health and the environment, cost-effective, attain applicable or relevant and appropriate requirements, and utilize permanent solutions to the maximum extent practicable. In addition, EPA believed incineration was the only method with the demonstrated ability to clean the large quantities of soil, storage bags, and other types of contaminated material found at the 27 dioxin-contaminated sites and reach the specified residential cleanup levels. In 1990, a consent decree signed by EPA, the state of Missouri, and Syntex, the corporation responsible for the cleanup, implemented EPA’s 1988 cleanup choice. The decree dictated cleanup responsibilities for each party involved. Under its terms, EPA had to excavate and transport dioxin-contaminated material from the 26 eastern Missouri sites to Times Beach, the site of the temporary incinerator. Syntex had to excavate and incinerate dioxin soil from Times Beach and to incinerate dioxin-contaminated material from the other eastern Missouri sites. Several stages in the cleanup process for the 27 eastern Missouri sites have already been completed. EPA has excavated contaminated material at 10 of the eastern Missouri sites and placed approximately 67 thousand cubic yards of material in temporary storage buildings until completion of the incinerator. (See fig. I.2.) In addition, Syntex has completed several components of the work required by the consent decree, including demolition and disposal of structures and debris in Times Beach, construction of a ring levee to protect the incinerator subsite from floods, construction of an interim storage facility at Times Beach, and excavation and storage of approximately 21,000 cubic yards of dioxin-contaminated soil. Currently, Syntex subcontractors at the site have completed construction of the temporary incinerator. EPA expects that testing of the incinerator will begin in October or November of 1995 and full-scale operation will begin early 1996. The 18,000-acre New Bedford Harbor Superfund site in Massachusetts is an urban tidal estuary consisting of a harbor and bay that are highly contaminated with PCBs and heavy metals. Manufacturers in the area used PCBs while producing electric capacitors from 1940 to 1978 and discharged PCB-containing waste into the harbor. The contamination of the sediments in the harbor and bay areas has resulted in closing the area to lobstering and fishing and has limited recreational activities and harbor development. EPA placed New Bedford Harbor on the National Priorities List in 1983. EPA planned to address the cleanup of New Bedford Harbor in two stages, starting with the cleanup of the “hot spot” area. EPA defined the hot spot as the area where the concentration of PCBs in the sediment was 4,000 parts per million (ppm) or greater. The PCB concentrations in the hot spot, an area of approximately five acres, ranged between 4,000 ppm and over 200,000 ppm. The volume of hot spot sediments that required treatment represented approximately 45 percent of the total PCB mass in the sediment in the entire New Bedford Harbor site. EPA identified over 90 potential technologies for cleaning New Bedford Harbor. After EPA narrowed its list, it conducted detailed studies on several innovative technologies to assess their potential for success at the New Bedford hot spot. After evaluating the alternatives it believed feasible, EPA decided in 1990 to use dredging and on-site incineration to clean up the hot spot. EPA believed that dredging and on-site incineration was the preferred option to protect public health and the environment and to permanently reduce the migration of contaminants throughout the site. (See fig. I.3.) On the basis of its analyses, EPA determined that incineration, considered a proven technology, would achieve the best balance among the criteria used by EPA to evaluate the alternatives. These criteria included both long- and short-term effectiveness, implementability, overall protection of human health and the environment, and compliance with federal and state applicable or relevant and appropriate requirements. On the other hand, the many uncertainties about the performance of innovative technologies at the New Bedford hot spot sediments made these technologies unlikely candidates for the site. For example, EPA was uncertain about the performance and adequacy of innovative technologies given the silt/clay composition and high water content of the New Bedford sediments. Soil composition and water content are factors that could compromise the performance of innovative technologies. As EPA proceeded with its plans to incinerate hot spot sediments, opposition from environmental and local community groups to EPA’s plans to incinerate grew. The public’s main concern was the potential health risk from dioxin emissions coming from the incinerator. In response to the community’s growing opposition, in 1994 EPA canceled the incineration part of the Corps of Engineers’ contract to clean the hot spot. The cancellation costs of the incineration contract were approximately $5 million dollars, and there may be additional costs. After the cancellation of EPA’s incineration plans, the agency started new efforts to identify alternative cleanup technologies for the site. With public participation, EPA narrowed candidate cleanup options to (1) solidification/stabilization, (2) chemical destruction, and (3) a separation technology such as thermal desorption followed by chemical destruction. EPA plans to conduct detailed studies on at least two chemical destruction technologies and at least two solidification technologies. The agency expects to issue its final decision on the cleanup for the hot spot in approximately 3 years. Dioxin and PCBs (polychlorinated biphenyls) are highly toxic contaminants of particular concern because of their potentially adverse effects on human health and their degree of permanence in the environment. EPA classifies dioxin as a probable human carcinogen. Dioxin has the potential to invoke a wide range of harmful effects in relatively small doses, as compared with other toxic compounds. Some PCBs, having a chemical makeup similar to dioxin’s, have the potential for many of the same effects. Dioxin and dioxin-like substances are not purposely manufactured but are unintentional by-products of combustion and chemical processes. The four main sources of dioxin are (1) the formation during incineration of materials that contain chlorine (such as the incineration of municipal and medical waste); (2) industrial and other processes that employ chlorine (such as chlorinated bleaching of wood pulp for paper manufacturing); (3) chemical manufacturing and related processes, including the manufacture of chlorine and chlorinated substances; and (4) redistribution of existing contamination—because dioxin tends to accumulate in soil and sediment, dioxin contamination may become redistributed through contaminated dust. In addition, dioxin emissions may also result from the incineration of materials already contaminated with dioxin. In this scenario, some of the dioxin-contaminated material remains intact through the incineration process and is emitted from the stack. Exposure to dioxin occurs daily, mainly through dietary intake of meat, dairy products, fish, and shellfish. Dioxin is present in all media, particularly in soil and sediment, which transfer the contaminant to plants and animals. Researchers believe that the presence of dioxin in the food chain is primarily the result of dioxin air emissions depositing from the atmosphere on soil, plants, and bodies of water. In addition, some individuals may be exposed to even higher dioxin levels from other sources; these include occupational exposures, exposure to a distinct local source (for example, a chemical manufacturing plant, or a municipal or medical incinerator), exposure of nursing infants from mothers’ milk, or frequent consumption of dioxin-contaminated fish from a particular source. Health effects have been associated with exposure to dioxin. Dioxin is considered a probable human carcinogen, according to laboratory studies on animals and observation of humans beings exposed to dioxin. In addition, it has been associated with other adverse effects, including reproductive, developmental, immunological, and endocrine changes. In high doses, dioxin causes chloracne, a serious skin condition. The adverse effects of dioxin are contingent upon dose and length of exposure. Dioxin is present in humans at birth in small concentrations and accumulates, increasing as individuals age. The exact level at which health effects will occur is uncertain. EPA began a scientific reassessment of dioxin and dioxin-related compounds in 1991. The reassessment summarizes and evaluates available research to provide a comprehensive survey of the sources of dioxin, the levels of exposure, and the potential health effects. It also identifies gaps in dioxin research. The preliminary conclusions of the reassessment strengthen the evidence that dioxin can cause human health effects even at low levels of environmental exposure. In September 1994, EPA issued two draft reports based on this work which have been released for public comment: Estimating Exposure to Dioxin-Like Compounds and Health Assessment Document for 2,3,7,8 Tetrachlorodibenzo-p-Dioxin (TCDD) and Related Compounds. Polychlorinated biphenyls (PCB) are similar to dioxin as they are in the same class of chemicals. However, unlike dioxin, PCBs were intentionally manufactured (from the 1920s to the 1970s in the United States), mainly for use as an insulating fluid in electrical equipment. The production and use of PCBs was widespread, causing large amounts to be released into the environment. They were used primarily because of their stability and resistance to decomposition, which have caused them to persist in the environment even though they are no longer manufactured. Because of the stability of PCBs, many routes of exposure are possible. The primary source of human intake of PCBs is through food—mainly fish, but also meat and dairy products. Other sources of exposure include inhalation and dermal contact. As with dioxin, exposure to PCBs may cause health effects. In its most toxic forms, PCBs are carcinogenic in laboratory animals and are considered a probable human carcinogen. Some forms of PCBs can have the same toxicity as dioxin (known as dioxin-like PCBs). PCBs are also associated with reproductive and immunologic changes in some people who are exposed to the contaminant. According to EPA researchers, the incomplete destruction of PCBs during incineration of the contaminant may pose the most significant of health threats because of the potential dioxin formation and emissions. In 1993, the Agency for Toxic Substances and Disease Registry (ATSDR) convened an expert panel to evaluate the public health implications of treating and disposing of PCB-contaminated waste. The panel concluded that although the safety of incinerating PCB-contaminated waste is not certain, information on the safety and effectiveness of alternative technologies is also limited. The panel affirmed that no single type of alternative technology can remediate all PCB-contaminated wastes. In addition, it recommended that further research is needed to study the health effects of PCBs. Incineration is the burning of substances by controlled flame in an enclosed area or compartment. During the process of incineration, hazardous organic wastes fed into an incinerator are converted to simpler forms, principally carbon dioxide and water, reducing their volume and toxic qualities. EPA regulates incineration under its authority to regulate hazardous waste. Pursuant to the Resource Conservation and Recovery Act (RCRA), as amended by the Hazardous and Solid Waste Amendments of 1984, EPA in the late 1980s and early 1990s promulgated land disposal restrictions to bar the disposal—except under very restrictive conditions—of untreated hazardous waste. As land disposal became increasingly expensive due to the restrictions, other disposal options, such as incineration, became increasingly attractive. In many cases, the disposal of waste through incineration has become the most economical and, in some cases, the only option for certain hazardous wastes. EPA has encouraged regulated burning as a treatment option and considers incineration to be the best demonstrated available technology for many wastes. By the late 1980s, incineration was also playing an important role in the cleanup of many Superfund sites, where it has been used for treating contaminated soils and other wastes removed from the site. Incineration involves four basic steps: (1) wastes are prepared and fed into the incinerator; (2) wastes are burned, converting organic compounds into residual products in the form of ash and gases;(3) ash is collected, cooled, and removed from the incinerator; and, (4) gases are cooled, cleaned, and released to the atmosphere through the incinerator stack. During incinerator operations, wastes are fed into the incinerator in batches or in a continuous stream. This flow of wastes is generally referred to as the waste feed. The wastes are then burned in the combustion chamber, which is designed to maintain and withstand extremely high temperatures. As the wastes are heated, they are converted from solids or liquids into gases. The gases are mixed with air and passed through a hot flame. As the temperature of the gases rises, the organic compounds in the gases begin to break down and recombine with oxygen from the air to form stable inorganic compounds, such as carbon dioxide and water. Depending on the waste composition, other inorganic compounds, such as the acid gas hydrogen chloride, may form. This entire process is called combustion. In many incinerators, combustion occurs in two combustion chambers. The combustion of more easily burned organics is completed in the first chamber. For compounds that are difficult to burn, combustion is completed in a secondary combustion chamber, or afterburner, after the compounds have been converted to gases and partially combusted in the first chamber. Combustion yields two residual products: solids, in the form of ash, and gases. Ash is an inert inorganic material composed primarily of carbon, salts, and metals. During combustion, most ash collects at the bottom of the combustion chamber; some ash, however, is carried along with the gases as small particles, or particulate matter. Ash removed from the bottom of the combustion chamber is considered, by regulation, a hazardous waste. Combustion gases are composed primarily of carbon dioxide and water, plus small quantities of other gases such as carbon monoxide and nitrogen oxides. Following combustion, the combustion gases move through various devices that cool and cleanse the gases before they are released to the atmosphere through the incinerator stack. A well-designed and operated hazardous waste incinerator will destroy all but a small fraction of the organic compounds contained in the waste. Complete combustion, however, is only a theoretical concept since the development of a 100-percent efficient incinerator is not possible. The three critical factors that determine the completeness of combustion in an incinerator are (1) the temperature in the combustion chamber; (2) the length of time wastes are maintained at high temperatures; and (3) the turbulence, or degree of mixing, of the wastes and the air. Because combustion is never complete, incinerator emissions gases may also contain small quantities of organic and inorganic compounds from both the original waste and compounds formed during the combustion. These “new” organic compounds form from the breakdown and recombination of the original compounds and are called products of incomplete combustion or PICs. PICs are formed during the combustion of any organic material, such as when wood is burned in a wood stove or when gasoline is burned in an automobile engine. Among the types of compounds found in analyses of PICs are very small quantities of dioxins and dibenzofurans. Among the inorganic compounds not present in the original waste are carbon monoxide and nitrogen oxides, both of which are always formed as a result of combustion. Among the most common types of hazardous waste incinerators is the rotary kiln incinerator. Rotary kiln incinerators are versatile and can accept gases, liquids, sludges, slurries, and solids either separately or simultaneously, either in bulk or in containers. Because of this versatility, rotary kilns are commonly used to treat a variety of wastes. The kiln is a cylindrical shell mounted on its side at a slight angle to the horizontal. As the kiln rotates and the wastes travel down the slope, the organic chemicals in the waste convert into gases and partially combust. The gases then pass into the afterburner or secondary combustion chamber where further combustion takes place. Ash residue is removed from the lower end of the kiln. (See fig III.1.) Mobile incineration systems are generally constructed using the rotary kiln incinerator design. These systems are hauled to a site on flat-bed trucks, then assembled and tested. Although smaller than most stationary facilities, they operate on identical principals. Figure III.1: Typical Incinerator Processes (Rotary Kiln) Quench Chamber (Cools Gases) Air Pollution Control Devices (Remove Acid Gases) Fan (Maintains Proper Pressure and Draw Rate) EPA developed performance standards for the incineration of hazardous wastes on the basis of research on incinerator air emissions and health and environmental risk studies. All incinerators emit gases through a stack as the final step in the incineration process. The quantity of pollutants in these emissions is the major determinant of the risk of incineration. The performance standards thus address and attempt to control the various emissions from the stack. Under EPA’s regulations, an incinerator must be able to burn wastes and cleanse combustion gases so that only very small quantities of pollutants are emitted through the stack. EPA’s principal measure of incinerator performance is destruction and removal efficiency (DRE). Destruction refers to the combustion of waste, while removal refers to the cleansing of the pollutants from the combustion gases before they are released from the stack. For most organic wastes, a DRE of 99.99 percent is required; however, for PCBs and dioxins, a DRE of 99.9999 percent is required, which means that no more than one molecule of the compound is released to the air for every 1 million molecules entering the incinerator. Because it is not technically feasible to monitor DRE results for all organic compounds that may be contained in a waste feed, an incinerator must demonstrate that it can achieve the performance standards for selected hazardous compounds, called principal organic hazardous constituents (POHC), which the permitting agency designates in the permit. These POHCs generally are selected from among the wastes the applicant is seeking approval to burn on the basis of their high concentration in the waste feed and their difficulty to burn in comparison with other organic compounds in the waste feed. According to the theory of incineration followed by EPA, if the incinerator achieves the required destruction and removal efficiency for the POHCs, then the incinerator should achieve the same or better destruction and removal efficiencies for organic compounds that are easier to incinerate. The incinerator performance standards in EPA’s RCRA regulations include emissions of the designated organic compounds, hydrogen chloride, and particulate matter. Specifically, those performance standards for the incineration of dioxin require (1) a minimum DRE of 99.9999 percent; (2) generally, removal of 99 percent of hydrogen chloride gas from the incinerator’s emissions; and (3) a limit of 180 milligrams of particulate matter per dry standard cubic meter of gas emitted through the stack. Before a final permit to operate the incinerator is issued, a trial burn generally is required. The trial burn tests the incinerator’s ability to meet all applicable performance standards when burning a waste under specific operating conditions. The operating conditions include such things as the rate and composition of the waste feed, the temperature that must be maintained in various areas of the incinerator, and the gas flow rate. To obtain a final operating permit, the trial burn results must demonstrate that the incinerator can meet the performance standards contained in its permit. The trial burn results are also used to establish the final operating conditions that will be included as part of the facility’s permit. Because the trial burn involves the measurement of the incinerator’s performance under different sets of operating conditions, the trial burn results verify the incinerator’s ability to meet the performance standards under one or more of these conditions and thus can be used to determine what is an acceptable range of operating conditions for the final permit. The final operating permit specifies only those operating conditions under which the incinerator has proven it can meet the performance standards. These operating conditions are important because it is not technically feasible to directly and continuously measure certain aspects of performance, such as destruction and removal efficiency, and certain emissions. On the basis of the results of the trial burn, the permit may specify different operating conditions for different types of waste feeds or specify ranges or minimum or maximum levels for different parameters, such as temperature. Under EPA’s regulatory approach, as long as the incinerator operates within these ranges, it is assumed to be operating under the same conditions as during the successful trial burn and thus to be in compliance with the environmental performance standards. Toxic Substances Control Act (TSCA) regulations have comparable requirements for the incineration of PCBs. While incineration is the only established technology for the treatment of most PCB- and dioxin-contaminated sites, EPA and the industry are developing and testing several innovative technologies that could become viable alternatives to incineration, particularly after further development. Some of these innovative technologies, like incineration, destroy the waste; some of them change its chemical composition so that it is no longer hazardous; and some of them immobilize the waste so that although it may still be hazardous, it will be less likely to move into the air, soil, or water or other waste. The following are the most recognized alternatives to incineration for PCBs and dioxin. Bioremediation: Bioremediation refers to the breakdown of contaminants into less harmful and usually less toxic forms by natural microorganisms. It can be performed at a higher rate in the presence of oxygen, or more slowly under near oxygen-free conditions. Historically, PCBs have been considered resistant to biodegradation. However, the results of lab studies and environmental monitoring studies indicate that PCBs biodegrade in the environment but at a very slow rate. In addition, bioremediation of highly chlorinated substances can result in highly toxic forms of dioxin. To date, EPA has not found a bioremediation process that can accelerate the biodegradation of PCBs to rates necessary to make such a process commercially viable for use in site cleanups. Similarly, limited information from field work on the biodegradation of dioxin has shown that the process can be significantly lengthy. Chemical Dechlorination: This process destroys or detoxifies certain contaminants, such as PCBs and dioxin, by gradually removing chlorine atoms. The conditions that most commonly determine the efficacy and cost of dechlorination methods include the size of soil particles, the soil’s moisture content, the organic carbon contents of the soil, and the cleanup level required. In addition, under certain circumstances, dechlorination can generate highly toxic dioxin. A well-known dechlorination technology is base catalyzed decomposition (BCD). EPA developed BCD to detoxify chlorinated organics such as PCBs and dioxin. It uses two different technologies—thermal desorption (described later in this appendix) followed by a chemical process to separate and detoxify organic contaminants. It is an efficient, relatively inexpensive treatment process for PCBs and potentially capable of treating PCBs at virtually any concentration. However, the process can be expensive for high PCB concentrations because it requires a larger dose of the chemicals necessary to neutralize the chlorine. Field data on the performance and cost of BCD for PCBs and dioxin are very limited. In addition, EPA officials responsible for administering the Toxic Substances Control Act regulations have not yet had an opportunity to assess whether BCD is acceptable as a remedy for PCBs. Soil Washing: Soil washing mixes, washes, and rinses the soil to separate contaminants, such as PCBs, adhering to soil particles. Because it is not a destruction technique, this technology does not present a final solution for the disposition of toxic and hazardous materials. The technology is designed for volume reduction of contaminated material. Its effectiveness depends on factors such as the size of soil particles and humic and silt or clay content of the soil. Multiple washings may be necessary to achieve acceptable contamination levels. In addition, there is need for further management of the concentrated contaminant. While limited work has been done on the effectiveness of soil washing for PCBs, no work has been done for dioxin. Solidification/Stabilization: Solidification and stabilization technologies focus primarily on limiting the solubility or mobility of contaminants, generally by physical means rather than by chemical reaction. Waste solidification technologies encapsulate the contaminants in a solid material—such as portland cement or asphalt. Waste stabilization technologies convert the contaminants into a less soluble, mobile, or toxic form by adding a binder to the waste, such as cement kiln dust or fly ash. Historically, solidification and stabilization technologies have been used to treat metals and other inorganic compounds. With currently available technology, it is generally easier to successfully solidify or stabilize inorganic compounds than organic compounds, such as PCBs and dioxin. More recently, some work has been done on the applicability of solidification and stabilization to organics, such as PCBs. Although no solidification or stabilization treatment currently offered is considered by EPA to be an acceptable alternative incineration for PCBs and dioxin, EPA believes the technology has potential. Solvent Extraction: Using a solvent, such as propane, solvent extraction separates hazardous contaminants from soil and sediment. This process reduces the volume of the hazardous waste that requires treatment. The application of this technology represents only a transfer of the contaminant from one medium (soil) to another (solvent) but does not provide for the contaminant’s ultimate destruction. The ultimate removal of PCBs depends on the number of stages employed and the feed concentration. Many variables, such as soil type and moisture content, influence the system’s performance. For example, water and fine-grained materials inhibit some solvent extraction processes. In addition, after extraction is complete, some solvent remains in the treated sediment. This residual solvent may pose a separate problem if the solvent is toxic or highly explosive. Thermal Desorption: Thermal desorption treats contaminated soils by heating the soil at relatively low temperatures between 300 and 1,000 degrees fahrenheit. The heat separates the contaminants from the soil. The contaminants then require further treatment. The effectiveness and cost of this technology vary and depend on site characteristics such as the moisture content of the soil and the concentration and distribution of the contaminants. In addition, thermal desorption can generate residual that should be monitored and may require further treatment. Vitrification: All existing vitrification technologies use heat to melt the contaminated soil or sediment, which forms a rigid, glassy product when it cools. The volume of the end product is typically 20 to 45 percent less than the volume of the untreated soil or sediment. Organic compounds, including PCBs, are destroyed by the high temperature during vitrification. Vitrification may also have application to special types of dioxin contamination if current developments can be successfully tested. However, the effectiveness of vitrification for both PCBs and dioxin is difficult to assess at this point. Jacqueline M. Garza, Staff Evaluator Richard P. Johnson, Attorney Advisor Gerald E. Killian, Assistant Director Pauline Seretakis Lichtenfeld, Staff Evaluator James B. Musial, Senior Evaluator William H. Roach, Jr., Senior Evaluator Paul J. Schmidt, Senior Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the Environmental Protection Agency's (EPA) efforts to encourage the development and use of innovative technologies at contaminated sites, focusing on: (1) whether EPA has identified innovative technologies that can be used at polychlorinated biphenyls (PCB) and dioxin-contaminated sites; and (2) what factors have limited the use of innovative technologies at PCB and dioxin contaminated sites. GAO found that EPA has: (1) chosen innovative technologies in about 20 percent of its cleanup decisions and has used innovative treatment technologies at 10 percent of the PCB-contaminated sites and 3 percent of the dioxin-contaminated sites; (2) not identified any innovative technologies that it believes to be as effective as incineration for treating waste at PCB or dioxin contaminated Superfund sites; (3) recognized that some of its previous cleanup decisions should be reevaluated to take advantage of recent technological advancements; and (4) identified a number of barriers that inhibit the development and use of innovative technologies at Superfund sites, including the inability of innovative technologies to meet incineration performance standards, technical limitations, limited cost and performance data, and the lack of incentives to encourage technology development. |
When legislative, administration, and agency actions, including those in response to our recommendations, result in significant progress toward resolving a high-risk problem, we remove the high-risk designation. The five criteria for determining if the high-risk designation can be removed are (1) a demonstrated strong commitment to, and top leadership support for, addressing problems; (2) the capacity to address problems; (3) a corrective action plan; (4) a program to monitor corrective measures; and (5) demonstrated progress in implementing corrective measures. For our 2013 high-risk update, we determined that the following two areas warranted removal from the High Risk List. Interagency contracting—where one agency either places an order using another agency’s contract or obtains contracting support services from another agency—can help streamline the procurement process, take advantage of unique expertise in a particular type of procurement, and achieve savings. While this method of contracting can save the government money and effort when properly managed, it also poses a variety of risks. In 2005, we designated the management of interagency contracting as high risk due in part to unclear lines of accountability between customer and assisting agencies and the potential for improper use, including out- of-scope work and noncompliance with competition requirements. We identified the continuing need for additional management controls and guidance and clearer definitions of roles and responsibilities as keys to addressing these issues. We have also highlighted challenges agencies faced in fully realizing the benefits of interagency contracts, including the lack of data and the risk of potential duplication when new contracting vehicles are created. To address these issues, we identified the need for a policy framework and business case analysis requirements to support the creation of certain new contracts and improved data on existing interagency contracts. As detailed in our 2013 high risk update report, we are removing the management of interagency contracting from the High Risk List based on the following: Continued progress in addressing previously identified deficiencies. In our 2009 and 2011 high-risk updates we noted improvements in procedures used in making purchases on behalf of the Department of Defense (DOD)—the largest user of interagency contracts. The DOD Inspector General has also reported a significant decrease in problems with DOD procurements through other federal agencies in congressionally mandated reviews of interagency acquisitions. More recently, we reported earlier this year that DOD substantially complied with new requirements for interagency contract orders. Strengthened management controls. In response to congressional direction, Federal Acquisition Regulation (FAR) provisions on interagency acquisitions were revised in 2010 to require that agencies make a best procurement approach determination to justify the use of an interagency contract and prepare written interagency agreements outlining the roles and responsibilities of customer and assisting organizations. OMB’s October 2012 analysis of reports from the 24 agencies that account for almost all contract spending governmentwide, found that most had implemented management controls to reinforce the new FAR requirements and strengthen the management of interagency acquisitions. New controls over the creation of new interagency contract vehicles. In response to congressional direction and our prior recommendation, OMB established a policy framework in September 2011 to govern the creation of new interagency contract vehicles. The framework addresses concerns about potential duplication by requiring agencies to develop a thorough business case prior to establishing certain contract vehicles. Improved data on interagency contracts. OMB and the General Services Administration have taken a number of steps to address the need for better data on interagency contract vehicles. These efforts should enhance both governmentwide efforts to manage interagency contracts and agency efforts to conduct market research and negotiate better prices. Importantly, congressional oversight sustained over several years, has been vital in addressing the issues that led this area to be designated high risk. Removing the management of interagency contracting from the High Risk List does not mean that the federal government’s use of these contracts is without challenges. But, we believe there are mechanisms in place that OMB and federal agencies can use to identify and address interagency contracting issues before they put the government at significant risk for waste, fraud, or abuse. We also will continue to monitor developments in this area. The Internal Revenue Service’s (IRS) Business Systems Modernization is a multi-billion dollar, highly-complex effort that involves the development and delivery of a number of modernized tax administration and internal management systems as well as core infrastructure projects that are intended to replace the agency’s aging business and tax processing systems. In 1995, we identified serious management and technical weaknesses in IRS’s modernization program that jeopardized its successful completion. We recommended many actions to fix the problems, and added IRS’s modernization to our High Risk List. In 1995, we also added the agency’s financial management to our High Risk List due to long-standing and pervasive problems which hampered the effective collection of revenues and precluded the preparation of auditable financial statements. We combined the two issues into one high-risk area in 2005 since resolution of the most serious financial management problems depended largely on the success of the business systems modernization program. We are removing IRS’s Business Systems Modernization program from the High Risk List because of: Progress in addressing weaknesses. In our 2007, 2009, and 2011 high risk updates, we reported that IRS continued to make progress in addressing our recommendations. In January 2012, the agency delivered the initial phase of its cornerstone tax processing project and began the daily processing and posting of individual taxpayer accounts. This enhanced tax administration and improved service by enabling faster refunds for more taxpayers, allowing more timely account updates, and faster issuance of taxpayer notices. Other improvements made led us to conclude that IRS’s remaining deficiencies in internal controls over information security no longer constitute a material weakness for financial reporting as of September 30, 2012. Commitment to sustaining progress in the future. In July 2011, we reported that IRS had put in place close to 80 percent of the practices needed for an effective investment management process, including all of the processes needed for effective project oversight. We also reported that IRS had embarked on an effort to improve its software development practices using the Carnegie Mellon University Software Engineering Institute’s Capability Maturity Model Integration (CMMI), which calls for disciplined software development and acquisition practices which are considered industry best practices. In September 2012, IRS’s application development organization reached CMMI maturity level 3, a high achievement by industry standards. Throughout the years, Congress conducted oversight of the Business Systems Modernization program by, among other things, requiring that IRS submit annual expenditure plans that needed to meet certain conditions, including a review by GAO. Because of the significant progress made in addressing the high-risk area, starting in fiscal year 2012, Congress did not require the submission of an annual expenditure plan. As with all areas removed from the High Risk List, we will continue to monitor how future events unfold. To determine which federal government programs and functions should be added to the High Risk List, we consider whether the program or function is of national significance or is key to government performance and accountability. Further, we consider qualitative factors, such as whether the risk involves public health or safety, service delivery, national security, national defense, economic growth, or privacy or citizens’ rights, or could result in significant impaired service, program failure, injury or loss of life, or significantly reduced economy, efficiency, or effectiveness. In addition, we also review the exposure to loss in quantitative terms such as the value of major assets being impaired, revenue sources not being realized, or major agency assets being lost, stolen, damaged, or wasted. We also consider corrective measures planned or under way to resolve a material control weakness and the status and effectiveness of these actions. This year, we added two new areas, delineated below, to the High Risk List based on those criteria. Climate change poses risks to many environmental and economic systems—including agriculture, infrastructure, ecosystems, and human health—and presents a significant financial risk to the federal government. The United States Global Change Research Program (USGCRP) has observed that the impacts and costliness of weather disasters will increase in significance as what are considered “rare” events become more common and intense due to climate change. Among other impacts, climate change could threaten coastal areas with rising sea levels, alter agricultural productivity, and increase the intensity and frequency of severe weather events such as floods, drought, and hurricanes. Weather-related events have cost the nation tens of billions of dollars in damages over the past decade. For example, in 2012, the administration requested $60.4 billion for Superstorm Sandy recovery efforts. These impacts pose significant financial risks for the federal government, which owns extensive infrastructure, insures property through federal flood and crop insurance programs, provides technical assistance to state and local governments, and provides emergency aid in response to natural disasters. However, the federal government is not well positioned to address this fiscal exposure, partly because of the complex, cross-cutting nature of the issue. Given these challenges and the nation’s precarious fiscal condition, we have added limiting the federal government’s fiscal exposure to climate change to our 2013 list of high-risk areas. Climate change adaptation—defined as adjustments to natural or human systems in response to actual or expected climate change—is a risk- management strategy to help protect vulnerable sectors and communities that might be affected by changes in the climate. For example, adaptation measures may include raising river or coastal dikes to protect infrastructure from sea level rise, building higher bridges, and increasing the capacity of storm water systems. Policymakers increasingly view climate change adaptation as a risk-management strategy to protect vulnerable sectors and communities that might be affected by changes in the climate, but, as we reported in 2009, the federal government’s emerging adaptation activities were carried out in an ad hoc manner and were not well coordinated across federal agencies, let alone with state and local governments. The federal government has a number of efforts underway to decrease domestic greenhouse gas emissions, but decreasing global emissions depends in large part on cooperative international efforts. Further, according to the National Research Council and USGCRP, greenhouse gases already in the atmosphere will continue altering the climate system for many decades. As such, the impacts of climate change can be expected to increase fiscal exposure for the federal government in many areas: Federal government as property owner. The federal government owns and operates hundreds of thousands of buildings and facilities, such as defense installations, that could be affected by a changing climate. In addition, the federal government manages about 650 million acres– –29 percent of the 2.27 billion acres of U.S. land––for a wide variety of purposes, such as recreation, grazing, timber, and fish and wildlife. In 2007, we recommended that that the Secretaries of Agriculture, Commerce, and the Interior develop guidance for resource managers that explains how they are expected to address the effects of climate changes, and the three departments generally agreed with the recommendation. We have ongoing work related to adapting infrastructure and the management of federal lands to a changing climate. Federal insurance programs. Two important federal insurance efforts—the National Flood Insurance Program (NFIP) and the Federal Crop Insurance Corporation—are based on conditions, priorities, and approaches that were established decades ago and do not account for climate change. NFIP has been on our High Risk List since March 2006 because of concerns about its long-term financial solvency and related operational issues. In March 2007, we reported that both of these insurance programs’ exposure to weather-related losses had grown substantially, and that the agencies responsible for them had done little to develop the information necessary to understand their long-term exposure to climate change. We recommended that the responsible agencies analyze the potential long-term fiscal implications of climate change and report their findings to the Congress. The agencies agreed with the recommendation and contracted with experts to study their programs’ long-term exposure to climate change, but the results of the work have not yet been reported to Congress. In addition, in June 2011, we reported that external factors continue to complicate the administration of the NFIP and affect its financial stability. In particular, the Federal Emergency Management Agency (FEMA), which administers the NFIP, was not been authorized to account for long-term erosion when updating flood maps used to set premium rates for the NFIP, increasing the likelihood that premiums would not cover future losses. We suggested that Congress consider authorizing the NFIP to account for long-term flood erosion in its flood maps, and the Biggert-Waters Flood Insurance Reform Act of 2012 requires FEMA to use information on topography, coastal erosion areas, changing lake levels, future changes in sea levels, and intensity of hurricanes in updating its flood maps. While these provisions respond to our suggestion to Congress, their ultimate effectiveness will depend on their implementation by FEMA. It is too early to evaluate such efforts, but we plan to examine the NFIP in the near future. Technical assistance to state and local governments. The federal government invests billions of dollars annually in infrastructure projects that state and local governments prioritize and supervise. These projects have large up front capital investments and long lead times that require decisions about how to address climate change to be made well before its potential effects are discernable. We reported in October 2009 that insufficient site-specific data—such as local temperature and precipitation projections—make it hard for state and local officials to justify the current costs of adaptation efforts for potentially less certain future benefits. We recommended that the appropriate entities within the Executive Office of the President develop a strategic plan for adaptation that, among other things, identifies mechanisms to increase the capacity of federal, state, and local agencies to incorporate information about current and potential climate change impacts into government decision making. USGCRP’s 2012-2021 strategic plan for climate change science, released in April 2012, recognizes this need by identifying enhanced information management and sharing as a key objective, and USGCRP is undertaking several actions designed to better coordinate use and application of federal climate science. We have ongoing work related to these issues. In addition, gaps in satellite coverage, which could occur as soon as 2014, are expected to affect the continuity of climate and space weather measurements important to developing the information needed by state and local officials. According to National Oceanic and Atmospheric Administration program officials, a satellite data gap would result in less accurate and timely weather forecasts and warnings of extreme events—such as hurricanes, storm surges and floods. We have concluded that the potential gap in weather satellite data is a high-risk area and added it to the High Risk List this year as well. Disaster aid. In the event of a major disaster, federal funding for response and recovery comes from the Disaster Relief Fund managed by FEMA and disaster aid programs of other participating federal agencies. The federal government does not budget for these costs and runs the risk of facing a large fiscal exposure at any time. We reported in September 2012 that disaster declarations have increased over recent decades to a record of 98 in fiscal year 2011 compared with 65 in 2004. Over that period, FEMA obligated more than $80 billion in federal assistance for disasters. We found that FEMA has had difficulty implementing longstanding plans to assess national preparedness capabilities and that FEMA’s indicator for determining whether to recommend that a jurisdiction receive disaster assistance does not accurately reflect the ability of state and local governments to respond to disasters. In September 2012, we recommended, among other things, that FEMA develop a methodology to more accurately assess a jurisdiction’s capability to respond to and recover from a disaster without federal assistance. FEMA concurred with this recommendation. The Council on Environmental Quality coordinates federal environmental efforts and the development of environmental policies and initiatives. The Office of Science and Technology Policy was established by statute in 1976 to serve as a source of scientific and technological analysis and judgment for the President with respect to major policies, plans, and programs of the federal government, among other things. interagency climate change adaptation task force. However, a 2012 National Research Council report states that while the task force has convened representatives of relevant agencies and programs, it has no mechanisms for making or enforcing important decisions and priorities. In May 2011, we found no coherent strategic government-wide approach to climate change funding and that federal officials do not have a shared understanding of strategic government-wide priorities. At that time, we recommended that the appropriate entities within the Executive Office of the President clearly establish federal strategic climate change priorities, including the roles and responsibilities of the key federal entities, taking into consideration the full range of climate-related activities within the federal government. The relevant federal entities have not directly addressed this recommendation. Federal agencies have made some progress toward better organizing across agencies, within agencies, and among different levels of government; however, the increasing fiscal exposure for the federal government calls for more comprehensive and systematic strategic planning including, but not limited to, the following: A government-wide strategic approach with strong leadership and the authority to manage climate change risks that encompasses the entire range of related federal activities and addresses all key elements of strategic planning. GAO, Climate Change: Improvements Needed to Clarify National Priorities and Better Align Them with Federal Funding Decisions, GAO-11-317 (Washington, D.C.: May 20, 2011). More information to understand and manage federal insurance programs’ long-term exposure to climate change and analyze the potential impacts of an increase in the frequency or severity of weather-related events on their operations. A government-wide approach for providing (1) the best available climate-related data for making decisions at the state and local level and (2) assistance for translating available climate-related data into information that officials need to make decisions. Potential gaps in satellite data need to be effectively addressed. Improved criteria for assessing a jurisdiction’s capability to respond and recover from a disaster without federal assistance, and to better apply lessons from past experience when developing disaster cost estimates. Additional information on Limiting the Federal Government’s Fiscal Exposure by Better Managing Climate Change Risks is provided in the 2013 high risk update report. For 2013, we are designating a new high-risk area—Mitigating Gaps in Weather Satellite Data. We and others—including an independent review team reporting to the Department of Commerce and the department’s Inspector General—have raised concerns that problems and delays on environmental satellite acquisition programs will result in gaps in the continuity of critical satellite data used in weather forecasts and warnings. The importance of such data was recently highlighted by the advance warnings of the path, timing, and intensity of Superstorm Sandy. Since the 1960s, the United States has used both polar-orbiting and geostationary satellites to observe the earth and its land, oceans, atmosphere, and space environments. Polar-orbiting satellites constantly circle the earth in an almost north-south orbit providing global coverage of environmental conditions that affect the weather and climate. As the earth rotates beneath it, each polar-orbiting satellite views the entire earth’s surface twice a day. In contrast, geostationary satellites maintain a fixed position relative to the earth from a high-level orbit of about 22,300 miles in space. Used in combination with ground, sea, and airborne observing systems, both types of satellites have become an indispensable part of monitoring and forecasting weather and climate. For example, polar- orbiting satellites provide the data that go into numerical weather prediction models, which are a primary tool for forecasting weather days in advance—including forecasting the path and intensity of hurricanes and tropical storms. Geostationary satellites provide frequently-updated graphical images that are used to identify current weather patterns and provide short-term warnings. For more than 40 years, the United States has operated two separate operational polar-orbiting meteorological satellites systems: the Polar- orbiting Operational Environmental Satellite series, which is managed by National Oceanic and Atmospheric Administration (NOAA)—a component of the Department of Commerce; and the Defense Meteorological Satellite Program (DMSP), which is managed by the Air Force. The government also relies on data from a European satellite program, called the Meteorological Operational (MetOp) satellite series. These satellites are positioned so that they cross the equator in the early morning, midmorning, and early afternoon in order to obtain regular updates throughout the day. With the expectation that combining the two separate U.S. polar satellite programs would result in sizable cost savings, a May 1994 Presidential Decision Directive required NOAA and DOD to converge the two programs into a single new satellite acquisition, which became the National Polar-orbiting Operational Environmental Satellite System (NPOESS). However, in the years that followed, NPOESS encountered significant technical challenges in sensor development and experienced program cost growth and schedule delays, in part due to problems in the program’s management structure. After several restructurings and recurring challenges, in February 2010, the Executive Office of the President’s Office of Science and Technology Policy announced that NOAA and DOD would no longer jointly procure NPOESS; instead, each agency would plan and acquire its own satellite system. Specifically, NOAA, with support from the National Aeronautics and Space Administration (NASA), would be responsible for the afternoon orbit, and DOD would be responsible for the early morning orbit. The U.S. partnership with the European satellite agency for data from the midmorning orbit would continue as planned. Subsequently, NOAA initiated its replacement program, the Joint Polar Satellite System (JPSS). JPSS consists of a demonstration satellite— called the Suomi National Polar-orbiting Partnership (NPP)—launched in October 2011; two satellites, with at least five instruments planned for each, to be launched by March 2017 and December 2022, respectively; two stand-alone satellites to accommodate three additional instruments; and ground systems for the entire program. The program is currently estimated to cost $12.9 billion. In June 2012, we reported that NOAA and NASA made progress in establishing the JPSS program and in launching and operating the demonstration satellite, but noted that program officials expect there to be a gap in satellite observations before the first JPSS satellite is launched. Specifically, NOAA officials anticipate a gap in the afternoon orbit from 18 to 24 months between the time that NPP reaches the end of its lifespan and when the first JPSS satellite is fully ready for operational use. We identified other scenarios where the gap could last from 17 to 53 months. For example, the gap would be 17 months if NPP lasts 5 years until October 2016 and JPSS is launched as planned in March 2017 and undergoes a 12-month on-orbit checkout before it is fully operational. Alternatively, if NPP lasts only 3 years—which NASA engineers consider possible due to poor workmanship in the fabrication of the instruments— and JPSS launches 1 year later than currently planned, the gap in satellite observations could reach 53 months. After NPOESS was disbanded, DOD also began planning its own follow- on polar satellite program. However, it halted work in early 2012, since it still has two legacy DMSP satellites in storage that will be launched as needed to maintain observations in the early morning orbit. The agency currently plans to launch its two remaining satellites in 2014 and 2020. Moreover, DOD is working to identify alternatives to meet its future environmental satellite requirements. However, in June 2012, we reported that there is a possibility of satellite data gaps in DOD’s early morning orbit. The two remaining DMSP satellites may not work as intended because they were built in the late 1990s and will be quite old by the time they are launched. If the satellites do not perform as expected, a data gap in the early morning orbit could occur as early as 2014. Satellite data gaps in the morning or afternoon polar orbits would lead to less accurate and timely weather forecasting; as a result, advanced warning of extreme events would be affected. Such extreme events could include hurricanes, storm surges, and floods. For example, the National Weather Service performed case studies to demonstrate how its forecasts would have been affected if there were no polar satellite data in the afternoon orbit, and noted that its forecasts for the “Snowmaggedon” winter storm that hit the Mid-Atlantic coast in February 2010 would have predicted a less intense storm further east, with about half of the precipitation at 3, 4, and 5 days before the event. Specifically, the models would have under-forecasted the amount of snow by at least 10 inches. Similarly, a European weather organization recently reported that NOAA’s forecasts of Superstorm Sandy’s track could have been hundreds of miles off without polar-orbiting satellites: rather than identifying the New Jersey landfall within 30 miles 4 days before landfall, the models would have shown the storm remaining at sea. In June 2012, we reported that while NOAA officials communicated publicly and often about the risk of a polar satellite data gap, the agency had not established plans to mitigate the gap. At the time, NOAA officials stated that the agency would continue to use existing satellites as long as they provide data and that there were no viable alternatives to the JPSS program. However, our report noted that a more comprehensive mitigation plan was essential since it is possible that other governmental, commercial, or foreign satellites could supplement the polar satellite data. For example, other nations continue to launch polar-orbiting weather satellites to acquire data such as sea surface temperatures, sea surface winds, and water vapor. Also, over the next few years, NASA plans to launch satellites that will collect information on precipitation and soil moisture. Because it could take time to adapt ground systems to receive, process, and disseminate an alternative satellite’s data, we noted that any delays in establishing mitigation plans could leave the agency little time to leverage its alternatives. We recommended that NOAA establish mitigation plans for pending satellite gaps in the afternoon orbit as well as potential gaps in the early morning orbit. In September 2012, the Under Secretary of Commerce for Oceans and Atmosphere (who is also the NOAA Administrator) reported that NOAA had several actions under way to address polar satellite data gaps, including (1) an investigation on how to maximize the life of the demonstration satellite, (2) an investigation on how to accelerate the development of the second JPSS satellite, and (3) the development of a mitigation plan to address potential data gaps until the first JPSS satellite becomes operational. The Under Secretary also directed NOAA’s Assistant Secretary to, by mid-October 2012, establish a contract to conduct an enterprise-wide examination of contingency options and to develop a written, descriptive, end-to-end plan that considers the entire flow of data from possible alternative sensors through data assimilation and on to forecast model performance. In October 2012, NOAA issued a mitigation plan for a potential gap in the afternoon orbit, between the current polar satellite and the first JPSS satellite. The plan identifies and prioritizes options for obtaining critical observations, including alternative satellite data sources and improvements to data assimilation in models. It also lists technical, programmatic, and management steps needed to implement these options. However, these plans are only the beginning. The agency must make difficult decisions on which steps it will implement to ensure that its mitigation plans are viable when needed. For example, NOAA must make decisions about (1) whether and how to extend support for legacy satellite systems so that their data might be available if needed, (2) how much time and resources to invest in improving satellite models so that they assimilate data from alternative sources, (3) whether to pursue international agreements for access to additional satellite systems and how best to resolve any security issues with the foreign data, (4) when and how to test the value and integration of alternative data sources, and (5) how these preliminary mitigation plans will be integrated with the agency’s broader end-to-end plans for sustaining weather forecasting capabilities. NOAA must also identify time frames for when these decisions will be made. We have ongoing work assessing NOAA’s efforts to limit and mitigate potential polar satellite data gaps. Geostationary environmental satellites transmit frequently updated images of the weather currently affecting the United States to every national weather forecast office in the country. These are the satellite images that the public often sees on television news programs. NOAA plans to have its $10.9 billion Geostationary Operational Environmental Satellite-R (GOES-R) series replace the current fleet of geostationary satellites, which will begin to reach the end of their useful lives in 2015. The GOES-R program has undergone a series of changes since 2006 and now consists of four geostationary satellites and a ground system. However, problems with instrument and ground system development caused a 19-month delay in completing the program’s preliminary design review, which occurred in February 2012. In June 2012, we reported that GOES-R schedules were not fully reliable and that they could contribute to delays in satellite launch dates. Program officials acknowledged that the likelihood of meeting the October 2015 launch date was 48 percent. While NOAA’s policy is to have two operational satellites and one backup satellite in orbit at all times, continued delays in the launch of the first GOES-R satellite could lead to a gap in satellite coverage. This policy proved useful in December 2008 and again in September 2012 when the agency experienced problems with one of its operational satellites, but was able to move its backup satellite into place until the problems were resolved. However, beginning in April 2015, NOAA expects to have only two operational satellites and no backup satellite in orbit until GOES-R is launched and completes an estimated 6-month post-launch test period. As a result, there could be a year or more gap during which time a backup satellite would not be available. If NOAA were to experience a problem with either of its operational satellites before GOES-R is in orbit and operational, it would need to rely on older satellites that are beyond their expected operational lives and may not be fully functional. Any further delays in the launch of the first satellite in the GOES-R program would likely increase the risk of a gap in satellite coverage. In September 2010, we reported that NOAA had not established adequate continuity plans for its geostationary satellites. Specifically, in the event of a satellite failure, with no backup available, NOAA planned to reduce its operations to a single satellite and if available, rely on a satellite from a foreign nation. However, the agency did not have plans that included processes, procedures, and resources needed to transition to a single or a foreign satellite. Without such plans, there would be an increased risk that users would lose access to critical data. We recommended that NOAA develop and document continuity plans for the operation of geostationary satellites that included implementation procedures, resources, staff roles, and timetables needed to transition to a single satellite, a foreign satellite, or other solution. In September 2011, NOAA developed an initial continuity plan that generally includes these elements. Specifically, NOAA’s plan identified steps it would take in transitioning to a single or foreign satellite; the amount of time this transition would take; roles of product area leads; and resources such as imaging product schedules, disk imagery frequency, and staff to execute the changes. In December 2012, NOAA issued an updated plan that provides additional contingency scenarios. However, it is not evident that critical steps have been implemented, including simulating continuity situations and working with the user community to account for differences in products under different continuity scenarios. These steps are critical for NOAA to move forward in documenting the processes it will take to implement its contingency plans. Once these activities are completed, NOAA should update its contingency plan to provide more details on its contingency scenarios, associated time frames, and any preventative actions it is taking to minimize the possibility of a gap. We have ongoing work assessing NOAA’s actions to ensure that its plans are viable and that continuity procedures are in place and have been tested. Additional information on Mitigating Gaps in Weather Satellite Data is provided in our high-risk update report. Since our 2011 update, sufficient progress has been made to narrow the scope of the following three areas. In 2011, we added the Department of the Interior’s (Interior) management of oil and gas on leased federal lands and waters to GAO’s High Risk List for three reasons; (1) Interior did not have reasonable assurance that it was collecting its share of revenue from oil and gas produced on federal lands; (2) Interior was unable to hire, train, and retain sufficient staff to provide oversight and management of oil and gas operations on federal lands and waters; and (3) Interior was reorganizing its oversight of offshore oil and gas activities in the immediate aftermath of the Deepwater Horizon incident. Since 2011, sufficient progress has been made in one of these three areas—Interior’s reorganization of its oversight of offshore oil and gas activities—but Interior’s revenue collection and human capital challenges remain a concern. The explosion onboard the Deepwater Horizon and oil spill in the Gulf of Mexico in April 2010 emphasized the importance of Interior’s management of permitting and inspections to ensure operational and environmental safety. In 2011, Interior undertook a substantial reorganization of its oversight of offshore oil and gas activities that included establishing three new bureaus and separating revenue collection and oversight functions. At that time, we raised concerns about Interior’s ability to continue to perform these functions while undertaking this reorganization. In July 2012, we concluded that Interior had fundamentally completed its reorganization. However, Interior continues to face challenges in collecting the appropriate amount of royalties from oil and gas produced on federal lands and waters. We have recommended that Interior reassess its revenue collection policies and processes and correct problems with its data on oil and gas production, and Interior is working to implement a number of these recommendations. We are reviewing Interior’s revenue collection practices and will evaluate, among other things, Interior’s progress in implementing these recommendations. Interior also continues to face problems in hiring, training, and retaining staff at the bureaus responsible for managing federal oil and gas resources, potentially placing both the environment and royalties at risk. We are reviewing Interior’s human capital challenges, focusing on the causes of these challenges and the actions Interior is taking to address them. To recognize progress at the Department of Energy (DOE) on the National Nuclear Security Administration’s (NNSA) and Office of Environmental Management’s (EM) execution of nonmajor projects— projects with values of less than $750 million—we are shifting the focus of its high-risk designation more to major contracts and projects executed by NNSA and EM, those contracts and projects with values of $750 million or greater. These contracts include those for management and operating contracts for national laboratories and nuclear production plants—such as Los Alamos National Laboratory—that are government owned and contractor operated, as well as for capital asset projects—such as the Hanford Tank Waste Treatment and Immobilization Plant under construction in Hanford, Washington, and the Mixed Oxide Fuel Fabrication Facility under construction near Aiken, South Carolina— projects that are currently estimated to cost $13.4 billion and $4.9 billion respectively with cost increases anticipated. Two of our reviews completed in 2012 focused on nonmajor projects found that these projects were being completed in large part, although additional and sustained attention by DOE is needed to adequately set and document performance baselines and further demonstrate that these actions result in improved performance. These reports included recommendations to DOE to clearly define, document, and track the scope, cost, and completion date targets for each of its projects, as required by DOE’s project management order. DOE agreed with these recommendations. With further monitoring of this area to ensure that progress is sustained, coupled with continued efforts and commitment by top leadership to address contract and project management weaknesses, nonmajor project performance issues will have been sufficiently addressed. Significant challenges remain for the successful execution of major projects. NNSA is tasked with modernizing the nation’s aging nuclear weapons production facilities, a difficult effort that will take years and cost billions of dollars. EM faces ongoing complex and long-term challenges in removing radioactive and hazardous chemical contaminants—left over from decades of weapons production—from soil, groundwater, and facilities. Billions of dollars have already been spent, and will continue to be spent over the coming decades to treat and dispose of this waste. NNSA and EM are currently managing 10 major projects with combined estimated costs totaling as much as $65.7 billion. As part of this high-risk update, we examined these 10 projects but were only able to analyze changes in schedule estimates for 5 projects and cost estimates for 7 projects because of limitations in the data. For these projects, we determined that DOE has added as much as 38.5 years to their initial schedules and $16.5 billion to original cost estimates with further delays and cost increases anticipated. For example, since we reported in February 2011 that NNSA’s project to design and construct a new Uranium Processing Facility at the Y-12 National Security Complex had experienced nearly seven-fold cost growth from its 2004 estimate to the current estimate of between $4.2 billion and $6.5 billion, the facility will be redesigned to correct issues concerning processing equipment with the potential for significant additional cost and schedule delay. NNSA and EM will remain on the High Risk List until DOE can consistently demonstrate that recent changes to policies and processes are resulting in improved performance on major projects. In 2003, we designated implementing and transforming the Department of Homeland Security (DHS) as high risk because DHS had to transform 22 agencies—several with major management challenges—into one department. Further, failure to effectively address DHS’s management and mission risks could have serious consequences for U.S. national and economic security. Given the significant effort required to build and integrate a new department as large and complex as DHS, our initial high risk designation focused on the department’s initial transformation and subsequent implementation efforts, to include associated management and programmatic challenges. Over the past 10 years, the focus of this high-risk area has evolved in tandem with DHS’s maturation and evolution. The overriding tenet has consistently remained the department’s ability to build a single, cohesive and effective department that is greater than the sum of its parts—a goal that requires effective collaboration and integration of its various components and management functions. In 2007, in reporting on DHS’s progress since its creation, as well as in our 2009 high risk update, we noted that DHS had made more progress in implementing its range of missions than in its management functions, and that continued work was needed to address an array of programmatic and management challenges. DHS’s initial focus on mission implementation was understandable given the critical homeland security needs facing the nation after the department’s establishment, and the challenges posed by its creation, integration and transformation. As DHS continued to mature, and as we reported in our assessment of DHS’s progress and challenges 10 years after 9/11, we found that the department implemented key homeland security operations and achieved important goals in many areas to create and strengthen a foundation to reach its potential. However, we also identified that more work remained for DHS to address weaknesses in its operational and implementation efforts, and to strengthen the efficiency and effectiveness of those efforts. We further reported that continuing weaknesses in DHS’s management functions had been a key theme impacting the department’s implementation efforts. Recognizing DHS’s progress in transformation and mission implementation, our 2011 high risk update focused on the continued need to strengthen DHS’s management functions (acquisition, information technology, financial management, and human capital) and integrate those functions within and across the department, as well as the impact of these challenges on the department’s ability to effectively and efficiently carry out its missions. While challenges remain for DHS to address across its range of missions, the department has made considerable progress in transforming its original component agencies into a single cabinet-level department and positioning itself to achieve its full potential. Important strides have also been made in strengthening the department’s management functions and in integrating those functions across the department, particularly in recent years. For example, DHS has chartered eight Centers of Excellence to enhance component acquisition capabilities, defined and begun to implement a vision for a tiered governance structure intended to improve its information technology program and portfolio management, obtained a qualified audit opinion on its fiscal year 2012 financial statements, and issued a workforce strategy and a revised Workforce Planning Guide to help the department address its human capital challenges and plan for its workforce needs. However, DHS still has considerable work ahead in many areas. For example, in September 2012, we reported that most of DHS’s major acquisition programs continue to cost more than expected, take longer to deploy than planned, or deliver less capability than promised. We identified 42 programs that experienced cost growth or schedule slips, or both, with 16 of the programs’ costs increasing from a total of $19.7 billion in 2008 to $52.2 billion in 2011—an aggregate increase of 166 percent. Further, while DHS has defined and begun to implement a vision for a tiered governance structure to improve information technology (IT) management, we reported in July 2012 that the governance structure covers less than 20 percent (about 16 of 80) of DHS’s major IT investments and 3 of its 13 portfolios. DHS has also been unable to obtain an audit opinion on its internal controls over financial reporting, and needs to obtain and sustain unqualified audit opinions for at least two consecutive years on the department-wide financial statements. Finally, federal surveys have consistently found that DHS employees are less satisfied with their jobs than the government-wide average. Key to addressing the department’s management challenges is DHS demonstrating the ability to achieve sustained progress across the 31 actions and outcomes we identified as needed to address the high-risk designation, to which DHS agreed. As shown in table 1, we believe DHS has fully addressed 6, mostly addressed 2, partially addressed 16, and initiated 7 of the 31 key actions and outcomes. To more fully address GAO’s high-risk designation, continued progress is needed in order to mitigate the risks that management weaknesses pose to mission accomplishment and the efficient and effective use of the department’s resources. In particular, the department needs to demonstrate continued progress in implementing and strengthening key management initiatives and addressing corrective actions and outcomes. Therefore, we are narrowing the scope of the high-risk area and changing the name from Implementing and Transforming the Department of Homeland Security to Strengthening the Department of Homeland Security Management Functions to reflect this focus. One area—Modernizing the Outdated U.S. Financial Regulatory System—has been modified due to changing circumstances to include the Federal Housing Administration (FHA). To reflect these changing circumstances, the name of the area has been changed as well. We first designated this area as high risk in 2009 due to the urgent need to reform the fragmented and outdated U.S. financial regulatory system. As detailed in our 2013 high risk update report, many actions are underway to implement oversight by new regulatory bodies and new requirements for market participants, although many rulemakings remain unfinished. Among the additional actions needed are resolving the role of the two housing-related government-sponsored enterprises (GSE)— Fannie Mae and Freddie Mac—that continue operating under government conservatorships. However, a new challenge for the markets has also evolved as the decline in private sector participation in housing finance that began with the 2007-2009 financial crisis has resulted in much greater activity by FHA, whose single-family loan insurance portfolio has grown from about $300 billion in 2007 to more than $1.1 trillion in 2012. Although required to maintain capital reserves equal to at least 2 percent of its portfolio, FHA’s capital reserves have fallen below this level, due partly to increases in projected defaults on the loans it has insured. As a result, we are modifying this high-risk area to include FHA and acknowledge the need for actions beyond those already taken to help restore FHA’s financial soundness and define its future role. One such action would be to determine the economic conditions that FHA’s primary insurance fund would be expected to withstand without drawing on the Treasury. Recent events suggest that the 2-percent capital requirement may not be adequate to avoid the need for Treasury support under severe stress scenarios. Additionally, actions to reform GSEs and to implement mortgage market reforms in the Dodd-Frank Act will need to consider the potential impacts on FHA’s risk exposure. There has been notable progress on the vast majority of the issues that remain on the High Risk List. The nation cannot afford to allow problems to persist. Addressing high-risk problems can save billions of dollars each year. Several areas on the High Risk List illustrate both the challenges of addressing difficult and tenacious high-risk problems and the opportunities for savings that can accrue if progress is made to address high-risk problems. Congress, the administration, and the Food and Drug Administration (FDA) have all taken actions to improve the agency’s oversight of medical products—drugs, biologics, and medical devices—marketed in the United States. The recently enacted Food and Drug Administration Safety and Innovation Act of 2012 (Public Law 112-144) included several provisions to enhance FDA’s oversight that reflects recommendations we have made. For example, the law directed FDA to take a risk-based approach in selecting foreign drug establishments for inspections, as we recommended in September 2008. It also required FDA to improve oversight of medical device recalls by directing FDA to take actions consistent with the recommendations in our June 2011 report. In addition, the law addressed the problem of drug shortages by requiring manufacturers to advise FDA of any changes that could affect the supply of their drugs, as we suggested in November 2011. Further, the President issued an Executive Order in October 2011 that instructs FDA to expedite review of applications to market drugs that would help to prevent or resolve shortages. FDA has also taken important steps. For example, as we recommended, FDA developed an evidence-based estimate of its resource needs and improved the quality of some of the data it uses to manage its foreign drug inspection program. This is important progress. Nevertheless, we believe that FDA must do more to bolster its oversight of medical products. FDA needs to fully implement the provisions in the Food and Drug Administration Safety and Innovation Act cited above and address other outstanding concerns. Specifically, FDA needs to: strengthen its Drug Shortage Program by assessing program resources, systematically tracking data on shortages, considering the availability of medically necessary drugs as a strategic priority, and developing relevant results-oriented performance metrics to gauge the agency’s response to shortages; improve oversight of medical device recalls by routinely assessing information on device recalls, clarifying procedures for conducting recalls, developing criteria for evaluating the effectiveness of recalls, and documenting the agency’s basis for terminating individual recalls; implement the Safe Medical Devices Act of 1990; conduct more inspections of foreign establishments manufacturing medical products for the U.S. market and utilize new authority to take a risk-based approach in selecting foreign drug establishments to ensure that they are inspected at a frequency comparable to domestic establishments with similar characteristics; emphasize the importance of timely medical product reviews, particularly for medical devices; and track applications to market medical products for children. The Pension Benefit Guaranty Corporation (PBGC) insures the pension benefits of 43 million American workers and retirees participating in nearly 26,000 private sector defined benefit plans through its single-employer and multiemployer insurance programs. Because of long-term challenges related to PBGC’s governance and funding structure, PBGC’s financial future is uncertain. At the end of fiscal year 2012, PBGC’s net accumulated financial deficit was $34 billion—an increase of more than $23 billion from the end of fiscal year 2008. Both Congress and PBGC have taken significant steps to address many of our concerns with the agency’s overall management and governance structure, reflecting increased top-level attention to the challenges facing this agency. In July 2012, the Moving Ahead for Progress in the 21st Century Act (MAP-21) became law, with several provisions pertaining to PBGC. These measures called for stabilizing sponsors’ pension contribution requirements, adjusting premium rates, as well as strengthening PBGC’s governance in various ways. For example, the law calls for PBGC’s Board of Directors to meet more regularly, four times a year; PBGC’s Inspector General to report to the Board; creation of new positions for a risk management officer and a participant and plan sponsor advocate; an independent peer review of PBGC’s insurance modeling system, to be conducted annually; and a study to be conducted by the National Academy of Public Administration Association on possible changes to PBGC’s governance structure. We have long recommended that the composition of PBGC’s board—currently made up of the Secretaries of the Treasury, Commerce, and Labor—be expanded to include additional members with diverse knowledge and expertise useful to PBGC’s mission. PBGC also has taken steps to address several areas of weakness noted in our previous reports. For example, to improve its asset management, PBGC issued a new investment policy statement in May 2011 and has subsequently aligned its portfolio with these new objectives. To enhance understanding of potential reforms to its premium structure, PBGC modeled various options for adjusting premiums to better reflect the risk of future claims. To strengthen the accountability of its contract management, PBGC implemented new practices requiring documentation of the decision to use contractors instead of federal employees, annual reviews of contract files, and evaluation of staff’s performance of contract monitoring duties. However, despite these efforts, certain challenges related to PBGC’s governance and funding structure remain. To improve the stability of PBGC’s insurance programs, we believe further congressional action should be considered with respect to: expanding and diversifying PBGC’s board, redesigning PBGC’s premium structure, strengthening pension plan funding requirements, and developing a strategy for PBGC’s long-term financial solvency as the defined benefit sector continues to decline. DOD has taken positive steps to address weaknesses in its supply chain, particularly in the management of spare parts inventories. Our prior work reviewing spare parts management at the military services and the Defense Logistics Agency (DLA) identified ineffective and inefficient inventory management practices. Problems with accurately forecasting demand for spare parts have resulted in DOD purchasing and storing billions of dollars worth of excess inventory. For example, DOD’s most recent available data shows that in September 2011 it had $9.2 billion worth of on-hand excess inventory, categorized for potential reuse or disposal, and $523 million worth of on-order excess inventory, already purchased but likely to be excess due to changes in requirements. In response to a provision of the National Defense Authorization Act for fiscal year 2010, DOD submitted a corrective action plan to Congress in November 2010 aimed at reducing excess inventory by improving inventory management practices. DOD established overarching goals in the plan to reduce on-hand excess inventory and on-order excess inventory. Additionally, DOD developed actions to improve inventory management in nine key areas, including improving demand forecasting for spare parts. We reported in 2012 that DOD had made progress in implementing its inventory improvement plan and was tracking reductions to its excess inventory. With respect to on-hand excess inventory, DOD has met its fiscal year 2012 target of having no more than 10 percent of its inventory categorized as on-hand excess. Also, DOD reported that from fiscal years 2009 to 2011 it had reduced on-order excess inventory by approximately $632 million—a reduction that achieved its initial target 4 years early. However, DOD continues to maintain significant quantities of excess inventory and its plan to improve inventory management practices runs through 2015. As implementation continues, DOD needs to monitor its progress in achieving the targets for on-order and on-hand excess inventory and update the targets, as necessary, to ensure the department has challenging, yet achievable targets to guide continued improvement. Moreover, challenges remain in improving demand forecasting; accelerating the use of modeling to determine the optimal number and types of parts needed at the wholesale and retail levels to achieve readiness and cost goals; and implementing revised DOD guidance outlining the processes and procedures for retaining inventory. As it implements the remainder of its plan, DOD will need to address these areas and demonstrate sustained progress in implementing corrective measures and achieving results. Overall, the government continues to take high-risk problems seriously and is making long-needed progress toward correcting them. Congress has acted to address several individual high-risk areas through hearings and legislation. GAO’s high-risk update and high risk website, http://www.gao.gov/highrisk/, can help inform the oversight agenda for the 113th Congress and guide efforts of the administration and agencies to improve government performance and reduce waste and risks. In support of Congress and to further progress to address high risk issues, GAO continues to review efforts and make recommendations to address high risk areas problems. As an example, today we are issuing our review of the nation’s overall cybersecurity strategy. Continued perseverance in addressing high-risk areas will ultimately yield significant benefits. Thank you, Mr. Chairman, Ranking Member Cummings, and Members of the Committee. This concludes my testimony. I would be pleased to answer any questions. For further information on this testimony, please contact J. Christopher Mihm at (202) 512-6806 or [email protected]. Contact points for the individual high-risk areas are listed in the report and on our high-risk web site. Contact points for our Congressional Relations and Public Affairs offices may be found on the last page of this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The federal government is the world's largest and most complex entity, with about $3.5 trillion in outlays in fiscal year 2012 funding a broad array of programs and operations. GAO maintains a program to focus attention on government operations that it identifies as high risk due to their greater vulnerabilities to fraud, waste, abuse, and mismanagement or the need for transformation to address economy, efficiency, or effectiveness challenges. Since 1990, more than one-third of the areas previously designated as high risk have been removed from the list because sufficient progress was made to address the problems identified. This biennial update describes the status of high-risk areas listed in 2011 and identifies any new high-risk area needing attention by Congress and the executive branch. Solutions to high-risk problems offer the potential to save billions of dollars, improve service to the public, and strengthen the performance and accountability of the U.S. government. In February 2011, GAO detailed 30 high-risk areas. Sufficient progress has been made to remove the high-risk designation from two areas. Management of Interagency Contracting. Improvements include (1) continued progress made by agencies in addressing identified deficiencies, (2) establishment of additional management controls, (3) creation of a policy framework for establishing new interagency contracts, and (4) steps taken to address the need for better data on these contracts. Internal Revenue Service Business Systems Modernization. We are removing this area because progress has been made in addressing significant weaknesses in information technology and financial management capabilities. IRS delivered the initial phase of its cornerstone tax processing project and began the daily processing and posting of individual taxpayer accounts in January 2012. This enhanced tax administration and improved service by enabling faster refunds for more taxpayers, allowing more timely account updates, and faster issuance of taxpayer notices. IRS has put in place close to 80 percent of the practices needed for an effective investment management process, including all of the processes needed for effective project oversight. While these two areas have been removed from the High Risk List, GAO will continue to monitor them. This year, GAO has added two areas. Limiting the Federal Government's Fiscal Exposure by Better Managing Climate Change Risks. Climate change creates significant financial risks for the federal government, which owns extensive infrastructure, such as defense installations; insures property through the National Flood Insurance Program; and provides emergency aid in response to natural disasters. The federal government is not well positioned to address the fiscal exposure presented by climate change, and needs a government wide strategic approach with strong leadership to manage related risks. Mitigating Gaps in Weather Satellite Data. Potential gaps in environmental satellite data beginning as early as 2014 and lasting as long as 53 months have led to concerns that future weather forecasts and warnings--including warnings of extreme events such as hurricanes, storm surges, and floods--will be less accurate and timely. A number of decisions are needed to ensure contingency and continuity plans can be implemented effectively. In the past 2 years notable progress has been made in the vast majority of areas that remain on GAO's High Risk List. This progress is due to the combined efforts of the Congress through oversight and legislation, the Office of Management and Budget through its leadership and coordination, and the agencies through their efforts to take corrective actions to address longstanding problems and implement related GAO recommendations. This report contains GAOs views on progress made and what remains to be done to bring about lasting solutions for each high-risk area. Perseverance by the executive branch in implementing GAOs recommended solutions and continued oversight and action by Congress are essential to achieving progress. GAO is dedicated to continue working with Congress and the executive branch to help ensure additional progress is made. |
Our April 1996 report found that since deregulation, as expected, fares had fallen and service had improved for most large-community airports. However, without the cross-subsidy that was present when the industry was regulated, experts also expected fares to increase somewhat at airports serving small and medium-sized communities and expected service to decline. We found, in fact, that since deregulation, substantial regional differences have existed in fare and service trends, particularly among small and medium-sized community airports. A primary reason for these differences has been the greater degree of economic growth that has occurred over the past two decades in the West and Southwest and in larger communities nationwide. In particular, we noted that most low-fare airlines that began interstate air service after deregulation, such as Southwest Airlines and Reno Air, had decided to enter airports serving communities of all sizes in the West and Southwest because of these communities’ robust economic growth. By contrast, low-fare airlines had generally avoided serving small- and medium-sized-community airports in the East and upper Midwest, in part because of the slower growth, harsher weather, and greater airport congestion in these regions. Our review of the trends in fares between 1979 and 1994 for a sample of 112 small-, medium-sized, and large-community airports identified 15 airports where fares, adjusted for inflation, had declined by over 20 percent and 8 airports where fares had increased by over 20 percent.Each of the 15 airports where fares declined was located in the West or Southwest, and low-fare airlines accounted for at least 10 percent of the passenger boardings at all but one of those airports in 1994. On the other hand, each of the eight airports where fares had increased by over 20 percent since deregulation was located in the Southeast and the Appalachian region. Our April 1996 report also discussed similar trends in service quantity and quality since deregulation. Large communities, in general, and communities of all sizes in the West and Southwest had experienced a substantial increase in the number of departures and available seats as well as improvements in such service quality indicators as the number of available nonstop destinations and the amount of jet service. Over time, however, smaller- and medium-sized communities in the East and upper Midwest had generally experienced a decline in the quantity and quality of air service. In particular, these communities had experienced a sharp decrease in the number of available nonstop destinations and in the amount of jet service relative to turboprop service. This decrease occurred largely because established airlines had reduced jet service from these airports and deployed turboprops to link the communities to those airlines’ major hubs. We reported in October 1996 that operating barriers at key hub airports in the upper Midwest and the East, combined with certain marketing strategies of the established carriers, had two effects on competition. The operating barriers and marketing strategies deterred new entrant airlines and fortified established carriers’ dominance of those hub airports and routes linking those hubs with nearby small- and medium-sized-community airports. In the upper Midwest, there is limited competition in part because two airlines control nearly 90 percent of the takeoff and landing slots at O’Hare, and one airline controls the vast majority of gates at the airports in Minneapolis and Detroit under long-term, exclusive-use leases. Similarly, in the East, one airline controls the vast majority of gates under exclusive-use leases at Cincinnati, Charlotte, and Pittsburgh and a few established airlines control most of the slots at National, LaGuardia, and Kennedy. Perimeter rules at LaGuardia and National further limit the ability of airlines based in the West to compete in those markets. Particularly for these key markets in the upper Midwest and East, the relative significance of these barriers in limiting competition and contributing to higher airfares has grown over time. As a result, our October 1996 report recommended that DOT take action to lower the operating barriers and highlighted areas for potential congressional action. Our 1996 report also discussed the effects of some marketing strategies of incumbent airlines on competition. To reduce congestion, the Federal Aviation Administration (FAA) has limited since 1969 the number of takeoffs and landings that can occur at O’Hare, National, LaGuardia, and Kennedy. By allowing new airlines to form and established airlines to enter new markets, deregulation increased the demand for access to these airports. Such increased demand complicated FAA’s efforts to allocate takeoff and landing slots equitably among the airlines. To minimize the government’s role in the allocation of slots, in 1985 DOT began to allow airlines to buy and sell them to one another. Under this “Buy/Sell Rule,” DOT “grandfathered” slots to the holders of record as of December 16, 1985. Emphasizing that it still owned the slots, however, DOT reserved the right to withdraw slots from the incumbents at any time. In addition, to mitigate the anticompetitive effects of grandfathering, DOT retained about 5 percent of the slots at O’Hare, National, and LaGuardia and in 1986 distributed them in a random lottery to airlines having few or no slots at those airports. Even with the lottery, we found that the level of control over slots by a few established airlines had increased over time. By contrast, the share held by the airlines that started after deregulation has remained low. (See app. I.) To address this problem, in October 1996, we recommended that DOT redistribute some of the grandfathered slots to increase competition, taking into account the investments made by those airlines at each of the slot-controlled airports. We were envisioning that a small percentage of slots would be redistributed. In response to our report, DOT has begun to use the authority that the Congress gave it in 1994 to allow additional slots for entry at O’Hare, LaGuardia, and Kennedy. In October 1997, DOT awarded Reno Air and Trans States Airlines exemptions from slot limitations at O’Hare, while Frontier Airlines, ValuJet Airlines, and AirTran Airways were granted exemptions at LaGuardia. These exemptions should help to enhance service in the East and upper Midwest. For example, Trans States Airlines received 8 exemptions to provide service between O’Hare and its choice of Asheville, North Carolina; Chattanooga, Tennessee; Roanoke, Virginia; and Tri-Cities, Tennessee/Virginia. Our reports have also identified restrictive gate leases as a barrier to establishing new or expanded service at some airports. These leases permit an airline to hold exclusive rights to use most of an airport’s gates over a long period of time, commonly 20 years. Such leases prevent nonincumbents from securing necessary airport facilities on equal terms with incumbent airlines. To gain access to an airport where most gates are exclusively leased, a nonincumbent must sublet gates from the incumbent airlines—often at nonpreferred times and at a higher cost than the incumbent pays. While some airports, such as Los Angeles International, have attempted to regain more control of their facilities by signing less restrictive, shorter-term leases once the exclusive-use leases expired, our October 1996 report identified several airports where entry was still limited because of long-term, exclusive-use gate leases with one airline. We identified six airports in particular where this occurred: Charlotte; Cincinnati; Detroit; Minneapolis; Newark, New Jersey; and Pittsburgh. The vast majority of gates at each airport are exclusively leased, usually to one established airline. (See app. II.) As a result, it is extremely difficult to gain competitive access to these airports, according to executives at many airlines that started after deregulation. Although the development, maintenance, and expansion of airport facilities is essentially a local responsibility, most airports are operated under federal restrictions that are tied to the receipt of federal grant money from FAA. To address the gate lease problem, we recommended that when disbursing airport improvement grant moneys, FAA give priority to those airports that do not lease the vast majority of their gates to one airline under long-term, exclusive-use terms. DOT did not concur with this recommendation. According to DOT, because the number of airports that we identified as presenting gate access problems is sufficiently small, the agency would prefer to address those problems on a case-by-case basis. DOT emphasized that in cases where incumbent airlines are alleged to have used their contractual arrangements with local airport authorities to block new entry, the agency will investigate to determine whether the behavior constitutes an unfair or deceptive practice or an unfair method of competition. If so, the agency noted that it will take appropriate action. At LaGuardia and National airports, perimeter rules prohibit incoming and outgoing flights that exceed 1,500 and 1,250 miles, respectively. The perimeter rules were designed to promote Kennedy and Dulles airports as the long-haul airports for the New York and Washington metropolitan areas. However, the rules limit the ability of airlines based in the West to compete because those airlines are not allowed to serve LaGuardia and National airports from the markets where they are strongest. By contrast, because of their proximity to LaGuardia and National, each of the seven largest established carriers is able to serve those airports from its principal hub. While the limit at LaGuardia was established by the Port Authority of New York & New Jersey, National’s perimeter rule is federal law. Thus, in our October 1996 report, we suggested that the Congress consider granting DOT the authority to allow exemptions to the perimeter rule at National when proposed service will substantially increase competition. We did not recommend that the rule be abolished because removing it could have unintended negative consequences, such as reducing the amount of service to smaller communities in the Northeast and Southeast. This could happen if major slot holders at National were to shift their service from smaller communities to take advantage of more profitable, longer-haul routes. As a result, we concluded that a more prudent course to increasing competition at National would be to examine proposed new services on a case-by-case basis. Our October 1996 report also emphasized that certain marketing strategies of incumbent airlines, taken together, had created strong loyalty among passengers and travel agents, making it difficult for nonincumbents to enter markets dominated by an established airline. Two strategies in particular—booking incentives to travel agents and frequent flier plans—have encouraged business flyers, who represent the most profitable segment of the industry, to use the dominant carrier in each market. Because about 90 percent of business travel is booked through travel agencies, airlines strive to influence the agencies’ booking patterns by offering special bonus commissions as a reward for booking a targeted proportion of passengers on their airline. Similarly, frequent flier programs have become an increasingly effective tool to encourage customers’ loyalty to a particular airline. As such, entry by new and established airlines alike into a market dominated by one carrier is very difficult. This is particularly true given that to attract new customers a potential entrant must announce its schedule and fares well in advance of beginning service, thus giving the incumbent an opportunity to adjust its marketing strategies. Such adjustments by the incumbent may include matching low fares offered by new entrant airlines and selling far more seats at these low fares than are being offered by the new entrants. In many cases, we found that airlines chose not to enter or to quickly exit markets where they did not believe they could overcome the combined effect of these marketing strategies. In October 1996, we reported that the effect of these and other marketing strategies tends to be the greatest—and fares the highest—in markets where the dominant carrier’s position is protected by operating barriers. However, we also noted that the marketing strategies produced consumer benefits, such as free frequent flier trips, and concluded that short of an outright ban, few policy options existed that would mitigate the marketing strategies’ negative impact on new entry. Because a variety of factors has contributed to higher fares and poorer service that some small and medium-sized communities in the East and upper Midwest have experienced since deregulation, a coordinated effort involving federal, regional, local, and private-sector initiatives may be needed. Recent efforts by DOT and proposed legislation are aimed at enhancing competition. Additional public and private activities are currently under way to address regional and local air service problems. If successful, these initiatives would complement, and potentially encourage, the increasing use of small jets by the commuter affiliates of established airlines—a trend that has the potential for increasing competition and improving the quality of service for some communities. In response to our October 1996 report, DOT stated in January 1997 that it shared our concerns that barriers to entry limit competition in the airline industry. As we mentioned earlier in this testimony, in October 1997, DOT granted slots to two new entrants at O’Hare and three new entrants at LaGuardia. At the same time, DOT set forth its new policy on slot exemptions, which has been expanded to take into account the need for increased competition at the slot-controlled airports. DOT is currently considering other slot exemptions but acknowledged that there are only a limited number of exemption opportunities. Because some in government and academia believe that slots at some airports may be underutilized, DOT is also evaluating how effectively slots are being used at these airports. In addition, DOT has expressed concern about potentially overaggressive attempts by some established carriers to thwart new entry. According to DOT, over the past 2 years, there has been an increasing number of alleged anticompetitive practices—such as predatory conduct—aimed at new competition, particularly at major network hubs. DOT is formulating a new policy to clearly delineate what is acceptable and unacceptable behavior in the area of competition between major carriers at their hubs and smaller, low-cost competitors. The policy will indicate those factors that DOT will consider if it pursues formal enforcement actions to correct unacceptable behavior. Over the past several months, a number of bills have been proposed to promote aviation competition and address some of the problems we identified. The proposals include creating a mechanism by which DOT would increase access to the slot-controlled airports by periodically withdrawing a small portion of the slots that were grandfathered to incumbent airlines and reallocating them among new entrant and limited incumbent air carriers. The proposals also include requiring DOT to grant exemptions to the perimeter rule at National under certain circumstances, limiting the time that DOT has to respond to complaints of predatory behavior, and providing loan guarantees for commuter air carriers to purchase regional jet aircraft for use in underserved markets. Recognizing that federal actions alone would not remedy their regions’ air service problems, several airport directors and community chamber of commerce officials in the Southeast and Appalachian regions have begun a coordinated effort to improve air service in their region. As a result of this effort, several Members of Congress from these regions in turn organized a bipartisan caucus named “Special Places of Kindred Economic Situation” (SPOKES). Among other things, SPOKES is designed to ensure sustained consumer education and coordinate federal, state, local, and private efforts to address the air service problems of communities adversely affected since deregulation. Two SPOKES-led initiatives include establishing a Website on the Internet and convening periodic “national air service roundtables” to bring together federal, state, and local officials and airline, airport, and business representatives to explore potential solutions to air service problems. The first roundtable was held in Chattanooga in February 1997. The roundtable concluded that greater regional, state, and local efforts were needed to promote economic growth and attract established and new airlines alike to serve small and medium-sized markets in the East and upper Midwest. Suggested initiatives included (1) creating regional trade associations composed of state and local officials, airport directors, and business executives; (2) offering local financial incentives to nonincumbent airlines, such as guaranteeing a specified amount of revenue or providing promotional support; and (3) targeting aggressive marketing efforts by communities toward airlines to spur economic growth. A second roundtable was held in Jackson, Mississippi, in January 1998. A regional conference, held in West Virginia in December 1997, brought together federal and state officials, airport representatives, and local businesses to discuss ways to restore quality air service to small communities in the state. In West Virginia, for example, Wheeling, Elkins, and Martinsburg have lost all scheduled air service since deregulation. Throughout the state, communities have experienced declines in the number of nonstop flights, the number of seats available, and the number of jet flights. Regional concerns about air service have extended to other states and conferences were recently held in Iowa and Arizona. To grow and prosper, businesses need convenient, affordable air service. As a result, businesses located in the affected communities have increasingly attempted to address their communities’ air service problems. Perhaps the most visible of these efforts was the formation of the Business Travel Contractors Corporation (BTCC) by 45 corporations, including Chrysler Motors, Procter & Gamble, and Black & Decker. These corporations formed BTCC because they were concerned about the high fares they were paying in markets dominated by one established airline. BTCC held national conferences in Washington, D.C., in April and October 1997 to examine this problem and explore potential market-based initiatives. At the October conference, attendees endorsed the concepts of (1) holding periodic slot lotteries to provide new entrant airlines with access to slot-controlled airports, (2) allowing new entrants and other small airlines to serve points beyond National’s perimeter rule, and (3) requiring DOT to issue a policy addressing anticompetitive practices and specifying the time frames within which all complaints will be acted upon. While BTCC suspended operations in January 1998, its lobbying arm—the Business Travel Coalition—plans to continue efforts to increase competition. In addition to public and private-sector initiatives, the increasing use of 50- to 70-seat regional jets is improving the quality of air service for a growing number of communities. Responding to consumers’ preference to fly jets rather than turboprops for greater comfort, convenience, and a perceived higher level of safety, commuter affiliates of established airlines are increasingly using regional jets to (1) replace turboprops on routes between established airlines’ hubs and small and medium-sized communities and (2) initiate nonstop service on routes that are either uneconomical or too great a distance for commuter carriers to serve with slower, higher-cost, and shorter-range turboprops. Because regional jets can generally fly several hundred miles farther than turboprops, commuter carriers will be able to link more cities to established airlines’ hubs. To the extent that this occurs, it could increase competition in many small and medium-sized communities by providing consumers with more service options. Mr. Chairman, this concludes our prepared statement. We would be glad to respond to any questions that you or any Members of the Subcommittee may have. Major lease holders and dates of lease expiration 48 43 (90%) 34 gates leased to USAir until 2007 67 67 (100%) 50 gates leased to Delta with 9 leases expiring in 2015 and 41 expiring in 2023 86 76 (88%) 64 gates leased to Northwest until the end of 2008, with all but 10 under exclusive-use terms 65 65 (100%) 49 gates leased to Northwest with 16 leases having expired as of 1996 and on month-to-month basis, and remainder expiring at various times ranging from the end of 1997 to 2015 94 79 (84%) 43 gates leased to Continental until 2013, 36 gates leased to the other established airlines until 2018, and 15 gates reserved primarily for international use 75 66 (88%) Domestic Aviation: Barriers Continue to Limit Competition (GAO/T-RCED-98-32, Oct. 28, 1997). Airline Deregulation: Addressing the Air Service Problems of Some Communities (GAO/T-RCED-97-187, June 25, 1997). Domestic Aviation: Barriers to Entry Continue to Limit Benefits of Airline Deregulation (GAO/T-RCED-97-120, May 13, 1997). Airline Deregulation: Barriers to Entry Continue to Limit Competition in Several Key Domestic Markets (GAO/RCED-97-4, Oct. 18, 1996). Changes in Airfares, Service, and Safety Since Airline Deregulation (GAO/T-RCED-96-126, Apr. 25, 1996). Airline Deregulation: Changes in Airfares, Service, and Safety at Small, Medium-Sized, and Large Communities (GAO/RCED-96-79, Apr. 19, 1996). Airline Competition: Essential Air Service Slots at O’Hare International Airport (GAO/RCED-94-118FS, Mar. 4, 1994). Airline Competition: Higher Fares and Less Competition Continue at Concentrated Airports (GAO/RCED-93-171, July 15, 1993). Airline Competition: Options for Addressing Financial and Competition Problems, testimony before the National Commission to Ensure a Strong Competitive Airline Industry (GAO/T-RCED-93-52, June 1, 1993). Computer Reservation Systems: Action Needed to Better Monitor the CRS Industry and Eliminate CRS Biases (GAO/RCED-92-130, Mar. 20, 1992). Airline Competition: Effects of Airline Market Concentration and Barriers to Entry on Airfares (GAO/RCED-91-101, Apr. 26, 1991). Airline Competition: Weak Financial Structure Threatens Competition (GAO/RCED-91-110, Apr. 15, 1991). Airline Competition: Fares and Concentration at Small-City Airports (GAO/RCED-91-51, Jan. 18, 1991). Airline Deregulation: Trends in Airfares at Airports in Small and Medium-Sized Communities (GAO/RCED-91-13, Nov. 8, 1990). Airline Competition: Industry Operating and Marketing Practices Limit Market Entry (GAO/RCED-90-147, Aug. 29, 1990). Airline Competition: Higher Fares and Reduced Competition at Concentrated Airports (GAO/RCED-90-102, July 11, 1990). Airline Deregulation: Barriers to Competition in the Airline Industry (GAO/T-RCED-89-65, Sept. 20, 1989). Airline Competition: DOT’s Implementation of Airline Regulatory Authority (GAO/RCED-89-93, June 28, 1989). Airline Service: Changes at Major Montana Airports Since Deregulation (GAO/RCED-89-141FS, May 24, 1989). Airline Competition: Fare and Service Changes at St. Louis Since the TWA-Ozark Merger (GAO/RCED-88-217BR, Sept. 21, 1988). Competition in the Airline Computerized Reservation Systems (GAO/T-RCED-88-62, Sept. 14, 1988). Airline Competition: Impact of Computerized Reservation Systems (GAO/RCED-86-74, May 9, 1986). Airline Takeoff and Landing Slots: Department of Transportation’s Slot Allocation Rule (GAO/RCED-86-92, Jan. 31, 1986). Deregulation: Increased Competition Is Making Airlines More Efficient and Responsive to Consumers (GAO/RCED-86-26, Nov. 6, 1985). 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 air service problems that some communities have experienced since the deregulation of the airline industry in 1978. GAO noted that: (1) not all communities have benefited from airline deregulation; (2) certain airports--particularly those serving small and medium-sized communities in the East and upper Midwest--have experienced higher fares and poorer service since deregulation; (3) there are several reasons for the substantial regional differences in fare and service trends, including the dominance of routes to and from these airports by one or two traditional hub-and-spoke airlines and operating barriers, such as long-term exclusive-use gate leases at hub airports; (4) the more widespread entry of new airlines at airports in the West and Southwest since deregulation has stemmed largely from the greater economic growth in those regions as well as from the absence of dominant market positions of incumbent airlines and barriers to entry; (5) operating barriers continue to block entry at key airports and contribute to fare and service problems in the East and upper Midwest; (6) to minimize congestion and reduce flight delays, the Federal Aviation Administration has set limits since 1969 on the number of takeoffs or landings that can occur during certain periods of the day at four congested airports; (7) a few airlines control most of these slots at these airports, which limits new entrants; (8) in 1996 GAO reported that the vast majority of gates at six airports in the East and Upper Midwest were exclusively leased to usually one airline, making it very difficult to gain competitive access to these airports; (9) perimeter rules at two major airports limit the ability of airlines based in the West to compete at those airports; (10) these operating barriers, combined with certain marketing strategies by established carriers, have deterred new entrant airlines while fortifying established carriers dominance at key hubs in the East and upper Midwest; (11) increasing competition and improving air service at airports serving communities that have not benefited from deregulation will likely entail a range of federal, regional, local, and private-sector initiatives; (12) the Department of Transportation is undertaking several efforts to enhance competition; (13) recently proposed legislation would address several barriers to competition: slot controls, the perimeter rule, and predatory behavior by air carriers; (14) recent national and regional conferences exemplify efforts to pool available resources to focus on improving the airfares and quality of air service to such communities; and (15) other steps--such as improving the availability of gates--may also be needed to further ameliorate current competitive problems. |
Pipelines transport roughly two-thirds of domestic energy supplies through approximately 2.5 million miles of pipelines throughout the United States. These pipelines carry hazardous liquids and natural gas from producing wells to end users (residences and businesses). Within this nationwide system, there are three main types of pipelines. Gathering pipelines. Gas gathering pipelines collect natural gas from production areas, while hazardous liquid gathering pipelines collect oil and other petroleum products. These pipelines then typically transport the products to processing facilities, which in turn refine and send the products to transmission pipelines. According to PHMSA officials, traditionally, gathering pipelines range in diameter from about 2 to 12 inches and operate at pressures that range from about 5 to 800 pounds per square inch (psi). These pipelines tend to be located in rural areas but can also be located in urban areas. PHMSA estimates there are 200,000 miles of gas gathering pipelines and 30,000 to 40,000 miles of hazardous liquid gathering pipelines. Transmission pipelines. Transmission pipelines carry hazardous liquid or natural gas, sometimes over hundreds of miles, to communities and large-volume users (e.g., factories). For natural gas transmission pipelines, compression stations located periodically along the pipeline maintain product pressure. Similarly, pumping stations along hazardous liquid transmission pipelines maintain product flow. Transmission pipelines tend to have the largest diameters and pressures of any type of pipeline, generally ranging from 12 inches to 42 inches in diameter and operating at pressures ranging from 400 to 1440 psi. PHMSA has estimated there are more than 400,000 miles of gas and hazardous liquid transmission pipelines. Distribution pipelines. Gas distribution pipelines continue to transport natural gas to residential, commercial, and industrial customers, splitting off from transmission pipelines. These pipelines tend to be smaller, sometimes less than 1 inch in diameter, and operate at lower pressures—0.25 to 100 psi. PHMSA has estimated there are roughly 2 million miles of distribution pipelines, most of which are intrastate pipelines. There are no hazardous liquid distribution pipelines. However, some distribution pipelines can be as large as 24 inches in diameter and operate at higher pressures (i.e., over 350 psi). Part 191 (Gas Reporting), Part 192 (Gas), Part 193 (Liquid Natural Gas), Part 194 (Liquid Facility Response Plans), and Part 195 (Hazardous Liquid) of Title 49 of the Code of Federal Regulations. Most natural gas distribution pipelines would generally be considered to be in high-consequence areas, as defined under the transmission pipelines regulations, since they are typically located in highly populated areas. PHMSA regulates hazardous liquid and natural gas gathering pipelines— using uniform, minimum standards—based on their proximity to populated and environmentally sensitive areas. For natural gas gathering pipelines,PHMSA uses class locations—the same classification system used for natural gas transmission and distribution pipelines. (See table 1.) Under this system, PHMSA generally regulates onshore natural gas gathering pipelines in Class 2, 3, or 4 locations. For hazardous liquid gathering pipelines, PHMSA regulates those pipelines in incorporated and unincorporated cities, towns, and villages; pipeline segments that cross a waterway currently used for commercial navigation; and certain rural gathering pipelines within one-quarter mile of environmentally sensitive areas. This includes high-consequence areas, as defined for the hazardous liquid integrity management program. High-consequence areas can also be in Class 1, 2, 3, or 4 locations, which can entail different reporting requirements. For example, gathering pipeline operators in high-consequence areas that are in Class 1 locations are not required to report data on pipeline-related incidents, including fatality, injury, and property damage information. Under the current regulatory system, PHMSA does not regulate most gathering pipelines in the United States based on their location. For example, out of the more than 200,000 estimated miles of natural gas gathering pipelines, PHMSA regulates roughly 20,000 miles. Similarly, of the 30,000 to 40,000 estimated miles of hazardous liquid gathering pipelines, PHMSA regulates about 4,000 miles. However, according to PHMSA officials, the agency has the authority to collect data on all onshore hazardous liquid and gas gathering pipelines, even though it generally does not regulate gas gathering pipelines in Class 1 locations or hazardous liquid gathering pipelines not located in high-consequence areas. Generally, PHMSA retains full responsibility for inspecting and enforcing regulations on interstate pipelines. However, states may be authorized to conduct inspections for interstate pipelines, as well as inspections and associated enforcement for intrastate pipelines. States can also promulgate regulations for intrastate pipelines, including gathering pipelines. PHMSA has arrangements with 48 states, the District of Columbia, and Puerto Rico to assist with overseeing interstate, intrastate, or both interstate and intrastate pipelines. These arrangements, in which states act as “agents” for PHMSA, can cover hazardous liquid pipelines only, gas pipelines only, or both (see fig. 2). State pipeline safety offices are allowed to issue regulations supplementing or extending federal regulations, but these state regulations must be at least as stringent as the minimum federal regulations. If a state wants to issue regulations that apply to pipelines that PHMSA does not regulate, such as unregulated gathering pipelines, it must do so under its own (state) authority. While gathering pipelines generally pose lower safety risks than other types of pipelines, PHMSA does not collect comprehensive data on safety risks associated with gathering pipelines. In response to GAO’s survey, state pipeline safety agencies cited construction quality, maintenance practices, unknown or uncertain locations, and limited or no information on current pipeline integrity as safety risks for federally unregulated gathering pipelines. Operators of unregulated gathering pipelines are not required by federal law to report information on such risk factors. Consequently, federal and state pipeline safety officials do not know the extent to which individual operators collect such information and use it to monitor the safety of their pipelines. In our survey of 52 state agencies, 39 agencies—10 monitoring hazardous liquid and 29 monitoring natural gas—responded that they had onshore gathering pipelines that PHMSA does not regulate located in their state. (See app. II for a summary of our survey results.) For these 39 agencies, four of the five top responses cited the following risk factors for onshore unregulated gathering pipelines as among the highest public safety risks. Construction quality. Eighteen state agencies reported that the quality of installation procedures and construction materials is a moderate or high safety risk for unregulated gathering pipelines. The construction phase of pipeline installation is critical to ensure the long-term integrity of the pipeline because the installation methods and materials used in pipeline construction affect the pipeline’s resistance to deterioration over time. For example, one inspection requirement for regulated pipelines is that they may not be installed unless they have been visually inspected at the site of installation to ensure that they are not damaged in a manner that could impair their strength or reduce their serviceability. This requirement does not currently apply to unregulated gathering pipelines. Maintenance practices. Sixteen state agencies reported that the extent to which pipeline operators maintain their pipelines is a moderate or high safety risk for unregulated gathering pipelines. According to agency officials, after a pipeline is installed and operational, periodic maintenance—such as inspecting and testing equipment—is important to prevent leaks and ruptures and could extend the operating life of a pipeline. Furthermore, preventive measures and repairs conducted on unregulated gathering pipelines, as well as a record of such activities, could provide useful information on the safety and history of a given gathering pipeline. Location. Sixteen state agencies reported that the unknown or uncertain location of unregulated gathering pipelines presents a moderate or high safety risk. Although individual operators may know the locations of unregulated pipelines, state and local safety agencies may not know or may be uncertain about the locations and mileage of unregulated pipeline infrastructure in their communities. This information is particularly useful for “Call Before You Dig” programs operated by states and localities. If unregulated gathering pipelines are unmarked and program officials do not know the location of the pipelines, businesses and citizens may damage a pipeline during excavation, which could result in an incident—including fatalities, injuries, or damage to property or the environment—as well as the shutting down of the pipeline for repair. Pipeline integrity. Sixteen state agencies reported that not knowing or having limited knowledge about the integrity—the current condition— of unregulated gathering pipelines is a moderate or high safety risk. Factors that affect the integrity of all pipelines—such as excavation damage and corrosion—also affect gathering pipelines. For example, excavation damage to a pipeline from nearby digging activities (see fig. 3) is the leading cause of pipeline incidents and, as previously noted, the uncertain location of unregulated gathering pipelines may increase the potential for such damage. Furthermore, corrosion can occur on the inside and outside of metal pipelines and is not easily identified without appropriate pipeline assessments. From 2004 through 2010, corrosion was reported as the cause of about 60 percent—or nine incidents—of regulated gas gathering pipeline incidents. Generally, pipeline experts we spoke with said limited information on the integrity of unregulated gathering pipelines prevents analysis to assess the internal and external condition of these pipelines. According to responses to our survey and interviews with industry officials and representatives, land-use changes and the increased extraction of oil and natural gas from shale deposits are two changes in the operating environments that could increase the safety risks for unregulated gathering pipelines. Land-use changes. The fifth top response reported by state pipeline safety agencies we surveyed was that increased urbanization has caused rural areas to become more densely populated and, in some cases, developments have encroached on existing pipeline rights-of- way. (See fig. 4.) Nineteen state agencies reported land-use changes as a moderate or high risk for federally unregulated gathering pipelines. Federal and state pipeline safety officials we spoke with are concerned about the safety and proximity of people who work and live near pipeline rights-of-way. For example, one state official stated that although a new housing or business development can change a location’s designation from Class 1 to a higher class that would then fall under PHMSA’s jurisdiction, the operator may not be aware of the development and therefore would not monitor and apply more stringent regulations along that pipeline. Increased extraction of oil and gas from shale deposits. According to pipeline industry officials and representatives we interviewed, the increased extraction of oil and natural gas from shale deposits poses an increased risk to the public, partly because of the development of new and larger gathering pipeline infrastructure. Deposits of oil and natural gas have become increasingly important energy sources in the United States over the past decade (see fig. 5). According to the U.S. Energy Information Administration, shale gas accounted for 16 percent of the total domestic natural gas supply in 2009 and is projected to increase to approximately 47 percent by 2035. This extraction has led to drilling and production in regions of the country that have previously seen little or no such activity. As a result of this ongoing activity, as well as future growth projections, state and federal safety officials we interviewed identified new gathering pipelines related to shale development as a potential public safety risk. The risk is primarily due to the characteristics and quantity of pipeline infrastructure required to support this new production. Specifically, some of these new gathering pipelines have larger diameters and operate at higher pressures that are equivalent to traditional transmission pipelines, but without the regulatory requirements. For instance, an October 2010 report on pipeline issues and concerns in Fort Worth stated that some gathering pipelines were as large as 24 inches in diameter with maximum allowable operating pressures similar to those for transmission pipelines. Those gathering pipelines were currently exempt from federal integrity management rules, which require some form of pipeline integrity assessment at least once every 7 years, and clearly define how and when problems found during these assessments are to be reported and repaired. PHMSA officials stated that they are considering collecting data on federally unregulated onshore gathering pipelines to better understand and evaluate the safety risks posed by these pipelines. Although PHMSA has the legal authority to collect data on unregulated gathering pipelines, the agency is not required and has not yet exercised its authority to do so. PHMSA officials reported that, instead of collecting such data, the agency was focusing on the development of integrity management requirements and improved data collection for higher-risk transmission and distribution pipelines. However, PHMSA officials reported that there is value in having data for unregulated pipelines similar to what is currently collected on regulated pipelines, such as pipeline characteristics and reportable information on incidents—including the location, cause, and consequences of these incidents. In addition, PHMSA issued Advanced Notices of Proposed Rulemakings (ANPRM) for onshore hazardous liquid and gas pipelines in October 2010 and August 2011, respectively. For these proposed rulemakings, PHMSA has sought comment on, among other things, whether to extend regulation or other requirements to currently federally unregulated gathering pipelines. Concerning potential data collection, the ANPRMs sought comment on whether to require the submission of annual, incident, and safety-related condition reports on federally unregulated gathering pipelines, as well as on whether to establish a new, risk-based regime of safety requirements for large-diameter, high-pressure gas gathering pipelines, including those pipelines in rural locations. While the ANPRMs did not seek comment on exactly what new data to collect, PHMSA officials reported that the information would likely be similar to what is currently collected on regulated gathering pipelines and that they plan to issue final rules in late 2012. In the event that reporting requirements are adopted, PHMSA officials stated that gathering pipeline data would likely be collected on a state-by-state basis, which could later be expanded to the national level. However, PHMSA’s plans for collecting data are preliminary, and the extent to which PHMSA will collect data sufficient to evaluate the potential safety risks associated with these pipelines is uncertain. Currently, PHMSA collects annual, incident, and safety-related condition data on regulated pipelines. The specific types of safety-related data collected for regulated pipelines include the operator, pipeline system description, mileage by class location, diameter size, operating pressure, incident location, number of injuries and fatalities, property damage, and assessments conducted. These data help federal and state safety officials and pipeline operators increase the safety of these pipelines by better identifying and quantifying safety risks, as well as by implementing mitigation strategies, and addressing potential regulatory needs. It is for these same reasons that PHMSA, state, and some industry officials reported that collecting similar data for unregulated gathering pipelines would be beneficial. PHMSA officials also reported that in the event the agency started collecting data on unregulated onshore gathering pipelines, their current data reporting system could accommodate such a collection and not require large changes for regulators or operators. On the other hand, a few operators and industry groups we met with expressed concerns over the burden that new data reporting would represent. Before any potential data collection reporting requirements could be enacted, PHMSA and the Office of Management and Budget would review and evaluate the value of such information and associated burdens on industry. PHMSA officials said that while many operators should already have information on their gathering pipelines readily available, it would still be important to communicate with operators and take steps to minimize burdens in collecting new gathering pipeline data. Some benefits of collecting such pipeline data can be seen through additional analysis of currently collected data. For example, PHMSA’s data on regulated pipelines indicate that more onshore reportable incidents, as well as total property damage, occur on transmission and distribution pipelines, than on regulated gathering pipelines (see figs. 6 and 7). Although the number of reportable incidents for regulated gas gathering pipelines is lower than for other regulated pipelines, the value of total property damage increased in the past few years. In 2010, these reportable incidents accounted for, on average, about $1.8 million in property damage per incident. Another benefit of collecting annual, incident, and safety-related condition pipeline data is an increased ability to assess and manage risks. We have previously reported on the importance of assessing and managing risks, including quantifying those risks using data. Data are instrumental in quantifying risks and can reduce uncertainty in assumptions and policy judgments (e.g., safety threats and the likelihood that they will be realized). PHMSA officials reported that collecting data could help to determine the safety risks associated with federally unregulated gathering pipelines, such as tracking injuries, fatalities, and property damage for new gathering pipelines associated with shale development, and whether current safety regulations are appropriate. Related to whether current regulations are appropriate, Congress recently mandated that DOT review the sufficiency of existing federal and state laws and regulations to ensure the safety of hazardous liquid and gas gathering pipelines. Two industry associations reported that such data collection could help better ensure that federal pipeline programs are appropriately targeted at mitigating safety risks, cost-effective, and not unnecessarily broad in scope. Quantitatively assessing risks could also allow for a ranking and prioritizing of safety risks facing gathering pipelines in a manner that is currently not possible. Besides PHMSA, states may collect data on unregulated gathering pipelines, but the scope and nature of this data collection can vary. Although the federal government is responsible for setting minimum pipeline safety standards, states can adopt additional or stricter safety standards for intrastate pipeline facilities and transportation—including standards for data collection. For example, Texas’s state regulation further defined that the state’s safety jurisdiction for onshore gas gathering pipelines begins after the first point of measurement—where the product is first measured to determine the volume being extracted from the well—and is based on population, which is stricter than the federal standard. Our survey revealed that only 3 of the 39 state agencies reported that they collect and analyze comprehensive pipeline spill and release data on federally unregulated pipelines. Such information can be used to help reduce future incidents. Additionally, the National Association of Pipeline Safety Representatives (NAPSR) recently conducted a nationwide surveyrequirements match or exceed federal pipeline safety requirements. The survey reported that neither states nor the District of Columbia collected comprehensive data on federally unregulated gathering pipelines, as is required for federally regulated pipelines. State pipeline safety agencies reported using five safety practices most frequently to help ensure the safety of onshore hazardous liquid and gas gathering pipelines not regulated by PHMSA, according to our survey of state agencies (see fig. 8). Several of these practices are designed to counter previously discussed safety risks; for example, implementing damage prevention programs can lower the risks of excavation damage.Although these practices were cited most frequently, one-third or less of the state pipeline safety agencies with unregulated gathering pipelines use any one of these practices. For instance, 13 of the 39 state pipeline safety agencies with unregulated gathering pipelines in their state reported using the most frequently cited safety practice—damage prevention programs. Additionally, some of the state agencies that reported using safety practices also responded that, overall, they had promulgated safety requirements for onshore gathering pipelines that were more stringent than those provided by PHMSA. Damage prevention programs. Thirteen state agenciesthey implement and enforce a damage prevention program as a practice to help ensure pipeline safety. Damage prevention programs can help mitigate risks and increase safety through a number of activities. For example, damage prevention programs can help reduce the risk of excavation damage by encouraging citizens and other parties to collect information to help identify pipeline locations before digging begins. Damage prevention programs can also include marking the rights-of-way for pipelines—including gathering pipelines—above ground to further reduce the likelihood of excavation damage (see fig. 9). States have developed or participated in damage prevention programs to help reduce instances of excavation damage, including damage to gathering pipelines. For example, Colorado has participated in the national One-Call program to reduce excavation damage. One-Call programs enable citizens and organizations to call an 811 number to notify utilities, pipeline operators, and others about the location and nature of planned digging. Utility, pipeline, or other organization members can then mark where underground pipelines run before any digging begins. Colorado pipeline safety officials reported that some calls related to the marking of regulated and unregulated gathering pipelines. As to the effectiveness of One-Call programs, the Common Ground Alliance has reported that, in 2010, when an excavator notified a call center before digging, damage occurred less than 1 percent of the time. Considering areas of highest risk. Ten state agencies reported they consider the areas of highest risk to effectively target resources as a safety practice. This approach can help address risks, such as corrosion and a lack of periodic maintenance, by directing oversight to those pipelines that could have the most serious consequences in the event of an incident. In addition, considering the areas of highest risk could help address potential safety risks from new gathering pipeline infrastructure associated with shale development. For example, considering risk factors associated with larger pipelines, operating pressures, and location could help determine the actual risks posed by these new pipelines. Indeed, some of PHMSA’s more recent pipeline safety regulations addressing integrity management and high-consequence areas account for risk factors to help determine which regulations might apply to a particular pipeline. Industry officials reported that it is more effective to target higher-risk areas than to allocate resources across all areas. Officials with the Texas Oil and Gas Association added that the risk of a pipeline incident in a heavily populated area warrants more attention than the risk of a similar incident in a sparsely populated area. This practice also acknowledges that gathering pipelines run through a wide variety of environments with varying risk levels (see fig. 10). Some states are overseeing pipelines based on identified safety risks. For example, safety compliance and enforcement staff at the Texas Railroad Commission reported that inspecting pipeline systems based on identified risks allows the state to inspect some pipelines less frequently, such as pipelines made from newer and safer materials, have advanced monitoring technology, or are located away from populations—like some rural gathering pipelines. Using these risk- based safety evaluations also enables Texas Railroad Commission inspectors to concentrate on higher-risk pipeline systems. Safety inspections. Nine state agencies reported they conduct recurring, scheduled, or unscheduled safety inspections of hazardous liquid and gas operators as another safety practice. NAPSR officials reported that safety inspections can be regularly scheduled inspections, during which inspectors check system components, specialized inspections (i.e., integrity management) aimed at higher- risk areas, or random checks. These inspections can also help address risks related to the installation and construction quality of a pipeline by ensuring that the pipeline is structurally sound and shows no evidence of questionable materials or other problems, such as corrosion and excavation damage. PHMSA has recommended that state pipeline safety agencies perform periodic surprise inspections on new pipeline construction to determine whether operators are complying with construction requirements. Inspectors with the Texas Railroad Commission, in addition to sampling on-site pipeline facilities in the field, also review pipeline operators’ records and documentation on selected pipeline systems for compliance with federal and state pipeline safety regulations. These risk-based safety evaluations have included the construction of gathering pipelines related to shale development and pipelines not regulated by PHMSA. Such evaluations also help ensure that operators maintain an up-to-date and consistent document records system for installation, operations, and emergency response (see fig. 11). Public outreach and communication. Seven state agencies reported they engage in outreach or other communication with communities and citizens to boost awareness and knowledge of pipeline safety practices they use. The Common Ground Alliance has reported on the importance of outreach, including the use of structured education programs, targeted mailings, and paid advertising. These and other outreach methods can also underscore the importance of other safety practices, such as damage prevention and One-Call programs. These outreach efforts can involve a number of methods and include educating and engaging the public. In Colorado, Damage Prevention Councils have hosted monthly meetings and participated in local community events—such as educational seminars, parades, and trade shows—to help educate citizens on pipeline safety. Another Colorado entity active in damage prevention is the Colorado Pipeline Association, which comprises pipeline operators dedicated to promoting pipeline safety by providing information for excavators, state residents, businesses, emergency responders, and public officials. In one community, according to a PHMSA official, citizens viewed state safety officials as an objective and neutral party that provided information and perspectives on the planned construction of gathering pipelines. In tandem with private operators, the state officials were able to answer citizen questions and address concerns. Enforcement. Six state agencies reported a safety practice of establishing a system of escalated enforcement to enhance and increase regulatory attention on operators that have experienced incidents. A pipeline expert we interviewed said that promoting an effective enforcement program was necessary to help ensure pipeline safety. A system of escalated enforcement can enhance and increase regulatory attention on pipeline operators with safety violations. One state pipeline safety official reported that making such attention public can bring additional pressure on and provide incentives for a company to maintain and operate its infrastructure safely. One PHMSA official reported that although many states do not have an enforcement program as elaborate as PHMSA, states with stronger enforcement programs have more of an impact on the operators to increase safety. Pipeline operators may have procedures and established contacts with local enforcement personnel in order to act appropriately to halt dangerous excavation activities that may damage pipelines and potentially cause an immediate threat to life or property. Regarding federally unregulated gathering pipelines, one Colorado official reported that because gathering pipeline companies operate pipelines and conduct excavation work, they would be subject to any necessary enforcement due to safety violations. However, sharing of information among states on the safety practices they use for unregulated gathering pipelines appears to be limited. Some state and PHMSA officials we interviewed had limited awareness of what other states were doing to help ensure the safety of gathering pipelines not regulated by PHMSA. For example, pipeline safety officials we interviewed had limited awareness of other state programs—sometimes even for an adjacent state—even if those programs were intended to address common risks, such as reducing excavation damage and corrosion. PHMSA officials were likewise unable to report on the safety practices that many states use or on states’ regulations that were more stringent than federal requirements. PHMSA’s website holds a wealth of information on various pipeline safety topics, including recent pipeline forums and industry research, incident investigations, and other information. However, information targeted at gathering pipelines, including relevant safety practices and state activities, is limited. In addition, all related information could be grouped to decrease time spent searching and scanning. Currently, there is no central PHMSA web page or resource for gathering pipelines, regulated or unregulated—possibly due, in part, to the lower safety risks that regulated gathering pipelines have posed to people and property when compared with other pipelines, like transmission pipelines. PHMSA officials said that its website also focuses on pipelines that PHMSA regulates but excludes most gathering pipelines. PHMSA has considered the development of a website to help facilitate sharing information among states. While this project is still in the planning stages and not targeted at gathering pipelines, it could be a resource to share program and safety practices among states and PHMSA. Increased communication and information sharing about pipeline safety practices could boost the use of those practices in states with unregulated gathering pipelines. As previously discussed, even the safety practice that our survey respondents reported using most frequently—implementing a damage prevention program—was used by just 13 of the 39 responding state pipeline safety agencies with unregulated gathering pipelines in their state. The other four safety practices cited are reportedly used even less. Improved information sharing among states and PHMSA could help spread information on how these safety practices—which are also used for regulated pipelines–-could be applied to unregulated gathering pipelines, thereby benefiting other states with unregulated gathering pipelines. We have previously reported on the value of organizations reporting and sharing safety information as part of encouraging a wider safety culture. Safety culture can include organizational awareness of safety and open communication. The benefits of a strong safety culture have widespread applicability, including in other transportation areas— such as aviation and transit. PHMSA could serve to facilitate feedback and evaluate safety information related to unregulated gathering pipelines in states. By collecting information on safety practices and other information relevant to unregulated gathering pipelines, PHMSA could increase the potential for identifying systemic issues, disseminating lessons learned, and improving pipeline safety across the country. PHMSA officials reported that, in the past, similar online and educational efforts in other areas have resulted in increasing education and information sharing among state pipeline safety officials. While the safety risks of federally unregulated, onshore hazardous liquid and gas gathering pipelines are generally considered to be lower than other types of pipelines, PHMSA is currently not able to determine the performance and safety of these gathering pipelines because it does not collect the necessary pipeline operator data. The agency is considering options to collect such information, which could facilitate quantitatively assessing the safety risks posed by unregulated gathering pipelines. Furthermore, these data would be critical in helping PHMSA to evaluate the sufficiency of safety regulations for gathering pipelines as required by the congressional mandate or that increasing shale development across the country might necessitate. Making data-driven, evidence-based decisions about the risks of federally unregulated gathering pipelines is especially important in a time of limited resources. The absence of an information-sharing resource focused on federally unregulated gathering pipelines means that both states and PHMSA could miss opportunities to share lessons learned and successful practices for helping to ensure pipeline safety. Sharing such lessons and related safety reporting can help support a safety culture and increase state officials’ awareness of possible safety practices or strategies that they can use to enhance pipeline safety. Lessons learned can also help states avoid the mistakes of others. Additionally, increased information sharing through such a resource would help PHMSA become more aware of state pipeline safety practices and initiatives—which in turn would assist PHMSA in sharing and supporting these safety practices, as well as in considering what state efforts may have applicability for federal programs, regulation, and guidance. To enhance the safety of unregulated onshore hazardous liquid and gas gathering pipelines, we recommend that the Secretary of Transportation direct the PHMSA Administrator to take the following two actions: Collect data from operators of federally unregulated onshore hazardous liquid and gas gathering pipelines, subsequent to an analysis of the benefits and industry burdens associated with such data collection. Data collected should be comparable to what PHMSA collects annually from operators of regulated gathering pipelines (e.g., fatalities, injuries, property damage, location, mileage, size, operating pressure, maintenance history, and the causes of incidents and consequences). Establish an online clearinghouse or other resource for states to share information on practices that can help ensure the safety of federally unregulated onshore hazardous liquid and gas gathering pipelines. This resource could include updates on related PHMSA and industry initiatives, guidance, related PHMSA rulemakings, and other information collected or shared by states. We provided the Department of Transportation with a draft of this report for review and comment. The department provided technical corrections, which we incorporated as appropriate. We are sending copies of this report to interested congressional committees and the Secretary of Transportation. 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) 512-2834 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. The objectives of our review were to determine (1) the safety risks that exist, if any, with onshore hazardous liquid and natural gas gathering pipelines that are not currently under the Pipeline and Hazardous Materials Safety Administration (PHMSA) regulation and (2) the practices states are using to help ensure the safety of unregulated onshore gathering pipelines. To address our objectives, we reviewed PHMSA and other federal agency regulations, as well as available safety data on regulated pipelines. We also interviewed officials at PHMSA, state pipeline safety agencies, pipeline companies and other industry stakeholders, and related associations. We obtained data on pipelines regulated by PHMSA to understand the types of pipeline data currently collected, as well as to compare and analyze accident, injury, fatality, and other trends. We reviewed the data and conducted follow-up work as necessary to determine that the data were complete, reasonable, and sufficiently reliable for the purposes of this report. We also conducted site visits—selecting locations based on geography, pipeline infrastructure, and other factors—to interview pipeline officials and representatives in Denver, Pittsburgh, and Dallas-Fort Worth. We later identified an initial list of safety risks and safety practices through information collection and document review processes. To determine what safety risks may be associated with federally unregulated gathering pipelines—in addition to reviewing federal agency regulations, regulated pipeline safety data, and conducting various interviews—and because of the lack of historical and nationwide data, we developed and administered a web-based survey to state pipeline safety agencies in all 50 states and the District of Columbia. Our survey was intended to collect information otherwise not available from PHMSA, states, industry, or other sources on safety risks associated with onshore, federally unregulated hazardous liquid and gas gathering pipelines and related safety practices to help address those risks and ensure safety. We used the survey to identify which states had unregulated, onshore gathering pipelines and what perceived pipeline safety risks were associated with those pipelines. To identify safety practices states are using, we reviewed industry documents and conducted interviews with public and private experts and officials. Then, as part of our survey of state pipeline safety agencies, we asked officials to identify the practices they used to ensure the safety of onshore, federally unregulated hazardous liquid and gas gathering pipelines. From our survey results, we identified the most frequently cited safety practices, including additional state programs, activities, and other practices. To develop the survey questions, we conducted initial interviews with state officials and other pipeline safety stakeholders to identify safety issues regarding unregulated gathering pipelines. We also reviewed key literature to ascertain pipeline safety practices and other issues. We consulted with PHMSA officials and reviewed PHMSA documentation to identify the proper terminology for use in the survey. The survey was pretested with potential respondents from state pipeline safety agencies, as well as with the Congressional Research Service and National Association of Pipeline Safety Representatives. We did this to ensure that (1) the questions were clear and unambiguous, (2) the terms we used were precise, (3) the survey did not place an undue burden on the agency officials completing it, and (4) the survey was independent and unbiased. In addition, the survey was reviewed by an internal, independent survey expert. We took steps in survey design, data collection, and analysis to minimize nonsampling errors. For example, we worked with PHMSA officials to identify the appropriate survey respondents—state pipeline safety agencies. To minimize measurement error that might occur from respondents interpreting our questions differently from our intended purpose, we extensively pretested the survey and followed up with nonresponding units and with units whose responses violated certain validity checks. We identified only two cases where the respondents had slightly varied responses from our intended question, although the majority understood our questions as intended. Finally, to eliminate data-processing errors, we independently verified the computer program that generated the survey results. Our results are not subject to sampling error because we administered our survey to all 50 state pipeline safety agencies and the District of Columbia. The survey was conducted using self-administered electronic questionnaires posted on the World Wide Web. We sent e-mail notifications to 52 agencies responding to our survey. We also e-mailed each potential respondent a unique password and username to ensure that only members of the target population could participate in the survey. To encourage respondents to complete the survey, we sent an e-mail reminder to each nonrespondent about 2 weeks after our initial e-mail message. The survey data were collected from July through September 2011. We received responses from all 50 states and the District of Columbia, for an overall response rate of 100 percent. This “collective perspective” obtained from each of the agencies helps to mitigate individual respondent bias by aggregating information across the range of different viewpoints. For purposes of characterizing the results of our survey, we identified specific meanings for the words we used to quantify the results, as follows: “a few” means between 1 percent and 24 percent of respondents, “some” means between 25 percent and 44 percent of respondents, “about half” means between 45 percent and 55 percent of respondents, “a majority” means between 56 percent and 74 percent of respondents, “most” means between 75 percent and 94 percent of respondents, and “nearly all” means 95 percent or more of respondents. This report contains the central results from the survey (see app. II). We conducted this performance audit from February 2011 to March 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Appendix II: Summary Results, GAO Pipeline Safety Regulations Survey General Pipeline Safety Regulation Survey Questions YES RESPONSES Does your state have any onshore gathering pipelines outside of high consequence areas that PHMSA does not regulate? Does your agency collect any data for onshore gathering pipelines that PHMSA does not regulate? Does your state have safety requirements for onshore gathering pipelines that are more stringent than those provided by PHMSA? Subpopulation Total How great a safety risk, if at all, are the following factors for onshore hazardous liquid and gas gathering pipelines in your state that PHMSA does not regulate? MODERATE AND HIGH SAFETY RISK RESPONSES A. Limited or no annual reporting data (similar to PHMSA’s) available on these pipelines (e.g., mileage, leaks) B. Limited or no incident data available on these pipelines (e.g., spills, releases) C. Limited or no information on the integrity of these pipelines D. Unknown or uncertain locations of pipelines E. Location of these pipelines in high consequence areas F. Limited or no inspections conducted on these pipelines G. Limited or no information on the pipe size H. Limited or no information on operating pressure I. Installation/construction quality J. Periodic maintenance not conducted on these pipelines K. Quality of product (sour or non-sour, corrosive, abrasive, etc.) Does your agency use any of the following practices to ensure onshore hazardous liquid and gas pipeline safety in your state? In addition to the contact named above, other key contributors to this report were Sara Vermillion (Assistant Director), Matt Cail (Analyst-in- Charge), Aisha Cabrer, David Hooper, Stuart Kaufman, Josh Ormond, Jerome Sandau, Jeremy Sebest, Rebecca Shea, Don Watson, and Adam Yu. | Pipelines are a relatively safe mode of transportation for hazardous liquid and natural gas and are regulated by the Department of Transportations (DOT) Pipeline and Hazardous Materials Safety Administration (PHMSA) and state entities. Included in the nations pipeline network are an estimated 200,000 or more miles of onshore gathering pipelines, which transport products to processing facilities and larger pipelines. Many of these pipelines have not been subject to federal regulation based on their generally rural location and low operating pressures. While incidents involving gathering pipelines regulated by PHMSA have resulted in millions of dollars in property damage in recent years, comparable statistics for federally unregulated gathering pipelines are unknown. This report identifies (1) the safety risks that exist, if any, with onshore hazardous liquid and natural gas gathering pipelines that are not currently under PHMSA regulation and (2) the practices states use to help ensure the safety of these pipelines. GAO surveyed state pipeline safety agencies in all 50 states and the District of Columbia; interviewed officials at PHMSA, state pipeline safety agencies, pipeline companies, and industry associations; and analyzed data and regulations. While the safety risks of onshore gathering pipelines that are not regulated by PHMSA are generally considered to be lower than for other types of pipelines, PHMSA does not collect comprehensive data to identify the safety risks of unregulated gathering pipelines. In response to a GAO survey, state pipeline safety agencies cited construction quality, maintenance practices, unknown or uncertain locations, and limited or no information on pipeline integrity as among the highest risks for federally unregulated pipelines. Without data on these risk factors, pipeline safety officials are unable to assess and manage safety risks associated with these pipelines. Furthermore, changes in pipeline operational environments cited in response to GAOs survey and by industry officials could also increase safety risks for federally unregulated gathering pipelines. Specifically, land-use changes are resulting in development encroaching on existing pipelines and the increased extraction of oil and natural gas from shale deposits is resulting in the development of new gathering pipelines, some of which are larger in diameter and operate at higher pressure than older pipelines. PHMSA is considering collecting data on federally unregulated gathering pipelines, but the agencys plans are preliminary, and the extent to which PHMSA will collect data sufficient to evaluate the potential safety risks associated with these pipelines is uncertain. A small number of state pipeline safety agencies GAO surveyed reported using at least one of five practices that were most frequently cited to help ensure the safety of federally unregulated pipelines. These practices include (1) damage prevention programs, (2) considering areas of highest risk to target resources, (3) safety inspections, (4) public outreach and communication, and (5) increased regulatory attention on operators with prior spills or leaks. However, the sharing of information among states on the safety practices used appears to be limited. Some state and PHMSA officials GAO interviewed had limited awareness of safety practices used by other states. Increased communication and information sharing about pipeline safety practices could boost the use of such practices for unregulated pipelines. However, information targeted at gathering pipelines on PHMSAs website, including relevant safety practices and state activities, is limited. DOT should (1) collect data on federally unregulated hazardous liquid and gas gathering pipelines and (2) establish an online clearinghouse or other resource for sharing information on pipeline safety practices. DOT provided technical corrections on a draft of this report. |
In October 2004, Congress included a provision in the Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005 that required the Secretary of Defense to develop a comprehensive policy for DOD on the prevention of and response to sexual assaults involving members of the Armed Forces. The legislation required that the department’s policy be based on the recommendations of the Department of Defense Task Force on Care for Victims of Sexual Assaults and on such other matters as the Secretary considered appropriate. Among other things, the legislation required DOD to establish a standardized departmentwide definition of sexual assault, establish procedures for confidentially reporting sexual assault incidents, and submit an annual report to Congress on reported sexual assault incidents involving members of the Armed Forces. In October 2005, DOD issued DOD Directive 6495.01, which contains its comprehensive policy for the prevention of and response to sexual assault, and in June 2006 it issued DOD Instruction 6495.02, which provides guidance for implementing its policy. DOD’s directive defines sexual assault as “intentional sexual contact, characterized by the use of force, physical threat or abuse of authority or when the victim does not or cannot consent. It includes rape, nonconsensual sodomy (oral or anal sex), indecent assault (unwanted, inappropriate sexual contact or fondling), or attempts to commit these acts. Sexual assault can occur without regard to gender or spousal relationship or age of victim. ‘Consent’ shall not be deemed or construed to mean the failure by the victim to offer physical resistance. Consent is not given when a person uses force, threat of force, coercion, or when a victim is asleep, incapacitated, or unconscious.” The Under Secretary of Defense for Personnel and Readiness has the responsibility for developing the overall policy and guidance for the department’s sexual assault prevention and response program. Under the Office of the Under Secretary of Defense for Personnel and Readiness, DOD’s Sexual Assault Prevention and Response Office (within the Office of the Deputy Under Secretary of Defense for Plans) serves as the department’s single point of responsibility for sexual assault policy matters. These include providing the military services with guidance, training standards, and technical support; overseeing the department’s collection and maintenance of data on reported sexual assaults involving servicemembers; establishing mechanisms to measure the effectiveness of the department’s sexual assault prevention and response program; and preparing the department’s annual report to Congress. In DOD, active duty servicemembers have two options for reporting a sexual assault: (1) restricted, and (2) unrestricted. The restricted reporting option permits a victim to confidentially disclose an alleged sexual assault to select individuals and receive care without initiating a criminal investigation. A restricted report may only be made to a Sexual Assault Response Coordinator, victim advocate, or medical personnel. Because conversations between servicemembers and chaplains are generally privileged, a victim may also confidentially disclose an alleged sexual assault to a chaplain. In contrast, the unrestricted reporting option informs the chain of command of the alleged sexual assault and may initiate an investigation by the military criminal investigative organization of jurisdiction. Since December 2007, the Coast Guard has employed a similar definition of sexual assault as well as similar options for reporting a sexual assault in its guidance, Commandant Instruction 1754.10C. At the installation level, the coordinators of the sexual assault prevention and response programs are known as Sexual Assault Response Coordinators in DOD and as Employee Assistance Program Coordinators in the Coast Guard. Other responders include victim advocates, judge advocates, medical and mental health providers, criminal investigative personnel, law enforcement personnel, and chaplains. DOD has taken positive steps to respond to congressional direction by establishing policies and a program to prevent, respond to, and resolve reported sexual assault incidents involving servicemembers, and the Coast Guard, on its own initiative, has taken similar steps. Further, we found that commanders are taking action against alleged sexual assault offenders. However, we also found that several factors hinder implementation of the programs, including (1) guidance that may not adequately address how to implement DOD’s program in certain environments, (2) inconsistent support for the programs, (3) limited effectiveness of some program coordinators, (4) training that is not consistently effective, and (5) limited access to mental health services. In response to statutory requirements, DOD has established a program to prevent, respond to, and resolve sexual assaults involving servicemembers. DOD’s policy and implementing guidance for its program are contained in DOD Directive 6495.01 and DOD Instruction 6495.02. Specific steps that DOD has taken include establishing a standardized departmentwide definition of sexual establishing a confidential option to report sexual assault incidents, known as restricted reporting; establishing a Sexual Assault Prevention and Response Office to serve as the single point of accountability for sexual assault prevention and response; requiring the military services to develop and implement their own policies and programs, based on DOD’s policy, to prevent, respond to, and resolve sexual assault incidents; establishing training requirements for all servicemembers on preventing and responding to sexual assault; and reporting data on sexual assault incidents to Congress annually. Although not explicitly required by statute, the Coast Guard has had a sexual assault prevention and response program in place since 1997. In December 2007, the Coast Guard, on its own initiative, updated its instruction to mirror DOD’s policy and to include a restricted option for reporting sexual assaults. In DOD, each of the military services has also established a Sexual Assault Prevention and Response office with responsibility for overseeing and managing sexual assault matters within that military service. The Coast Guard’s Office of Work-Life, which falls under the Commandant of the Coast Guard, is responsible for overseeing and managing sexual assault matters within the Coast Guard. A key aspect of the DOD’s and the Coast Guard’s efforts to address sexual assault is the disposition of alleged sexual assault offenders. In both DOD and the Coast Guard, commanders are responsible for discipline of misconduct, including sexual assault, and they have a variety of judicial and administrative options at their disposal. During the course of our ongoing work, we found that commanders at the installations we visited were supportive of the need to take action against alleged sexual assault offenders and were generally familiar with the options available to them for disposing of alleged sexual assault cases. Commanders’ options are specified in the Uniform Code of Military Justice (UCMJ) and the Manual for Courts-Martial and include trial by court-martial, the most severe disposition option, which can lead to many different punishments including death, prison time, and punitive separation from military service; nonjudicial punishment, pursuant to Article 15 of the UCMJ, which allows for a number of punishments including reducing a member’s grade, seizing a portion of pay, and imposing restrictions on freedom; and administrative actions, which are corrective measures that may result in a variety of actions including issuing a reprimand, extra military instruction, or the administrative withholding of privileges. In some cases, commanders may also elect to take no action, such as if evidence of an offense is not sufficient. However, there are also instances in which commanders cannot take action, such as if the alleged offender is not subject to military law or could not be identified, if the alleged sexual assault is unsubstantiated or unfounded, or if there is insufficient evidence that an offense occurred. In determining how to dispose of alleged sexual assault offenders, commanders take into account a number of factors that are specified in the Manual for Courts-Martial. Some of the factors that commanders take into account include the character and military service of the accused, the nature of and circumstances surrounding the offense and the extent of harm caused, and the appropriateness of the authorized punishment to the particular accused or offense. Further, commanders’ decisions are typically made after consulting with the supporting legal office (e.g., judge advocate). Despite taking positive steps to implement programs to prevent and respond to reported sexual assault incidents involving servicemembers, we identified several factors during the course of our ongoing work that, if not addressed, could continue to hinder implementation of the programs. DOD’s guidance may not adequately address some important issues. DOD’s directive and instruction may not adequately address how to implement the program when operating in deployed or joint environments. Program officials we met with overseas told us that DOD’s policies do not sufficiently take into account the realities of operating in a deployed environment, in which unique living and social circumstances can heighten the risks for sexual assault and program resources can be widely dispersed, which can make responding to a sexual assault challenging. Similarly, program officials told us there is a need for better coordination of resources when a sexual assault occurs in a joint environment. At one overseas installation we visited, Coast Guard members told us that they were confused about which program they fell under—DOD’s or the Coast Guard’s—and thus who they should report an alleged sexual assault to. Installations can also have multiple responders responsible for responding to an assault, potentially leading to further confusion. While most commanders support the programs, some do not. DOD’s instruction requires commanders and other leaders to advocate a strong program and effectively implement DOD’s sexual assault prevention and response policies. The Coast Guard’s instruction similarly requires that commanders and other leaders ensure compliance with the Coast Guard’s policies and procedures. Though we found that commanders—that is, company and field grade officers, at the installations we visited have taken actions to address incidents of sexual assault, some commanders do not support the programs. For example, at three of the installations program officials told us of meeting with resistance from commanders when attempting to place, in barracks and work areas, posters or other materials advertising the programs or the options for reporting a sexual assault. In some cases, commanders we spoke with told us that they supported the programs but did not like the restricted reporting option because they felt it hindered their ability to protect members of the unit or discipline alleged offenders. Commanders who do not support the programs effectively limit servicemembers’ knowledge about the program and ability to exercise their reporting options. Program coordinators’ effectiveness can be hampered when program management is a collateral duty. To implement sexual assault prevention and response programs at military installations, DOD and the services rely largely on Sexual Assault Response Coordinators, while the Coast Guard relies on Employee Assistance Program Coordinators. However, we found that there are a variety of models for staffing these positions. DOD’s instruction leaves to the military services’ discretion whether these positions are filled by military members, DOD civilian employees, or DOD contractors, and thus whether Sexual Assault Response Coordinators perform their roles as full-time or collateral duties. In the Coast Guard, Employee Assistance Program Coordinators are full-time federal civilian employees, but they are also responsible for simultaneously managing multiple programs, including sexual assault prevention and response, for a designated geographic region. We found that the time and resources dedicated to implementing sexual assault prevention and response programs varies, particularly when the program coordinators have collateral duties. Training is not consistently effective. Although DOD and the Coast Guard require that all servicemembers receive periodic training on their respective sexual assault prevention and response programs, our nongeneralizeable survey, interviews, and discussions with servicemembers and program officials revealed that a majority, but not all, servicemembers are receiving the required training, and that some servicemembers who have received it may not understand how to report a sexual assault using the restricted reporting option. For example, a survey we administered at 14 military installations revealed that while the majority of servicemembers we surveyed had received the required training, the percentage of servicemembers who responded that they would not know how to report a sexual assault using the restricted reporting option ranged from 13 to 43 percent for the seven installations where we administered our survey in the United States and from 13 to 28 percent for the seven installations where we administered our survey overseas. To date, neither DOD nor the Coast Guard has systematically evaluated the effectiveness of the training provided. Servicemembers who have not received the required training or are otherwise not familiar with their respective programs incur the risks of not knowing how to mitigate the possibility of being sexually assaulted or how to seek assistance if needed, or risk reporting the assault in a way that limits their option to maintain confidentiality while seeking treatment. Access to mental health services may be limited. DOD and the Coast Guard both require that sexual assault victims be made aware of available mental health services, and in 2007, DOD’s Mental Health Task Force recommended that DOD take action to address factors that may prevent some servicemembers from seeking mental health care. However, we found that several factors, including a DOD-reported shortage of mental health care providers, the inherent logistical challenges of operating overseas or in geographically remote locations in the United States or overseas, and servicemembers’ perceptions of stigma associated with mental health care can affect whether servicemembers who are victims of sexual assault can or do access mental health services. We also did not find any indication that either DOD or the Coast Guard are taking steps to systematically assess factors that may impede servicemembers who are victims of sexual assault from accessing mental health services. We found, based on responses to our nongeneralizeable survey and a 2006 DOD survey, the most recent available, that occurrences of sexual assault may be exceeding the rates being reported, suggesting that DOD and the Coast Guard have only limited visibility over the incidence of these occurrences. We recognize that the precise number of sexual assaults involving servicemembers is not possible to determine and that studies suggest sexual assault are generally underreported in the United States. Nevertheless, our findings indicate that some servicemembers may choose not to report sexual assault incidents for a variety of reasons, including the belief that nothing would be done or that reporting an incident would negatively impact their careers. In fiscal year 2007, DOD received 2,688 reports of alleged sexual assault made with either the restricted or unrestricted reporting option involving servicemembers as either the alleged offenders or victims. The Coast Guard, which did not offer the restricted reporting option during fiscal year 2007, received 72 reports of alleged sexual assault made using the unrestricted reporting option during this same time period. At the 14 installations where we administered our survey, 103 servicemembers indicated that they had been sexually assaulted within the preceding 12 months. Of these, 52 servicemembers indicated that they did not report the sexual assault incident. The number who indicated they did not report the sexual assault ranged from one to six servicemembers per installation. Respondents to our survey also told us that they were aware of alleged sexual assault incidents involving other servicemembers that were not reported to program officials. DOD’s fiscal year 2007 annual report and a Coast Guard program official further support the view that servicemembers are not reporting all sexual assault incidents, as does the Defense Manpower Data Center’s 2006 Gender Relations Survey of Active Duty Members, administered between June and September 2006. Issued in March 2008, the Defense Manpower Data Center survey found that of the estimated 6.8 percent of women and 1.8 percent of men in DOD who experienced unwanted sexual contact during the prior 12 months, the majority (an estimated 79 percent of women and 78 percent of men) chose not to report it. The Defense Manpower and Data Center report did not include data for the Coast Guard, but, at our request, the center provided information showing that an estimated 3 percent of female and 1 percent of male Coast Guard respondents reported experiencing unwanted sexual contact during the prior 12 months. While the survey results suggest a disparity between the actual number of sexual assault incidents and the number of those reported, this is largely an expected result of anonymous surveys. Whereas formal reports, whether restricted or unrestricted, involve some level of personal identification and therefore a certain amount of risk on the part of the victim, the risks and incentives for service members making anonymous reports are very different. Hence, anonymous survey results tend to produce higher numbers of reported incidents. Another factor obscuring the visibility that DOD and Coast Guard officials can have over the incidence of sexual assault is the fact that many of the individuals to whom the assaults may be reported—including clergy and civilian victim care organizations, civilian friends, or family—are not required to disclose these incidents. As a result, while DOD and the Coast Guard strive to capture an accurate picture of the incidence of sexual assault, their ability is necessarily limited. Our survey data revealed a number of reasons why respondents who experienced a sexual assault during the preceding 12 months did not report the incident. Commonly cited reasons by survey respondents at the installations we visited included: (1) the belief that nothing would be done; (2) fear of ostracism, harassment, or ridicule by peers; and (3) the belief that their peers would gossip about the incident. Survey respondents also commented that they would not report a sexual assault because of concern about being disciplined for collateral misconduct, such as drinking when not permitted to do so; not knowing to whom to make a report; concern that a restricted report would not remain confidential; the belief that an incident was not serious enough to report; or concern that reporting an incident would negatively impact their career or unit morale. The Defense Manpower Data Center’s 2006 Gender Relations Survey of Active Duty Members identified similar reasons why servicemembers did not report unwanted sexual contact, including concern that reporting an incident could result in denial of promotions, assignment to jobs that are not career enhancing, and professional and social retaliation. However, servicemembers also reported favorable results after reporting unwanted sexual contact to military authorities, including being offered counseling and advocacy services, medical and forensic services, legal services, and having action taken against alleged offenders. Respondents to our survey indicated they were supportive of the restricted reporting option as well. For example, a junior enlisted female observed that the military is going to great lengths to improve the ways that sexual assault can be reported and commented that “in my opinion, people will be more likely to report an incident anonymously.” Similarly, a female senior officer commented that “giving the victim a choice of making a restricted or unrestricted report is a positive change and allows that person the level of privacy they require.” DOD and the Coast Guard have established some mechanisms for overseeing reports of sexual assault involving servicemembers. However, they lack the oversight framework necessary to evaluate the effectiveness of their sexual assault prevention and response programs, and DOD lacks key information from the military services needed to evaluate the effectiveness of department’s program. DOD’s annual reports to Congress may not effectively characterize incidents of sexual assault in the military services because the department has not clearly articulated a consistent methodology for reporting incidents and the means of presentation for some of the data does not facilitate comparison. In addition, the congressionally directed Defense Task Force on Sexual Assault in the Military Services has yet to begin its review, although DOD considers its work to be an important oversight element. DOD’s directive establishes the department’s oversight mechanisms for its sexual assault prevention and response program and assigns oversight responsibility to DOD’s Sexual Assault Prevention and Response Office (within the Office of the Deputy Under Secretary of Defense for Plans). DOD’s Sexual Assault Prevention and Response Office is responsible for developing programs, policies, and training standards for the prevention, reporting, response, and program accountability of sexual assaults involving servicemembers; developing strategic program guidance and joint planning objectives; storing and maintaining sexual assault data; establishing institutional evaluation, quality improvement, and oversight mechanisms to periodically evaluate the effectiveness of the department’s program; assisting with identifying and managing trends; and preparing the department’s annual report to Congress. To help provide oversight of the department’s program, in 2006 DOD established a Sexual Assault Advisory Council, which consists of representatives from DOD’s Sexual Assault Prevention and Response Office, the military services, and the Coast Guard. The Sexual Assault Advisory Council’s responsibilities include advising the Secretary of Defense on the department’s sexual assault prevention and response policies, coordinating and reviewing the department’s policies and programs, and monitoring progress. The military services have also established some oversight mechanisms, though these efforts are generally focused on collecting data. Though Coast Guard representatives attend meetings of DOD’s Sexual Assault Advisory Council, the Coast Guard has few other formal oversight mechanisms in place to oversee its sexual assault prevention and response program. According to program officials with whom we spoke in both DOD and the Coast Guard, to date their focus has been on program implementation, as opposed to program evaluation. Though DOD and the Coast Guard have established some oversight mechanisms, neither has established an oversight framework for their respective sexual assault prevention and response programs, which is necessary to ensure the effective implementation of their programs. Our prior work has demonstrated the importance of outcome-oriented performance measures to successful program oversight and shown that having an effective plan for implementing initiatives and measuring progress can help decision makers determine whether their initiatives are achieving desired results. In reviewing DOD’s and the Coast Guard’s programs, we found that neither has established an oversight framework because they have not established a comprehensive plan that includes such things as clear objectives, milestones, performance measures, and criteria for measuring progress, nor established evaluative performance measures with clearly defined data elements with which to analyze sexual assault incident data. Because DOD’s and the Coast Guard’s sexual assault prevention and response programs lack an oversight framework, their respective programs, as currently implemented, do not provide decision makers with the information they need to evaluate the effectiveness of the programs or to determine the extent to which the programs are helping to prevent sexual assault from occurring and to ensure that servicemembers who are victims of sexual assault receive the care they need. During the course of our ongoing work, we found a number of areas demonstrating the need for an oversight framework. For example, although DOD’s Sexual Assault Prevention and Response Office is responsible for establishing institutional program evaluation, quality improvement, and oversight mechanisms to periodically evaluate the effectiveness of the department’s programs, it has yet to establish qualitative or quantitative metrics to facilitate program evaluation and assess effectiveness. As a specific example, DOD has not yet established metrics to determine the frequency with which victims were precluded from making a confidential report using the restricted reporting option or reasons that precluded them from doing so. Additionally, we found that neither DOD nor the Coast Guard has established performance goals, such as a goal to ensure that a specific percentage of servicemembers within a unit have received required training. In the absence of such measures, Sexual Assault Prevention and Response Office officials in DOD told us that they currently determine the effectiveness of DOD’s program based on how well the military services are complying with program implementation requirements identified by DOD. Importantly, both DOD and the Coast Guard recognize the need to establish an oversight framework in addition to their existing oversight mechanisms. For example, the Sexual Assault Advisory Council is in the initial stages of developing performance measures and evaluation criteria to assess program performance and identify conditions needing attention. However, DOD has not yet established time frames for developing and implementing these measures. DOD also is working with the military services to develop guidelines to permit, among other uses, consistent assessment of program implementation during site visits. In addition, Coast Guard program officials told us that they plan to conduct reviews of their program for compliance and quality in the future and plan to leverage any metrics developed by DOD to assess their program. Further, the Coast Guard Investigative Service has begun to conduct limited trend analysis on reported incidents, including the extent to which alcohol or drugs were involved in alleged sexual assaults. Without an oversight framework to guide program implementation, DOD and the Coast Guard also risk not collecting all of the information needed to provide insight into the effectiveness of their programs. In reviewing DOD’s program, we found that the military services encountered challenges providing requested data because the request to do so was made after the start of the data collection period. For example, with the exception of the Army, none of the military services was able to provide data as part of the fiscal year 2007 annual report to Congress on sexual assaults involving civilian victims, such as contractors and government employees. Similarly, while there is no statutory reporting requirement, the Coast Guard voluntarily participates in DOD’s annual reporting requirement by submitting data to DOD’s Sexual Assault Prevention and Response Office. However, DOD does not include these data in its annual report, and the Coast Guard does not provide these incident data to Congress because neither is required to do so. As a result, at the present time Congress does not have visibility over the extent to which sexual assaults involving Coast Guard members occur. Though DOD’s Sexual Assault Prevention and Response Office is responsible for assisting with identifying and managing trends, it is not able to conduct comprehensive cross-service trend analysis of sexual assault incidents because it lacks access to installation- or case-level data that would facilitate such analyses. DOD officials told us that the military services will not provide installation- or case-level incident data beyond those that are aggregated at the military service level. These data are generally limited to information needed to meet statutory requirements for inclusion in the annual report to Congress. In discussing this matter with the military services, service officials told us they do not want to provide installation- or case-level data to DOD because they are concerned (1) the data may be misinterpreted, (2) even nonidentifying data about the victim may erode victim confidentiality, and (3) servicemembers may not report sexual assaults if case-level data are shared beyond the service-level. However, without access to such information, DOD does not have the means to identify those factors, and thus to fully execute its oversight role, including assessing trends over time. For example, without case-level data, DOD cannot determine the frequency with which sexual assaults are reported in each of the geographic combatant commands to better target resources over time. DOD reports data to Congress annually on the total number of restricted and unrestricted reported incidents of sexual assault. However, in reviewing DOD’s annual reports to Congress, we found that the reports may not effectively characterize incidents of sexual assault in the military services because the department has not clearly articulated a consistent methodology for reporting incidents and the means of presentation for some of the data does not facilitate comparison. For example, meaningful comparisons of the data cannot be made because the respective offices that provide the data to DOD measure incidents of sexual assault differently. In the military services, Sexual Assault Response Coordinators, who focus on victim care, report data on the number of sexual assault incidents brought using the restricted reporting option based on the number of victims involved. In contrast, the criminal investigative organizations, which report data on the number of sexual assault incidents brought using the unrestricted reporting option, report data on a per “incident” basis, which may include multiple victims or alleged offenders. We believe that this lack of a common means of presentation for reporting purposes has prevented users of the reports from making meaningful comparisons or drawing conclusions from the reported numbers. Further, DOD’s annual report lacks certain data that we believe would facilitate congressional oversight or understanding of victims’ use of the reporting options. For example, while DOD’s annual report provides Congress with the aggregated numbers of investigations during the prior year for which commanders could not take action against alleged offenders, those aggregated numbers do not distinguish cases in which evidence was found to be insufficient to substantiate an alleged assault versus the number of times a victim recanted an accusation or an alleged offender died. Also, though DOD’s annual report documents the number of reports that were initially brought using the restricted reporting option and later changed to unrestricted, it includes these same figures in both categories—that is, the total number of restricted reports and the total number of unrestricted reports. An official in DOD’s Sexual Assault Prevention and Response Office told us that because the military services do not provide detailed case data to DOD that the department is not able to remove these reports from the total number of restricted reports when providing information in its annual report. However, we believe that the double listing of these figures is confusing. To provide further oversight of DOD’s sexual assault prevention and response programs, the Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005 required that the Defense Task Force on Sexual Assault in the Military Services conduct an examination of matters relating to sexual assault in cases in which members of the Armed Forces are either victims or offenders. As part of its examination, the law directs the task force to assess, among other things, DOD’s reporting procedures, collection, tracking, and use of data on sexual assault by senior military and civilian leaders, as well as DOD’s oversight of sexual assault prevention and response programs. The law does not require an assessment of the Coast Guard’s program. Senior officials within the Office of the Under Secretary of Defense for Personnel and Readiness have stated that they plan to use the task force’s findings to evaluate the effectiveness of DOD’s sexual assault prevention and response programs. However, as of July 2008, this task force has yet to begin its review. Senior task force staff members we spoke with attributed the delays to challenges in appointing the task force members and member turnover. As of July 2008, however, they told us that all 12 task force members were appointed and that their goal is to hold their first open meeting, and thus begin their evaluation, in August 2008. They also told us that they project that by the end of fiscal year 2008 DOD will have expended about $15 million since 2005 to fund the task force’s operations—with much of this funding going towards the task forces’ operational expenses, such as salaries for the civilian staff members, contracts, travel, and rent. The law directs that the task force submit its report to the Secretary of Defense and the Secretaries of the Army, Navy, and Air Force no later than 1 year after beginning its examination. If such a goal were met, the task force’s evaluation could be complete by August 2009. However, at this time it is uncertain whether the task force will be able to meet this goal. In closing, we believe that DOD and the Coast Guard have taken positive steps to prevent, respond to, and resolve reported incidents of sexual assault. However, a number of challenges—such as limited guidance for implementing DOD’s policies in certain environments, some commanders’ limited support and limited resources for the programs, training that is not consistently effective, limited access to mental health services, and a lack of an oversight framework—could undermine the effectiveness of some of their efforts. Left unchecked, these challenges could undermine DOD’s and the Coast Guard’s efforts by eroding servicemembers’ confidence in the programs, decreasing the likelihood that sexual assault victims will turn to the programs for help when needed, or by limiting the ability of DOD and the Coast Guard to judge the overall successes, challenges, and lessons learned from their programs. We expect to make a number or recommendations in our final report to improve implementation and oversight of sexual assault prevention and response programs in both DOD and the Coast Guard. Our final report will also include DOD’s and the Coast Guard’s response to our findings and recommendations once they have had an opportunity to further review our draft report. Mr. Chairman and Members of the Subcommittee, this concludes my prepared statement. I would be happy to answer any questions you may have at this time. If you have any questions on matters discussed in this testimony, please contact Brenda S. Farrell at (202) 512-3604 or [email protected]. Key contributors to this statement include Marilyn K. Wasleski (Assistant Director), Joanna Chan, Pawnee A. Davis, K. Nicole Harms, Wesley A. Johnson, Ronald La Due Lake, Stephen V. Marchesani, Amanda K. Miller, and Cheryl A. Weissman. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | In 2004, Congress directed the Department of Defense (DOD) to establish a comprehensive policy to prevent and respond to sexual assaults involving servicemembers. Though not required to do so, the Coast Guard has established a similar program. This statement addresses the extent to which DOD and the Coast Guard (1) have developed and implemented policies and programs to prevent, respond to, and resolve sexual assault incidents involving servicemembers; (2) have visibility over reports of sexual assault; and (3) exercise oversight over reports of sexual assault. This statement draws on GAO's preliminary observations from an ongoing engagement examining DOD's and the Coast Guard's programs to prevent and respond to sexual assault. In conducting its ongoing work GAO reviewed legislative requirements and DOD and Coast Guard guidance, analyzed sexual assault incident data, and obtained through surveys and interviews the perspective on sexual assault matters of more than 3,900 servicemembers stationed in the United States and overseas. The results of GAO's survey and interviews provide insight into the implementation of the programs but are nongeneralizable. GAO expects to issue its final report in August 2008 and to make a number of recommendations to improve implementation of sexual assault prevention and response programs and improve oversight of the programs in both DOD and the Coast Guard. DOD and the Coast Guard have established policies and programs to prevent, respond to, and resolve reported sexual assault incidents involving servicemembers; however, implementation of the programs is hindered by several factors. GAO found that (1) DOD's guidance may not adequately address some important issues, such as how to implement its program in deployed and joint environments; (2) most, but not all, commanders support the programs; (3) program coordinators' effectiveness can be hampered when program management is a collateral duty; (4) required sexual assault prevention and response training is not consistently effective; and (5) factors such as a DOD-reported shortage of mental health care providers affect whether servicemembers who are victims of sexual assault can or do access mental health services. Left unchecked, these challenges can discourage or prevent some servicemembers from using the programs when needed. GAO found, based on responses to its nongeneralizeable survey administered to 3,750 servicemembers and a 2006 DOD survey, the most recent available, that occurrences of sexual assault may be exceeding the rates being reported, suggesting that DOD and the Coast Guard have only limited visibility over the incidence of these occurrences. At the 14 installations where GAO administered its survey, 103 servicemembers indicated that they had been sexually assaulted within the preceding 12 months. Of these, 52 servicemembers indicated that they did not report the sexual assault. GAO also found that factors that discourage servicemembers from reporting a sexual assault include the belief that nothing would be done; fear of ostracism, harassment, or ridicule; and concern that peers would gossip. Although DOD and the Coast Guard have established some mechanisms for overseeing reports of sexual assault, neither has developed an oversight framework--including clear objectives, milestones, performance measures, and criteria for measuring progress--to guide their efforts. In compliance with statutory requirements, DOD reports data on sexual assault incidents involving servicemembers to Congress annually. However, DOD's report does not include some data that would aid congressional oversight, such as why some sexual assaults could not be substantiated following an investigation. Further, the military services have not provided sufficient data to facilitate oversight and enable DOD to conduct trend analyses. While the Coast Guard voluntarily provides data to DOD for inclusion in its report, this information is not provided to Congress because there is no requirement to do so. To provide further oversight of DOD's programs, Congress, in 2004, directed DOD to form a task force to undertake an examination of matters relating to sexual assault in which members of the Armed Forces are either victims or offenders. However, as of July 2008, the task force has not yet begun its review. Without an oversight framework, as well as more complete data, decision makers in DOD, the Coast Guard, and Congress lack information they need to evaluate the effectiveness of the programs. |
According to IAEA, between 1993 and 2006, there were 1,080 confirmed incidents of illicit trafficking and unauthorized activities involving nuclear and radiological materials worldwide. Eighteen of these cases involved weapons-usable material—plutonium and highly enriched uranium—that could be used to produce a nuclear weapon. IAEA also reported that 124 cases involved materials that could be used to produce a device that uses conventional explosives with radioactive material (known as a “dirty bomb”). Past confirmed incidents of illicit trafficking in highly enriched uranium and plutonium involved seizures of kilogram quantities of weapons-usable nuclear material but most have involved very small quantities. In some of these cases, it is possible that the seized material was a sample of larger quantities available for illegal purchase. IAEA concluded that these materials pose a continuous potential security threat to the international community, including the United States. Nuclear material could be smuggled into the United States in a variety of ways: hidden in a car, train or ship; sent through the mail; carried in a private aircraft or small boat; carried in personal luggage through an airport; or walked across the border. In response to these threats, U.S. agencies—including DHS, DOD, DOE, and State—fund, manage, and implement programs to combat nuclear smuggling in foreign countries and the United States. DOD, DOE, and State are responsible specifically for the overseas programs. Many of these programs started operations prior to DNDO’s creation and collectively cover all of the geographic regions of the global strategy. (See fig. 1.) For example, DOE’s Materials Protection, Control, and Accounting program, initiated in 1995, provides support to the Russian Federation and other former Soviet Union countries to secure nuclear weapons and weapons material that may be at risk of theft or diversion. In addition, during the 1990s, the United States began deploying radiation detection equipment at borders in countries of the former Soviet Union. DOD’s Cooperative Threat Reduction program was established in the early 1990s to help address proliferation concerns in the former Soviet Union, including helping secure sites where nuclear weapons are located. Two other DOD programs have provided radiation portal monitors, hand-held equipment, and radiation detection training to countries in the former Soviet Union and in Eastern Europe. Similarly, DOE’s Second Line of Defense program, initiated in 1998, supplies radiation detection equipment, training, and communication systems to Russia and other countries. DOE’s Megaports Initiative, also part of the Second Line of Defense program, began in 2003 and is focused on providing radiation detection systems at major international seaports. Once the equipment is installed, it is then operated by foreign government officials and port personnel working at these ports. State also has programs that provide radiation detection equipment and training to numerous countries. Domestically, DHS, in conjunction with other federal, state, and local agencies, is responsible for combating nuclear smuggling in the United States and has provided radiation detection equipment, including portal monitors, personal radiation detectors (known as pagers), and radioactive isotope identifiers at U.S. ports of entry, as well as in other settings. For example, DHS has equipped Coast Guard boarding and inspection teams with portable detection systems and has provided equipment, training, and assistance in other maritime, air, and land venues. In addition, DOE has programs to secure nuclear and radioactive sources domestically. For example, the U.S. Radiological Threat Reduction program recovers and manages excess and unwanted radioactive sources that belong to U.S. licensees. In addition, the Nuclear Regulatory Commission, as well as 35 states that have signed an agreement with the Nuclear Regulatory Commission, are responsible for regulating the security of radioactive and nuclear materials within the United States through its Radiological Materials and Reactor Security Programs. Several types of radiation detection equipment are used by CBP, the Coast Guard, and other agencies involved in radiological and nuclear detection activities: radiation portal monitors, radioactive isotope identification devices (RIID), and personal radiation detectors, among others. Portal monitors are stationary or mobile pieces of equipment that can detect radioactive materials carried by vehicles or transported in cargo containers. RIIDs are a type of handheld radiation detection equipment that can detect radiation as well as identify the specific isotope of the radioactive source. Personal radiation detectors are worn by CBP officials, Coast Guard boarding teams, and other law enforcement agents. Unlike portal monitors and RIIDs, personal radiation pagers function primarily as personal safety devices to alert the individual wearer when he or she is exposed to an increased level of radiation. Under certain circumstances these devices also could be used to detect smuggled nuclear material. However, they can only indicate variations in the general level of radiation and their sensitivity is limited because of the small size of the detector. Therefore, they should not be relied upon for that purpose. All radiation detection devices have limitations in their ability to detect and identify nuclear material. Detecting attempted nuclear smuggling is difficult because many sources of radiation are legal and not harmful when used as intended. These materials can trigger alarms—known as nuisance or innocent alarms—that may be difficult to distinguish in some cases from alarms that could sound in the event of a true case of nuclear smuggling without a thorough secondary inspection. Nuisance or innocent alarms can be caused by patients who have recently had cancer treatments, a wide range of cargo with naturally occurring radiation (e.g., fertilizer, ceramics, and food products), and legitimate shipments of radiological sources for use in medicine and industry. Additionally, detecting actual cases of illicit trafficking in weapons-useable nuclear material is complicated: one of the materials of greatest concern in terms of proliferation—highly enriched uranium—is among the most difficult materials to detect because of its relatively low level of radioactivity. DNDO is currently testing the next generation of radiation portal monitors—the advanced spectroscopic portal monitor, or ASP. We have repeatedly raised concerns about DNDO’s efforts to develop and test ASPs. Specifically, we found that testing of ASPs at DOE’s Nevada Test Site did not represent an objective or rigorous assessment because DNDO used biased test methods that enhanced the apparent performance of the ASPs and did not test the limitations of the ASPs’ detection capabilities. In 2008, we also found that DNDO’s cost estimate to equip U.S. ports of entry with radiation detection equipment is unreliable because it omits major project costs and relies on a flawed methodology. Furthermore, the agency is no longer following the original project execution plan, the scope of the agency’s current ASP deployment strategy has changed, and DNDO now plans a much more limited deployment of the ASP than initially proposed. The current ASP testing is expected to continue into 2009. DNDO’s ultimate goal is to expand radiological and nuclear detection capabilities to areas identified as vulnerable to nuclear smuggling. To that end, in 2005, DNDO identified critical gaps in domestic efforts to prevent and detect radiological and nuclear smuggling, including, but not limited to: (1) land border areas between ports of entry into the United States, (2) aviation, and (3) small maritime craft. However, DNDO is still in the early stages of developing initiatives to address these vulnerabilities, and it has not clearly articulated a long-term plan for how to achieve its goal of closing these gaps by expanding radiological and nuclear detection capabilities in the time frames identified. Land border areas between ports of entry. The United States has more than 6,000 miles of land border susceptible to illegal crossings by people and vehicles. DNDO began addressing this gap in 2005 and currently is jointly working with CBP to equip Border Patrol agents—who are responsible for patrolling the U.S. borders with Canada and Mexico—with portable radiological and nuclear detection equipment by 2012. Portability is critical to strengthening radiation detection efforts because it expands the opportunity to detect a potential radiological threat should a Border Patrol agent encounter one. To date, as part of a phased approach, DNDO and CBP have tested and evaluated radiation detection equipment and CBP developed operating procedures for using the equipment and resolving radiation alarms along the southern U.S. border. However, similar tests along the northern U.S. border have been postponed. Specifically, DNDO and CBP originally scheduled equipment testing along the southern border for January 2008 and along the northern border for March 2008. However, they did not actually begin testing along the southern border until May 2008. According to a CBP official, DNDO explained that this schedule slip was caused by a delay in selecting the equipment for the test. DNDO told us that it chose to conduct an additional review of commercially available detection equipment before field testing, which caused these tests to be delayed. As a result of preliminary findings from the field tests, DNDO and CBP decided in November 2008 to indefinitely postpone the previously scheduled tests along the northern border. According to these agencies, the preliminary test results indicated that further technological improvements will be necessary before the portable radiation detection equipment can be distributed more widely for use in this environment. Full distribution of equipment along the land border areas between ports of entry is contingent on completing these field evaluations and entails providing detection equipment and operating procedures to all 20 Border Patrol sectors across the United States. Assuming no further schedule and technological delays, the radiation detection equipment to help secure the U.S. land border areas between ports of entry may not be fully in place until fiscal year 2012. According to DNDO, the agency requested a total of $33.6 million in fiscal years 2008 and 2009 for such initiatives, but it has not estimated the total cost for this effort beyond those years. One of DNDO’s roles in supporting the effort to close gaps in the land border area between ports of entry is to procure and supply detection equipment to CBP. However, according to CBP officials, in fiscal year 2008, DNDO did not procure needed radiation detection equipment in a timely manner. Specifically, CBP’s Office of Field Operations—responsible for official ports of entry—and its Office of Border Patrol requested approximately 240 additional RIIDs. However, according to CBP officials, DNDO did not fill its procurement needs. As of November 2008, only 64 of the 240 devices requested had been delivered to CBP. This situation is particularly problematic for the Border Patrol because its agents do not have enough RIIDs to meet their current patrol needs, according to a Border Patrol official. Aviation. Because nuclear weapons and material can be small and portable enough to be carried on most aircraft, CBP, with the support of DNDO, has been working on initiatives to screen all incoming international planes, cargo, and passengers. Although progress has been made on screening international general aviation, many of the other initiatives are either in their initial phases or still on the drawing board and it is unclear how long it will take or how much it will cost to complete these initiatives. In fiscal years 2008 and 2009, DNDO has requested a total of $35 million for aviation-related activities; however, it has not estimated the costs of these initiatives beyond the near term. Since December 2007, CBP has been screening 100 percent of arriving international general aviation aircraft (approximately 400 flights per day) for radiological and nuclear material. According to DNDO officials, such efforts are being included in the strategy for the first time. To assist with the international general aviation initiative, DNDO managed the testing and evaluation of radiation detection devices in close coordination with CBP officials to ensure that the technology and operating procedures would be consistent with CBP’s responsibilities to screen all aircraft arriving from outside the United States. Specifically, in 2008, DNDO, in partnership with CBP, tested portable radiation detection equipment for use in scanning small, medium, and large international general aviation aircraft and assessed whether CBP screening procedures needed to be modified. While CBP has made progress in ensuring that appropriate operating procedures for using the equipment and resolving radiation alarms are established and all international general aviation is screened, its other aviation initiatives have not proceeded as smoothly or have not yet begun. CBP is working with DNDO on an initiative to screen international air cargo for radiological and nuclear material and has chosen Dulles International Airport as the first location for this screening. According to DNDO, this airport was chosen first because it has one gate through which all cargo travels. However, because both international and domestic cargo pass through this gate, the start of operations was delayed until September 2008 due to jurisdictional issues between CBP and TSA—CBP is responsible for screening international cargo for radiological and nuclear material and TSA for scanning domestic cargo for explosives. The two agencies had to reach an agreement allowing CBP to screen all cargo for radiological and nuclear material, regardless of origin. (Fig. 2 shows cargo moving through a stationary radiation portal monitor at Dulles International Airport.) In October 2008, we visited Dulles to observe this operation, including a demonstration of radiation detection capabilities. CBP sent a vehicle containing a small sample of Cesium-137—a radiological material that is considered a highly attractive source for the purpose of a radiological dispersal device, or dirty bomb—through the detection equipment. Cesium-137, which is generally in the form of a powder similar to talc, is highly dispersible. CBP uses this sample to routinely test equipment. However, the detection equipment failed to sound an alarm until the material had passed through it for a third time. CBP officials told us that this source material triggered an alarm during a test earlier that week, and attributed the problems with this demonstration to either the shielding of the source material by the vehicle or to a weak signal given off by the material because it may be nearing the end of its usable life. CBP plans to have cargo screening at the 30 U.S. airports that account for 99 percent of incoming international cargo by 2014. However, because cargo processing at Dulles is simpler than at other airports, due to the configuration of its cargo area, CBP officials acknowledged that their plan is very ambitious. According to CBP officials, expanding the cargo screening initiative to larger, more complicated airports will require CBP to devise different operational procedures and possibly develop new detection technology. DNDO and CBP also plan to cooperate with other federal agencies on an initiative to screen passengers and baggage from international commercial flights. However, according to DNDO, it is still working on the basic approach for this initiative, such as where to locate passenger and baggage scanning equipment in an airport. To date, DNDO and CBP have initiated a pilot program for screening international passengers and their baggage at airports. In fiscal year 2008, they completed site surveys at five airports in order to develop requirements for testing planned for fiscal year 2009. Current aviation initiatives focus on radiation detection both prior to departure from a foreign location and after the aircraft lands in the United States. Ultimately, DNDO and CBP would like the detection of radiological and nuclear materials to occur as far outside of U.S. borders as possible— at the point of departure instead of the point of entry. For example, rather than screening international general aviation once the plane arrives in the United States, it would be preferrable to screen the plane at the country from which it departs. However, such a strategy would rely on negotiating agreements with foreign governments, which could prove challenging given concerns about sovereignty and rights of access. Furthermore, DNDO officials were uncertain when and if agreements could be reached with enough foreign governments to establish a more effective aviation strategy. As of December 2008, DHS has concluded agreements with Ireland and Aruba to include radiological and nuclear screening of international general aviation aircraft in these countries. Small maritime vessels. A Coast Guard analysis revealed that small boats pose a greater threat for nuclear smuggling than transporting illicit material in shipping containers, according to a senior Coast Guard official. These small boats, which include maritime craft less than 300 gross tons, number in the millions. DNDO efforts related to radiological and nuclear detection on small maritime vessels are part of a larger DHS effort—the Small Vessel Security Strategy. This strategy recognizes a number of risks that small vessels pose, including serving as a vehicle to smuggle weapons or terrorists into the United States, and using the boat itself as an improvised explosive device. DHS is working to develop a Small Vessel Security Strategy implementation plan, which will, among other things, identify needed research, development, and testing, and recommend actions for future efforts and put the strategy into action. To address one of the vulnerabilities, DNDO has been working since 2005 with multiple federal agencies, including the Coast Guard and CBP, as well as state and local agencies, to develop and expand capabilities to detect radiological and nuclear materials that could be smuggled on small maritime craft. Coast Guard and CBP are responsible for developing the screening procedures and making decisions about what vessels are to be screened; DNDO provides the radiological and nuclear detection equipment. Coast Guard and DNDO have entered into a Joint Acquisition Strategy to update the current Coast Guard detection technology inventory, as well as to acquire new equipment if necessary. There are a number of challenges associated with radiological detection capabilities in the maritime environment that have limited DNDO’s ability to roll this initiative out widely. Specifically, these agencies have a pilot project underway in Puget Sound, Washington, to field-test equipment and develop standard operating procedures for detecting and interdicting radiological and nuclear materials on small vessels. DNDO chose Puget Sound because of its proximity to Vancouver, Canada, the host of the 2010 Winter Olympics; its military and economic significance; and the large number of commercial and recreational vessels. DNDO is also expanding this pilot to San Diego, California, where it has conducted an initial assessment of the area and briefed officials about the program. DNDO selected San Diego as a pilot location because of its proximity to Mexico, geographic configuration, and many military facilities. DNDO is currently in the first year of a 3-year pilot program; the Puget Sound and San Diego operations are scheduled to be completed in December 2010. According to DNDO’s data for fiscal years 2008 and 2009, the agency requested $14.7 million for the pilot project and a total of $54.2 million for these and other maritime initiatives. One significant challenge in developing maritime radiological and nuclear detection efforts is sustaining them beyond the original pilot projects; DNDO has not yet developed plans for doing so. In addition to the Coast Guard and CBP, state and local governments play a key role in maritime law enforcement activities. For example, in Puget Sound, the majority of the law enforcement personnel and equipment available for radiological and nuclear detection belong to the 15 state, tribal, and local agencies participating in the pilot. However, these agencies generally have limited resources, making it difficult to expand their mission to include radiological and nuclear detection. Furthermore, these agencies have competing demands and could choose to fund other priorities. Although DNDO is providing these agencies with the initial equipment, support, training, and maintenance during the Puget Sound and San Diego pilots, it is expecting them to seek funding from federal grant programs to sustain these initiatives. For many state and local agency officials we spoke with, the uncertainty of federal resources jeopardizes their ability to continue radiological and nuclear detection activities. According to one local sheriff from Washington state, if funding to maintain and support radiation detection equipment provided during the pilot disappears, his department will not continue radiological and nuclear detection activities. Other state and local agencies participating in the Puget Sound pilot also emphasized the difficulty in keeping personnel trained on detection equipment without additional federal support beyond the current pilot project. Because maritime law enforcement personnel may not frequently need to use the equipment, future training is necessary to ensure that that they maintain their skills. However, without the additional resources currently provided by DNDO, state and local agencies would have difficulty covering the costs associated with ongoing training, including overtime salaries for personnel who have to take on the regular duties of those being trained. Given these state and local concerns, DNDO’s strategy for sustaining such programs appears problematic. According to DNDO officials, sustaining the existing pilot programs will be the responsibility of the local jurisdictions through a well-established federal grants process. Specifically, DNDO anticipates that funding for these programs will come from Homeland Security grants, Urban Areas Security Initiative grants, and the DHS Port Security Grant Program. However, DNDO currently does not have a plan detailing which locations it would target next for the maritime program, nor has it estimated the total cost of this initiative. According to DNDO officials, the office has focused first on just two locations in order to determine whether maritime screening of small vessels for radiological and nuclear material is feasible and to gather lessons learned that can be used to minimize challenges and develop operating procedures for using the radiation detection equipment and resolving radiation alarms in other areas. However, DNDO has not established criteria for assessing the success of this pilot effort to help determine whether it should be expanded to other locations. Should its concept for detecting and interdicting radiological and nuclear material smuggled on small maritime vessels prove feasible, DNDO plans to develop guidance so that state and local law enforcement agencies can implement their own maritime radiological and nuclear detection programs. In addition, unlike radiation detection technology for land or aviation, technology in the maritime environment is relatively undeveloped and poses unique challenges. For example, the level of background radiation in water differs from the level of background radiation on land, which affects the capability of equipment to detect and identify certain types of radioactive material. Furthermore, the equipment needs to be water resistant and designed so that it can be used by agents who need their hands free to board and climb around ships. To date, DNDO has, among other things, tested boat-mounted radiation detectors, detection equipment that can be carried in a backpack, and handheld radiological detection and identification devices that can withstand exposure to water. Nevertheless, the effectiveness of radiation detection equipment in the maritime environment remains limited. For example: The boat-mounted radiation equipment is unable to indicate the direction of the radioactive material causing the alarm, making it difficult to identify the potential threat in an open sea with many small vessels, according to a local law enforcement officer we spoke with. CBP Air and Marine officers also expressed uncertainty about how boat-mounted detection equipment, which has been tested only in a fairly controlled lake environment, will work in a more turbulent open sea environment, where it is more difficult to detect and determine radioactive material. DNDO officials told us that a fiscal year 2009 initiative will assess boat-mounted detection systems in real-world environments. The backpack radiation equipment works best when physically worn by someone, according to a DNDO official. However, Coast Guard officers already have a difficult time maneuvering through the small passageways on boats with the current equipment they must wear. (Fig. 3 shows a Coast Guard officer wearing standard boarding team equipment, without a backpack.) The backpacks have the potential to further decrease officers’ maneuverability and their ability to inspect boats. If a hand-held radiological detection and identification device is accidentally dropped overboard, it does not float and can withstand being submerged under only 30 feet of water. These handheld devices cost $15,000 per unit, making them expensive to replace. DNDO has also delayed in rolling out radiation detection equipment to the agencies engaged in its maritime initiatives. Although federal, state, and local agencies in the Puget Sound pilot determined their equipment needs in April 2008 and submitted this request to DNDO, they have received little equipment. According to a DNDO official, DNDO was slow to process the order and once it was placed, the manufacturer was unable to fill the order in a timely manner and did not immediately notify DNDO of this delay. According to DNDO, once it was notified of the delay from the vender, it borrowed units from the Coast Guard so that the pilot could proceed. Of the 362 personal radiation detectors ordered, 95 had been delivered as of October 2008. However, the order may not be completely filled until early 2009. DNDO, in coordination with the Coast Guard, the New York City Police Department (NYPD), and other state and local agencies, is also engaged in maritime nuclear detection activities in the New York City area as part of the Securing the Cities initiative. This initiative is intended to enhance protection and response capabilities in and around high-risk urban area by designing a system to detect and interdict illicit radioactive materials that may be used as a weapon. As with the Puget Sound pilot, the agencie involved in the initiative’s maritime activities do not presently have enough equipment to meet their needs, according to officials particip ating in the Securing the Cities initiative. For example, the Coast Guard has one boat, with radiation detection equipment provided by DOE, and the NYPD has two boats with radiation detection equipment. However, NYPD officials told us that the NYPD has another 28 boats that need to be equipped with radiation detection technology and these equipment purchases depend on the availability of future federal grant funding. lthough DNDO has no authority over other federal agencies’ programs to A combat radiological and nuclear smuggling overseas, it has exchanged lessons learned with DOD, DOE, and State and provided technical expertise on radiological and nuclear detection equipment. Howeve r, most of DNDO’s efforts are modest in scope and reflect the fact that DOD, DOE, and State have well-established programs to combat nuclear smuggling overseas. DNDO officials told us that their efforts to develop a more comprehensive approach to global nuclear detection are very comple because each agency has a distinct area of authority. Areas in which DNDO has been able to contribute to other agencies’ overseas progra include the following: DOD. DNDO has been working with DOD, among other agencies, to develop radiation detection equipment and to minimize duplication o f research efforts. For example, DNDO and DOD are collaborating throu the National Institute for Standards and Technology to develop interagency standards and common practices for testing and eva radiation detection systems. These standards will be threat based and wi state the minimum detection capability that certain radiation detection systems should have to perform their purpose. D addressing gaps in DOE’s overseas radiation detection programs that are similar to those DNDO has been working on domestically. For example, DOE’s Second Line of Defense program had focused more on placing fixe detectors at particular sites. However, as a result of DOE’s review of its existing nuclear detection programs and its discussion with other agencies, including DNDO, DOE officials told us the agency has be work with law enforcement officials in other countries to improve detection capabilities for the land between ports of entry. DOE officials OE. DNDO has been collaborating with DOE to develop strategies for gun to said they also are considering assisting other countries with the implementation of mobile detection technologies, similar to thos domestically by CBP. DNDO and DOE also are exchanging lessons learn from both agencies’ efforts to screen aviation, specifically the development of standard operating procedures for using hand-held radiation detection equipment. tate. DNDO is working with State on the Global Initiative to Combat S Nuclear Terrorism—which provides 75 countries with an opportunity t integrate resources and share information and expertise on nuclear o smuggling prevention, detection, and response—to develop model guidelines that other countries can use to establish their own nucle detection strategies. DNDO sponsored a Global Initiative workshop in March 2008 to help 25 countries develop a draft of the model guidelines document. This document, among other things, is intended to raise awareness about the elements of an effective nuclear detection strat and build consensus for its implementation. In addition, DNDO personne have traveled with officials from State to countries involved in the department’s Nuclear Smuggling Outreach Initiative, a program to a ssess and improve the capabilities of countries to combat smuggling of nuclear and radiological materials, in order to provide advice to these countries on how to build their own capabilities to counter nuclear smuggling. DNDO also helped State develop questions that these countries could use to assess their own vulnerabilities. In addition to providing the U.S. government agencies engaged in international nuclear detection programs with knowledge gained f domestic nuclear detection initiatives, DNDO has been directed by thes agencies to develop an inventory of radiation detection equipment deployed overseas. In a March 2006 report, we recommended that S tate, working with DOD and DOE, create, maintain, and share a comprehensiv list of all U.S.-funded radiation detection equipment provided to foreign governments. In December 2006, State, in coordination with DOD, DOE , and DHS, issued a strategic plan giving DNDO responsibility for gathering data on the deployment of radiation detection equipment overseas, including portal monitors and handheld devices. As part of DNDO’s efforts to develop the global strategy for nuclear detection, it is charge d with maintaining this database, share information from it at interagency e meetings, and provide other relevant government agencies with access to the database. According to DNDO, it collected information on radiation detection equipment from DOD, DOE, and State most recently in 2007 and is updating some of the information in 2008 and 2009. A DNDO official also said that the agency analyzed these data to determine the proximity of radiation detection equipment to areas with nuclear facilities. HS, DOD, DOE, and State budgeted a total of $2.8 billion in fiscal year 2007 for the programs included in the global strategy for radiological and nuclear detection, according to DNDO. Nearly the same amount of funds— $1.1 billion—were budgeted for programs and activities to (1) combat nuclear smuggling overseas and (2) detect nuclear materials primarily a U.S. borders and ports of entry; a smaller portion was budgeted for cross- cutting programs. By agency, the majority of 2007 budgeted funds for the global strategy for radiological and nuclear detection went to DOE— 62 percent. Although DNDO has detailed information on the budgets fo r various security and detection programs, it is not using this information t coordinate with other agencies on the overall strategic direction of these detection efforts. According to our analysis of DNDO’s data, of the approximately $2.8 billion agencies budgeted in fiscal year 2007, about 39 percen t went to combat nuclear smuggling overseas, while 41 percent went to programs to detect and secure radiological and nuclear materials at and within U.S. borders; another 20 percent went to programs that cut across foreign an domestic activities. Figure 4 shows budgets by program focus and by agency. Table 1 shows the allocation of these funds by programs to combat nuclear smuggling overseas and within the United States. ajority of the budget for programs to combat international nuclear Programs to combat nuclear smuggling overseas. DOE received the m smuggling—$737 million (or approximately 67 percent) of the $1.1 bill total in fiscal year 2007. For all the agencies, the international program s are largely intended to secure nuclear and radiological materials at their source or detect them in transit. By agency, key programs include the following: DHS budge provides multidisciplinary teams—agents, intelligence analysts, and CBP officers—to selected foreign seaports in order to protect the United Sta from potential terrorist attacks using maritime cargo shipments and to help secure the primary system of containerized shipping for international trade. Another DHS program, the Secure Freight Initiative, is importa to the global strategy for nuclear detection because it provides foreign countries with radiation scanning systems for containers at ports of departure and communications infrastructure to transmit radiological a nuclear material data to the United States. This program is designed t the feasibility of 100 percent scanning of U.S.-bound container cargo at seven overseas seaports and involves the deployment of integrated scanning systems, consisting of radiation portal monitors and RIIDs. ted $139 million for its Container Security Initiative, which At DOD, 98 percent of its budget for combating nuclear smuggling o Reduction Program—a program that protects national security by reducing the present threat and preventing the proliferation of weapons o mass destruction. The Nuclear Weapons Safety and Security Progr a budget of $92.8 million to enhance Russia’s security systems at nuclear weapons storage sites and capability to account for and track nuclear weapons scheduled for dismantlement. The Proliferation Prevention Initiative had a budget of $32.4 million to help countries of the former Soviet Union prevent the smuggling of weapons of mass destruction o r related materials across their borders; this initiative provides equipmen logistics support, and training. Finally, the Nuclear Weapons verseas went to three programs that are part of the Cooperative Threat t, Transportation Security Program had a budget of $32.7 million to enhance safe and secure transport of nuclear weapons from operationa l sites and storage areas to enhanced security storage sites and dismantlement sites throughout Russia. At DOE, two progra b Protection, Control, and Accounting Program had a budget of $414 million. This program provides support to the Russian Feder and other countries of the former of Soviet Union to secure nuc weapons and weapons material that may be at risk of theft or diversion from their current location. Second, DOE’s Second Line of Defense— a cooperative assistance program for deploying radiological and nuclear detection systems and associated training at international border crossings, airports, and seaports—had a budget of $183 million. ms account for about 81 percent of the department’s udget to combat nuclear smuggling overseas. First, the Materials State budgeted approximately $42 million for its Export Control a R weapons of mass destruction, their delivery systems, and conventiona weapons by assisting recipient countries in detecting, deterring, preventing, and interdicting illicit trafficking in weapons and weapons- related items. The program is also designed to provide a wide ra nge of assistance and support, such as offering licensing and legal and regulato technical workshops, and providing detection equipment and training for border control and enforcement agencies. elated Border Security program to help stem the proliferation of Programs to combat radiological and nucl U DOE received most of the budget for programs to combat radiological and nuclear smuggling domestically—$871 million (or 76 percent) of the $1.1 billion budgeted in fiscal year 2007. By agency, key programs include the following: ear smuggling at and within .S. borders. As with programs to combat nuclear smuggling overseas, At DHS, the Advanced Spectroscopic Portals/Radiological Portal Monitors program had a acquisition, and deployment of these technologies to ports of entry. The Securing the Cities initiative, with a fiscal year 2007 budget of $8.47 million, is intended to enhance protection and response capabilities in a around the nation’s highest risk urban areas. Starting with New York City the department will work with state and local officials to develop urb an and regional deployment and operations strategies, identify appropriate detection equipment, establish the necessary support infrastructure, and develop incident management and response protocols. In addition, DHS budgeted $1.1 million for the West Coast Maritime Radiation Detection Program, which is evaluating general radiation detection capabilities to be deployed aboard Coast Guard or other law enforcement vessels that participate in vessel-boarding activities. budget of $209 million to provide systems development, DOD budgeted $1.6 million for domestic radiation detection programs with $1.1 million directed to its Radiation program uses the best available detection technologies to prevent or mitigate the effects of radiation exposure on Pentagon personnel and structures. The remaining funds were budgeted for the department’s Unconventional Nuclear Warfare Defense, which installed radiologica nuclear sensors at Camp Lejeune. At DOE, $846 million (or 97 percent) of the $871 million budgeted to combat nuclear smuggling went to S ecurity Program, which is intended to protect DOE’s critical assets— nuclear weapons, nuclear weapons components, special nuclear mate classified information, and DOE facilities from such threats as terrorist activity, theft, diversion, loss, or unauthorized access. the Nuclear and Radiological Materials Cross-cutting activities that simultaneously support multiple program DHS had nearly half of the $577 million budgeted for cr activities—about $271 million. By agency, key programs include the following: s. At DHS, the Human Portable Radiation Detection System had a budg $18.1 million to support the development of detection systems and the acquisition of advanced, hand-held radiation detectors. In addition, DHS budgeted about $11 million for the Technical Reachback Program, which provides technical assistance to help personnel operating radiation detection equipment identify the source that triggered the alarm. Finally, the Joint Analysis Center had a budget of $1.75 million to collect and notify appropriate federal, state, and local agencies as early as possi ble of radiological and nuclear threats and coordinate technical support to federal, state, and local authorities. DOD budgeted $94.5 million of the $137 million of its funds budgeted for cross-cutting programs to support it s Weapons of Mass Destruction Civil Support Teams. These 55 teams are deployed nationwide to support civil authorities during domestic chemical, biological, radiological, nuclear, and high-yield explosives incidents. In addition, the Nuclear Detection Technologies Division of DOD’s Defense Threat Reduction Agency was budgeted $28 million in fiscal year 2007 to develop technologies to detect, locate, and identify radiological and nuclear weapons and materials to support search and interdiction missions. In July 2007, Congress passed the “Implementing Recommendations of the 9/11 Commission Act of 2007,” which required DHS, DOD, DOE, the Department of Justice, and the Director of National Intelligence to coordinate the preparation of a Joint Annual Interagency Review of the Global Nuclear Detection Architecture. DNDO collected these program- level budget data in response to a statutory requirement that select agencies, including DHS, DOD, DOE, and State, annually assess their capacity to implement their portion of the global nuclear detection strategy. DNDO issued this report in June 2008 after gathering data from relevant agencies on programs and budgets in support of each layer of the global nuclear detection effort. The report provides an overview of the global nuclear detection strategy and discusses programs and budgets for combating nuclear smuggling domestically and overseas. DNDO has collected these data since 2006. It used these data to identify areas in which new domestic initiatives may be needed. For example, in the most recent review, DNDO said that programs focused on the land border areas between ports of entry, aviation, and maritime pathways will need to grow substantially in the years ahead. However, the Joint Annual Interagency Review does not serve as a tool to analyze nuclear detection budgets across agencies in order to ensure that the level and nature of resources devoted to combating nuclear smuggling are going toward the highest priority gaps and are aligned with the overall strategic direction of global detection efforts. Agency officials said that their program decisions and budget requests are primarily guided by their agencies’ mission-related needs, rather than by the overarching goals and priorities of a broader, more comprehensive global detection strategy. In addition, DOD, DOE, and State officials told us that the information in the review is primarily used to provide agencies and Congress with an overview of already established programmatic roles and responsibilities across the range of programs to combat nuclear smuggling. Finally, agency officials told us that they do not use the specific budget data included in the Joint Annual Interagency Review to help determine whether funding levels are reasonable in terms of individual agency or governmentwide needs. In July 2008, we testified on the preliminary findings of our work. Specifically, we found that while DNDO’s initiatives are a step in the right direction for improving the current efforts to combat nuclear smuggling, they are not being undertaken within the larger context of an overarching strategic plan. Although each agency with a role in combating nuclear smuggling has its own planning documents, an overarching strategic plan is needed to guide these efforts to address the gaps and move to a more comprehensive global nuclear detection strategy. Our past work has discussed the importance of strategic planning. We have reported that strategic plans should clearly define objectives to be accomplished, identify the roles and responsibilities for meeting each objective, ensure that the funding necessary to achieve the objectives is available, and employ monitoring mechanisms to determine progress and identify needed improvements. For example, such a plan would define how DNDO would monitor the goal of detecting the movement of radiological and nuclear materials through potential smuggling routes, such as small maritime craft or land border areas in between ports of entry. Moreover, this plan would include agreed-upon processes and procedures to guide the improvement of the efforts to combat nuclear smuggling and coordinate the activities of the participating agencies. DNDO agreed with the need for an overarching strategic plan and believes that many elements of such a plan exist in DHS and other agency documents, but noted that solutions for addressing gaps and vulnerabilities are still under development. As of December 2008, DNDO had not yet established detailed plans to address those gaps and vulnerabilities, nor had it integrated all the plan elements into an overarching strategic plan, as we recommended. Preventing terrorists from obtaining and smuggling radiological or nuclear material into the United States is a national security imperative. DNDO has an important and complex task in this regard—develop a global nuclear detection strategy to combat nuclear smuggling and to keep radiological and nuclear material and weapons from entering the United States. However, DNDO has not yet taken steps to work with DOE, DOD, and State to develop an overarching strategic plan, as we recommended in July 2008. Given the national security implications and urgency attached to combating nuclear smuggling globally, we continue to believe that such a plan needs to be established as soon as possible. Without an overarching plan that ties together the various domestic and international efforts to combat nuclear smuggling and clearly describes goals, responsibilities, priorities, resource needs, and performance metrics, it is unclear how the strategy will evolve or whether it is evolving in the right direction. While DNDO has gathered useful program and budget information in its Joint Annual Interagency Review, we believe it has missed an opportunity to use this information as a basis for working with other agencies—most notably DOD, DOE and State—to identify future priorities, and analyze and help determine future resource allocations. We are not suggesting that any of the agencies participating in U.S. efforts to combat nuclear smuggling cede authority to manage its own programs. However, this information could be used as a tool to better ensure that limited resources are leveraged to promote program effectiveness and avoid potential duplicative efforts. By doing so, we believe the federal government will be better positioned to take a holistic view of global nuclear detection and develop a plan that helps safeguard investments to date, more closely links future goals with the resources necessary to achieve those goals, and enhances the agencies’ ability to operate in a more cohesive and integrated fashion. DNDO, for its part, has helped highlight the need to address critical gaps in efforts to combat nuclear smuggling domestically. It also has made some progress in developing and supporting initiatives to close these gaps. However, remaining challenges are great, funding is uncertain, time frames are unclear, and the technology may not be available any time soon to bridge some of these vulnerabilities. Without a plan to guide development of initiatives to address domestic gaps, it is unclear how DNDO plans to achieve its objectives of closing these critical gaps, particularly in three key areas—land border areas between ports of entry, aviation, and small maritime vessels. Maritime detection efforts pose unique technological and operational challenges. DNDO’s maritime pilot is a sensible first step to addressing this vulnerability. However, DNDO should establish criteria for assessing the effectiveness of this effort and use the result of this evaluation to determine the feasibility of expanding this program beyond the pilot stage. Should the pilot prove worthy of replicating, we believe that DNDO will need to engage in additional planning to identify next steps to help ensure that it will be able to roll the program out to other locations in a timely manner. To help ensure that U.S. governmentwide efforts to secure the homeland are well coordinated, well conceived, and properly implemented, we reiterate the recommendation we made in our July 2008 testimony to develop an overarching strategic plan. We also recommend that the Secretary of Homeland Security take the following four actions: In coordination with the Secretary of Defense, the Secretary of Energy, and the Secretary of State, use the Joint Annual Interagency Review to guide future strategic efforts to combat nuclear smuggling. This effort should include analyzing overall budget allocations to determine whether governmentwide resources clearly align with identified priorities to maximize results and whether there is duplication of effort across agencies. Develop a strategic plan for the domestic part of the global nuclear detection strategy to help ensure the future success of initiatives aimed at closing gaps and vulnerabilities. This plan should focus on, among other things, establishing time frames and costs for the three areas of recent focus—land border areas between ports of entry, aviation, and small maritime vessels. Develop criteria to assess the effectiveness, cost, and feasibility of the maritime radiological and nuclear pilot program. Should the decision be made to expand the maritime radiological and nuclear program beyond the pilot, undertake additional planning to identify next steps, including how and where a broader strategy would be implemented, what technology would be needed, what organizations should be involved, and how such efforts would be sustained. We provided a draft of this report to DHS, DOD, DOE, and State for comment. DHS and DOD provided written comments, which are presented in appendixes I and II, respectively. DOE and State provided technical comments which we incorporated as appropriate. DOD concurred with the recommendation that the Secretary of Homeland Security, in coordination with the Secretary of Defense, Secretary of Energy, and Secretary of State, use the Joint Annual Interagency Review to guide future strategic efforts to combat nuclear smuggling. DOD stated that greater use could be made of the review associated with the development of this annual report to guide U.S. efforts to combat nuclear smuggling. DHS did not directly comment on our recommendations but noted that the recommendations aligned with DNDO’s past, present, and future actions. The department agreed, however, that planning can always be improved and that the office will seek to continue to do so. DHS also reiterated that it agreed with a recommendation that we made in our 2008 testimony on the need for an overarching strategic plan to guide future efforts to combat nuclear smuggling and move toward a more comprehensive global nuclear detection strategy. In its comments, DHS noted that work had already begun on an overarching plan. DHS also pointed to what, in its view, were a number of shortcomings in the draft report. Specifically, the department believes that we did not give enough credit to DNDO’s strategic planning efforts. The department asserted that we did not clearly and adequately explain the background and context of DNDO’s efforts to develop a global strategy, what has been accomplished so far, what challenges it faces, and what remains to be done. Finally, DHS asserted that the draft contained a number of inaccuracies and omissions that make it less reliable and useful than it could be. DHS also provided a number of more detailed comments on specific issues presented in the draft report. We have addressed those comments in our detailed responses and incorporated changes where appropriate. First, we found no evidence that DNDO engaged in long-term strategic planning to carry out its initiatives to address gaps in domestic nuclear detection. During the course of our review, we specifically asked DNDO for strategic planning documents used to develop and implement a global radiation detection strategy. In response, DNDO officials referred to the more than 4,000 pages of documents provided and stated in their comments on the report that this material was the basis for their plan. Although this information documented the efforts put forth by DNDO in developing its initial strategy and identifying gaps and vulnerabilities, it did not constitute a plan with clear goals, time frames, and costs. More specifically, DNDO commented that we did not mention the DNDO-Coast Guard Joint Acquisition Strategy as a cornerstone of its small maritime strategy, that we only mention DHS Small Vessel Security Strategy in passing in the back of the report, and that we do not mention the DHS Small Vessel Security Strategy implementation plan. We revised the report to include references to the Joint Acquisition Strategy and the implementation plan. However, we disagree with DNDO’s characterization that we failed to give the Small Vessel Security Strategy adequate attention. In fact, the report describes the strategy and how it relates to efforts to combat nuclear smuggling. We would also point out, however, that these planning documents cited by DNDO only apply to one specific critical gap area identified—the small maritime vessel threat. Second, we disagree with the department’s comment that we did not clearly and adequately explain the background and context of DNDO’s efforts to develop a global strategy, what has been accomplished so far, what remains to be done, and what challenges it faces. Specifically, our report contains an overview of DNDO’s initial approach in developing a global strategy, including providing information on steps DNDO has taken to identify potential pathways for radiological and nuclear material. In addition, the report identified some of DNDO’s accomplishments in specific areas, such as working with the other agencies to develop new radiation detection technologies. Furthermore, we recognize that DNDO has helped highlight the need to address critical gaps in efforts to combat nuclear smuggling, and we have reported DNDO’s key initiatives to improve radiation detection capabilities in areas that had previously received insufficient attention—land borders between the ports of entry, aviation, and maritime. The report also recognizes the many challenges that DNDO faces as it attempts to enhance nuclear detection capabilities, including technological limitations of detection equipment and sustaining initiatives beyond their pilot phase. We also believe that DNDO needs to undertake additional planning so that it can be in a better position to determine the work that remains. That is why our recommendation to develop a strategic plan for the domestic part of the global nuclear detection strategy is so crucial. Finally, where appropriate, we have incorporated a variety of technical comments provided by DHS to better characterize DNDO’s role and accomplishments, and the challenges it faces in developing a global nuclear detection strategy to combat nuclear smuggling. We do not believe that any of the comments that we incorporated represented a serious flaw in the content or quality of the draft report and in fact improve the technical accuracy of the report. In the few areas where DHS commented that we were factually incorrect, we have made minor changes to the report to clarify our point, to correct technical inaccuracies, or to avoid confusion. Where appropriate, we have provided additional information to further support our point, in some cases using information contained in DHS’s letter. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to interested congressional committees and Members of Congress, the Secretary of Homeland Security, the Secretary of Defense, the Secretary of Energy, and the Secretary of State. The report will also be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. The following are GAO’s comments on the Department of Homeland Security’s letter dated January 14, 2009. 1. We agree with DHS that deploying or purchasing ineffective equipment would be inappropriate. We also agree with DHS that, as we reported, field evaluations are not complete and that the necessary equipment may not be deployed until 2012. We discuss the reasons for these delays on page 14 of the report. In addition, we disagree with DHS’s assertion that Border Patrol told us that lessons learned from field evaluations “would help avert large amounts of taxpayer funds for equipment that would not have been effective.” We do not dispute the importance of spending taxpayer dollars wisely; however, it was not expressed to us as such until this letter. 2. We added language on the highlights page to clarify that CBP is also responsible for putting radiation detection equipment in place. 3. We discuss in more depth the technological limitations of detection equipment and sustaining detection efforts on pages 19 through 21 of the report. 4. DHS commented that we have understated the value, importance, and challenge of technology development efforts needed to arrive at effective solutions. We disagree. We acknowledge these challenges in the body of the report and discuss some of the measures DNDO has taken to develop needed equipment. Furthermore, we disagree with DNDO’s statement about our findings regarding the status of sustainability planning. We describe at more length on pages 19 and 20 of the report our concerns with DNDO’s efforts to sustain maritime initiatives into the future. 5. While we do not mention the Phased Deployment Implementation Plan by name, on page 14 we state that DNDO and CBP are jointly working on measures to better secure the border areas between ports of entry and that these efforts are part of a phased approach. We have added clarifying language to the paragraph on page 4 to more clearly delineate the different roles CBP and DNDO play in this regard. Furthermore, while we do not disagree with taking a phased approach, DNDO has not kept to its original schedule and if such delays continue, it is uncertain whether DNDO and CBP will meet their original goal of full deployment of equipment by 2012. 6. We have modified the text on page 16 to include a reference that efforts to screen aviation for radiological and nuclear materials are being included in the strategy for the first time. 7. We have modified the language on page 5 to clarify the roles and responsibilities of DNDO and CBP. 8. DHS may have misunderstood the point we were making concerning maritime screening as compared with land and aviation screening. We agree that non-port of entry screening will require modifications to existing screening operations and new equipment. However, we were told that maritime screening posed unique challenges, which we have documented on pages 18-21 of this report. 9. We disagree with DHS that the conclusions we reach regarding the maritime program are incorrect. Although DHS comments that our conclusions are incorrect, DHS does not dispute the facts we present. Namely, DNDO has not established criteria for assessing the success of pilot efforts and it has no plan detailing which locations it would target next. Furthermore, during the course of our work we heard repeated concerns about the sustainability of the maritime radiological and nuclear screening from state and local law enforcement. Specifically, we asked the maritime mission area manager if a sustainability plan existed and we were told no. After our visit to Puget Sound, we received an e-mail from the manager stating DNDO would begin to develop a sustainability plan should the decision be made to continue the initiative. 10. We understand the role of grants in funding these types of activities and agree with DHS that, according to DNDO, grants are the primary mechanism it plans to rely on for sustaining radiological and nuclear detection activities in the maritime environment. We agree with DNDO efforts to work with the Coast Guard to adapt the Maritime Security Risk Assessment Model to accommodate more explicitly radiological and nuclear detection challenges. However, we maintain our concern that DNDO does not have any detailed plans, including how and where a broader strategy would be implemented, what technology would be needed, what organizations should be involved, and how such efforts would be sustained for this important national security issue. 11. DNDO incorrectly asserted that we did not recognize its contributions to international efforts. On page 23 of the report we acknowledged DNDO’s efforts to look for opportunities to work with other agencies to help strengthen their radiological and nuclear detection efforts, despite the fact that these programs to combat nuclear smuggling are well established and are under the purview of another agency. 12. DNDO has misunderstood the reference to its annual assessment of the global nuclear detection strategy and we believe the text that now appears on page 6 is consistent with our discussion later in the report. Our discussion on page 6 focuses on the global strategy, encompassing radiological and nuclear detection activities across all relevant government agencies. The reference DNDO makes to text later in the report focuses specifically on actions taken by DNDO to enhance domestic detection capabilities. However, we have modified the language to be clearer about what is being discussed in each place. We acknowledge that DNDO does not have authority over the budgets of other agencies and we would not advocate for such authority to be provided to it. However, DNDO is responsible for enhancing and coordinating federal, state, and local efforts to combat nuclear smuggling domestically and overseas. We believe that the analysis we are recommending—that DNDO undertake using data collected as part of the Joint Annual Interagency Review—is consistent with this requirement. 13. We recommended that DNDO develop a strategic plan to guide the development of a more comprehensive global nuclear strategy and delineated what such a plan should contain, including clearly defined objectives, roles, and responsibilities for meeting the objectives; necessary funding; and monitoring mechanisms to determine progress in meeting goals. However, DNDO has not yet produced such a strategic plan. We acknowledge that combating nuclear smuggling on a global scale is a large and complex undertaking. We repeatedly asked DNDO for detailed plans, containing the elements described above, but did not receive any. 14. We have modified the text on page 12 to recognize the role of the Nuclear Regulatory Commission. 15. DNDO commented that portal monitors can also be used to monitor pedestrians, but according to CBP, it does not currently use portal monitors for this purpose. However, we have modified the text to reflect that portal monitors are used for screening cargo containers. With regard to the use of pagers to detect smuggled nuclear material, we have reported in the past on the limitations of using these devices and that pagers should not be relied upon to detect smuggled nuclear material. 16. None of the radiation detection devices discussed in this report use the active interrogation techniques cited by DHS. 17. DHS commented that including a paragraph on ASPs (now on page 13) was beyond the scope of this audit and should be removed from this report. The scope of our review is presented on pages 3 and 4 of the report. As such, we agree with DHS that our review did not include an assessment of DNDO’s efforts to test and procure ASP technology. However, several prior GAO reports have found significant problems with DNDO’s work in this area. Reporting the results of our prior work in the background of this report is appropriate and germane because portal monitors are a key component of the global nuclear detection strategy. 18. DHS commented that our findings on DNDO’s lack of long-term plans are misleading and suggest DNDO has no plans or strategies. We agree that DNDO has identified gaps and vulnerabilities and has taken some steps to address these, including jointly working with CBP as mentioned on page 14 of our report. However, DHS does not dispute our finding that it has not developed a detailed plan, which clearly conveys the goals, responsibilities, resource needs, and performance metrics needed to further its detection efforts. Identifying gaps and initiating programs are positive steps toward enhancing detection capabilities, but these efforts alone do not constitute a long-term plan. Without a detailed, documented plan, DNDO will be unable to determine whether these new programs are actually succeeding and addressing the identified gaps. 19. We believe DHS had misconstrued our description of efforts to implement radiological and nuclear screening at the border areas in between official ports of entry. We acknowledge that there are a number of challenges associated with implementing portable detection equipment for use in the field and appreciate DNDO and CBPs efforts to develop this capability. However, the fact remains that DNDO has not kept to its original schedule, and if such delays continue, it is uncertain whether DNDO and CBP will meet their original goal of full deployment of such equipment by 2012. 20. Our description of the procurement challenges faced by DNDO and CBP is an accurate summary of the information we were provided. One of DNDO’s primary roles is to test and procure needed radiological and nuclear detection equipment for use by CBP and other agencies. We were informed by CBP that it did not receive the equipment it had originally ordered in the agreed upon time frames. Regardless of whether the equipment was for use at an official border crossing or for use by Border Patrol officers in the field, the needed equipment was not procured as requested. In CBP’s technical comments on a draft of this report, it stressed that its radiological and nuclear detection equipment procurement funding was handed over to DNDO in 2006. CBP further stated that it believes that the most effective way to procure commercial off-the-shelf equipment is for CBP to have its own radiation and nuclear equipment budget. 21. We have modified the text on pages 15 through 17 to more clearly delineate roles and responsibilities. 22. We have accurately described what we observed during our visit to Dulles International Airport. We were told by CBP officials that the source used in the demonstration was what they use to routinely check the responsiveness of the portal monitor and successfully did just that earlier in the week. 23. We believe DHS has misconstrued our statement about detecting radiological and nuclear material outside the U.S. borders. We are not minimizing the importance of such a goal. In fact, since DNDO believes that it is one of the largest and most important vulnerabilities in the existing detection architecture, it will be even more important that DNDO develop detailed plans for securing such arrangements with as many nations as possible. 24. We have listed on page 18 of the report a number of other factors we were told by DHS officials influenced the decision to pilot the maritime program in the Puget Sound area. In response to the draft report, DHS provided an additional reason for the selection of Puget Sound. 25. We modified the text on page 19 to include the actual funding amount for the pilot project. 26. See comments 9 and 10. 27. DHS provided new information that the Preventative Radiological and Nuclear Detection handbook is under development and that DNDO reached out to state and local entities in its development. This is another positive step. However, as DNDO stated, this handbook is currently in draft, undergoing review, and not yet finalized or in use by any locale. 28. We believe DNDO has incorrectly characterized our finding regarding detection technologies in the maritime environment. On pages 20 and 21, our report delineates some of the technological limitations, as they were presented to us by the users of the equipment. We do not assert that these limitations are insurmountable; only that they exist and should be taken into consideration when crafting a plan for radiological and nuclear detection in the maritime environment. 29. The information contained in the report on page 22 is factually accurate. 30. The information contained on pages 22 and 23 of the report was obtained through interviews with NYPD officials in the presence of a DNDO representative. The primary purpose of the statement was to point out the number of boats with boat-mounted radiation detection equipment in use at the time of our review. 31. While there are other complexities with developing a global nuclear detection strategy, DNDO officials repeatedly told us during the course of our review that a primary complicating factor is the office’s limited ability to influence other agencies’ programs to combat nuclear smuggling. 32. We modified the text on page 25 to reflect DNDO’s efforts to update some of the information. 33. We modified the text on page 25 to reflect the fact that DNDO should coordinate with other agencies on the overall strategic direction of detection efforts. 34. In response to our July 2008 recommendation that DNDO develop an overarching strategic plan, DNDO commented that it has included a request for strategic planning information as part of its efforts to develop the next edition of the Joint Annual Interagency Review. However, DHS did not comment on how this will inform or contribute to an overarching strategic plan to guide future enhancement to global nuclear detection. In addition to the contact person named above, Glen Levis (Assistant Director), Elizabeth Erdmann, Rachel Girshick, Sandra Kerr, Omari Norman, Kim Raheb, Rebecca Shea, Carol Herrnstadt Shulman, and Tommy Williams made key contributions to this report. Nuclear Nonproliferation: Focusing on the Highest Priority Radiological Sources Could Improve DOE’s Efforts to Secure Sources in Foreign Countries. GAO-07-580T. Washington, D.C.: March 13, 2007. Nuclear Nonproliferation: Progress Made in Improving Security at Russian Nuclear Sites, but the Long-term Sustainability of U.S.-Funded Security Upgrades Is Uncertain. GAO-07-404. Washington, D.C.: February 28, 2007. Nuclear Nonproliferation: DOE’s International Radiological Threat Reduction Program Needs to Focus Future Efforts on Securing the Highest Priority Radiological Sources. GAO-07-282. Washington, D.C.: January 31, 2007. Nuclear Nonproliferation: IAEA Has Strengthened Its Safeguards and Nuclear Security Programs, but Weaknesses Need to Be Addressed. GAO-06-93. Washington, D.C.: October 7, 2005. Radiological Sources in Iraq: DOD Should Evaluate Its Source Recovery Efforts and Apply Lessons Learned to Future Recovery Missions. GAO-05-672. Washington, D.C.: September 7, 2005. Nuclear Nonproliferation: U.S. and International Assistance Efforts to Control Sealed Radioactive Sources Need Strengthening. GAO-03-638. Washington, D.C.: May 16, 2003. Weapons of Mass Destruction: Additional Russian Cooperation Needed to Facilitate U.S. Efforts to Improve Security at Russian Sites. GAO-03-482. Washington, D.C.: March 24, 2003. Nuclear Security: DOE and NRC Have Different Security Requirements for Protecting Weapons-Grade Material from Terrorist Attacks. GAO-07-1197R. Washington, D.C.: September 11, 2007. Nuclear Security: Actions Taken by NRC to Strengthen Its Licensing Process for Sealed Radioactive Sources Are Not Effective. GAO-07-1038T. Washington, D.C.: July 12, 2007. National Nuclear Security Administration: Security and Management Improvements Can Enhance Implementation of the NNSA Act. GAO-07-428T. Washington, D.C.: January 31, 2007. Securing U.S. Nuclear Materials: Poor Planning Has Complicated DOE’s Plutonium Consolidation Efforts. GAO-06-164T. Washington, D.C.: October 7, 2005. Nuclear Security: DOE Needs Better Information to Guide Its Expanded Recovery of Sealed Radiological Sources. GAO-05-967. Washington, D.C.: September 22, 2005. Nuclear Security: Actions Needed by DOE to Improve Security of Weapons-Grade Nuclear Material at Its Energy, Science and Environment Sites. GAO-05-934T. Washington, D.C.: July 26, 2005. Securing U.S. Nuclear Materials: DOE Needs to Take Action to Safely Consolidate Plutonium. GAO-05-665. Washington, D.C.: July 20, 2005. Nuclear Security: DOE’s Office of the Under Secretary for Energy, Science, and Environment Needs to Take Prompt, Coordinated Action to Meet the New Design Basis Threat. GAO-05-611. Washington, D.C.: July 15, 2005. Nuclear Security: Federal and State Action Needed to Improve Security of Sealed Radioactive Sources. GAO-03-804. Washington, D.C.: August 6, 2003. Combating Nuclear Smuggling: Challenges Facing U.S. Efforts to Deploy Radiation Detection Equipment in Other Countries and in the United States. GAO-06-558T. Washington, D.C.: March 28, 2006. Combating Nuclear Smuggling: Corruption, Maintenance, and Coordination Problems Challenge U.S. Efforts to Provide Radiation Detection Equipment to Other Countries. GAO-06-311. Washington, D.C.: March 14, 2006. Preventing Nuclear Smuggling: DOE Has Made Limited Progress in Installing Radiation Detection Equipment at Highest Priority Foreign Seaports. GAO-05-375. Washington, D.C.: March 31, 2005. Nuclear Nonproliferation: U.S. Efforts to Help Other Countries Combat Nuclear Smuggling Need Strengthened Coordination and Planning. GAO-02-426. Washington, D.C.: May 16, 2002. Maritime Security: The SAFE Port Act: Status and Implementation One Year Later. GAO-08-126T. Washington, D.C.: October 30, 2007. Maritime Security: Observations on Selected Aspects of the SAFE Port Act. GAO-07-754T. Washington, D.C.: April 26, 2007. Homeland Security: Key Cargo Security Programs Can Be Improved. GAO-05-466T. Washington, D.C.: May 26, 2005. Maritime Security: Enhancements Made, But Implementation and Sustainability Remain Key Challenges. GAO-05-448T. Washington, D.C.: May 17, 2005. Container Security: A Flexible Staffing Model and Minimum Equipment Requirements Would Improve Overseas Targeting and Inspection Efforts. GAO-05-557. Washington, D.C.: April 26, 2005. Combating Nuclear Smuggling: DHS’s Phase 3 Test Report on Advanced Portal Monitors Does Not Fully Disclose the Limitations of the Test Results. GAO-08-979. Washington, D.C.: September 30, 2008. Combating Nuclear Smuggling: DHS’s Program to Procure and Deploy Advanced Radiation Detection Portal Monitors Is Likely to Exceed the Department’s Previous Cost Estimates. GAO-08-1108R. Washington, D.C.: September 22, 2008. Combating Nuclear Smuggling: Additional Actions Needed to Ensure Adequate Testing of Next Generation Radiation Detection Equipment. GAO-07-1247T. Washington, D.C.: September 18, 2007. Combating Nuclear Smuggling: DHS’s Decision to Procure and Deploy the Next Generation of Radiation Detection Equipment Is Not Supported by Its Cost-Benefit Analysis. GAO-07-581T. Washington, D.C.: March 14, 2007. Combating Nuclear Smuggling: DNDO Has Not Yet Collected Most of the National Laboratories’ Test Results on Radiation Portal Monitors in Support of DNDO’s Testing and Development Program. GAO-07-347R. Washington, D.C.: March 9, 2007. Combating Nuclear Smuggling: DHS’s Cost-Benefit Analysis to Support the Purchase of New Radiation Detection Portal Monitors Was Not Based on Available Performance Data and Did Not Fully Evaluate All the Monitors’ Costs and Benefits. GAO-07-133R. Washington, D.C.: October 17, 2006. Combating Nuclear Terrorism: Federal Efforts to Respond to Nuclear and Radiological Threats and to Protect Emergency Response Capabilities Could Be Strengthened. GAO-06-1015. Washington, D.C.: September 21, 2006. Border Security: Investigators Transported Radioactive Sources Across Our Nation’s Borders at Two Locations. GAO-06-940T. Washington, D.C.: July 7, 2006. Combating Nuclear Smuggling: DHS Has Made Progress Deploying Radiation Detection Equipment at U.S. Ports-of-Entry, but Concerns Remain. GAO-06-389. Washington, D.C.: March 22, 2006. Technology Assessment: Securing the Transport of Cargo Containers. GAO-06-68SU. Washington, D.C.: January 25, 2006. Homeland Security: Limited Progress in Deploying Radiation Detection Equipment at U.S. Ports of Entry. GAO-03-963. Washington, D.C.: September 4, 2003. Nuclear Safety: Construction of the Protective Shelter for the Chernobyl Nuclear Reactor Faces Schedule Delays, Potential Cost Increases, and Technical Uncertainties. GAO-07-923. Washington, D.C.: July 19, 2007. Nuclear Nonproliferation: Better Management Controls Needed for Some DOE Projects in Russia and Other Countries. GAO-05-828. Washington, D.C.: August 29, 2005. Cooperative Threat Reduction: DOD Has Improved Its Management and Internal Controls, but Challenges Remain. GAO-05-329. Washington, D.C.: June 30, 2005. Weapons of Mass Destruction: Nonproliferation Programs Need Better Integration. GAO-05-157. Washington, D.C.: January 28, 2005. Nuclear Nonproliferation: DOE’s Effort to Close Russia’s Plutonium Production Reactors Faces Challenges, and Final Shutdown Is Uncertain. GAO-04-662. Washington, D.C.: June 4, 2004. | In April 2005, the Domestic Nuclear Detection Office (DNDO) was established within the Department of Homeland Security (DHS) to enhance and coordinate federal, state, and local efforts to combat nuclear smuggling domestically and overseas. DNDO was directed to develop, in coordination with the departments of Defense (DOD), Energy (DOE), and State (State), a global strategy for nuclear detection--a system of radiation detection equipment and interdiction activities domestically and abroad. GAO was asked to examine (1) DNDO's progress in developing programs to address critical gaps in preventing nuclear smuggling domestically, (2) DNDO's role in supporting other agencies' efforts to combat nuclear smuggling overseas, and (3) the amount budgeted by DHS, DOD, DOE, and State for programs that constitute the global nuclear detection strategy. To do so, GAO analyzed agency documents; interviewed agency, state, and local officials; and visited select pilot program locations. DNDO has made some progress in strengthening radiation detection capabilities to address critical gaps and vulnerabilities in combating nuclear smuggling, which include the land border area between ports of entry into the United States, aviation, and small maritime vessels. However, DNDO is still in the early stages of program development, and has not clearly developed long term plans, with costs and time frames, for achieving its goal of closing these gaps by expanding radiological and nuclear detection capabilities. For example, DNDO and Customs and Border Protection have been collaborating on radiological and nuclear detection options to better secure the land borders between ports of entry. However, DNDO-sponsored field evaluations to test radiation detection equipment are still not complete and DNDO and CBP may not have all radiation detection equipment in place until 2012. In addition, DNDO is in the first year of a 3-year maritime pilot program, working with the Coast Guard and local law enforcement agencies in the Puget Sound, Washington, area to field test equipment and to develop radiological and nuclear screening procedures. However, DNDO has made little progress in (1) developing criteria for assessing the success of the pilot to help determine whether it should be expanded to other locations, and (2) resolving some of the challenges it faces in the pilot program, such as technological limitations of the detection equipment and sustaining current detection efforts. Although DNDO has no authority over other federal agencies' programs to combat radiological and nuclear smuggling overseas, it has worked with DOD, DOE, and State to provide subject matter expertise and exchange lessons learned on radiological and nuclear detection. However, most of DNDO's efforts are modest in scope, reflecting the fact that these agencies have well-established programs to combat nuclear smuggling. For example, DNDO has been working with State's Global Initiative to Combat Nuclear Terrorism to develop model guidelines that other nations can use to establish their own nuclear detection programs. According to DNDO, approximately $2.8 billion was budgeted by DHS, DOD, DOE, and State in fiscal year 2007 for programs included in the global strategy for nuclear detection. Of this amount, approximately $1.1 billion was budgeted for programs to combat nuclear smuggling overseas, $1.1 billion was budgeted for nuclear detection programs at the U.S. border and within the United States, and approximately $577 million was budgeted to fund cross-cutting activities, such as providing technical support to users of the radiation detection equipment. DNDO collected budget data and published them in the Joint Annual Interagency Review, an annual report required by Congress. DOD, DOE, and State officials told GAO that this information is used primarily as a status report of individual programs to combat nuclear smuggling. It is not used as a tool to help plan for or inform the future direction of the strategy or to help establish current or future priorities. |
Wildland fires ignited by lightning are both natural and inevitable and play an important ecological role on the nation’s landscape. In addition to maintaining habitat diversity, releasing soil nutrients, and causing the seeds of fire-dependent species to germinate, fire periodically removes undergrowth, small trees, and vegetation that can otherwise build up and intensify subsequent fires. However, various human land use and management practices, including decades of suppressing wildland fires, have altered the normal frequency of fires in many forest and rangeland ecosystems, leading to uncharacteristically dense vegetation and atypical fire patterns in some places. At the same time, more homes and communities are being built in areas where fires can occur, increasing risks to human life, property, and infrastructure. Experts estimate that between 1990 and 2000, 60 percent of all new housing units in the United States were built in the wildland-urban interface, and by 2000, about 38 percent of housing units overall were located in the wildland-urban interface. Recent media reports indicate that this trend of growth in the wildland-urban interface continues. Finally, agency analyses indicate that climate change and related drought may also be responsible for significant increases in the occurrence of, and costs of responding to, wildland fire. Increases in the size and severity of wildland fires, and in the cost of fighting them, have led federal agencies to fundamentally reexamine their approach to wildland fire management. For decades, federal agencies aggressively suppressed wildland fires and were generally successful in decreasing the number of acres burned. In some areas of the country, however, rather than eliminating severe wildland fires, decades of suppression disrupted ecological cycles and began to change the structure and makeup of forests and rangelands, increasing the land’s susceptibility to fire. Increasingly, the agencies have recognized the key role that fire plays in many ecosystems and the utility of fire itself as a tool in managing forests and watersheds. The agencies worked together to develop the Federal Wildland Fire Management Policy in 1995, which for the first time formally recognized the essential role that fire plays in maintaining natural systems. This policy was subsequently reaffirmed and updated in 2001. In addition to noting the negative effects of past wildland fire suppression, the policy also recognized that continued development in the wildland- urban interface has placed more values at risk from wildland fire while increasing the complexity and cost of wildland fire suppression operations. To help address these trends, the policy directed agencies to consider management objectives and the values at risk when determining how or whether to suppress a wildland fire. Under this approach, termed “appropriate management response,” the agencies may fight fires that threaten communities or other highly valued areas more aggressively than they fight fires in remote areas or in areas where natural fuel reduction would be beneficial. In some cases, the agencies may simply monitor the fire, or take only limited suppression actions, to ensure that it continues to pose little threat to valued resources. Under current interagency policy, local federal units must develop land management and fire management plans that document approved fire management strategies for each acre of burnable land and other important information about how the land will be managed, including local values at risk, needed local fuel reduction, and rehabilitation actions. Once a fire starts, land management and fire management specialists are to identify and implement the appropriate management response, in accordance with the unit’s approved land and fire management plans. Responding to wildland fires—which can burn across federal and nonfederal jurisdictions—often requires coordination and collaboration among federal, tribal, state, and local firefighting entities to effectively protect lives, homes, and resources. Five federal agencies—the Forest Service within the Department of Agriculture and the Bureau of Indian Affairs, Bureau of Land Management, Fish and Wildlife Service, and National Park Service within the Department of the Interior—fight wildland fires. These federal agencies work together with nonfederal firefighting entities to share personnel, equipment, and supplies and to fight fires, regardless of which entities have jurisdiction over the burning lands. Agreements developed and agreed to by cooperating entities, commonly referred to as master agreements, govern cooperative fire protection efforts and include general provisions for sharing firefighting costs among responsible entities. Agencies need a cohesive strategy that identifies the available long-term options and associated funding for reducing excess vegetation and responding to wildland fires if the agencies and the Congress are to make informed decisions about an effective and affordable long-term approach for addressing problems that have been decades in the making. We first recommended that the agencies develop such a strategy for addressing fuels in 1999. After we evaluated a number of related wildland fire management issues, we reiterated our recommendation in 2005 and 2006 but also recognized that a comprehensive solution needs to address not only reducing fuels but also an overall response to wildland fire. To develop an effective overall strategy, agencies need to complete several key tasks, which address weaknesses we previously identified. Our 2005 report summarized several weaknesses in the federal government’s management of fuel reduction and related wildland fire programs and identified a number of actions to address these weaknesses. Specifically, these weaknesses included the following: the agencies lacked basic data, such as the extent and location of lands needing fuel reduction; the agencies needed to identify and prioritize fuel reduction projects; many federal land management units did not have fire management plans that met agency requirements designed to restore fire’s natural role in ecosystems consistent with human health and safety; and the agencies were unable to assess the extent to which they were reducing wildland fire risks, to establish meaningful fuel reduction performance measures, or to determine the cost-effectiveness of these efforts because they lacked needed data. We also identified a number of tasks the agencies needed to complete to develop a cohesive strategy. These tasks included finishing data systems that are needed to identify the extent, severity, and location of wildland fire threats in our national forests and rangelands; updating local fire management plans to better specify the actions needed to effectively address these threats; and assessing the cost-effectiveness and affordability of options for reducing fuels and responding to wildland fire problems. The agencies have made some progress on the three primary tasks we identified as important to developing a wildland fire management strategy, although concerns have been raised about when or whether the agencies will successfully complete them. More specifically, LANDFIRE, a geospatial data and modeling system, is being designed to assist the agencies in identifying the extent, severity, and location of wildland fire threats to the nation’s communities and ecosystems. LANDFIRE data are nearly complete for most of the western United States, with data for the remainder of the country scheduled to be completed in 2009. The agencies will need to ensure, however, that LANDFIRE data are kept current in order to reflect landscape-altering events, such as large fires and hurricanes, and they do not yet have a plan to do so. In 2006, we reported that 95 percent of the agencies’ individual land management units had completed fire management plans in accordance with agency requirements promulgated in 2001. However, the agencies do not require regular plan updates to ensure that new data (from LANDFIRE, for example) are incorporated into the plans. Moreover, in the wake of two court decisions—each holding that the Forest Service was required to prepare an environmental assessment or environmental impact statement under the National Environmental Policy Act (NEPA) to accompany the relevant fire management plan—the Forest Service decided to withdraw the two plans instead of completing them. It is unclear whether the agency would withdraw other fire management plans successfully challenged under NEPA; nor is it clear whether or to what extent such agency decisions could undermine the interagency policy directing that every burnable acre have a fire management plan. Without such plans, however, current agency policy does not allow use of the entire range of wildland fire response strategies, including less aggressive, and potentially less costly, strategies. The Fire Program Analysis (FPA) system is a computer-based model designed to assist the agencies in cost-effectively allocating the resources necessary to address wildland fires. FPA is being designed in two phases. Phase I was intended to provide information for use in allocating resources for the initial responses to fires and in developing estimates for agencies’ fiscal year 2008 budgets. Phase II was to be focused on additional activities, including fuel reduction and large-fire suppression. A “midcourse review” of FPA, completed in 2006, however, has resulted in recent endorsement by the Wildland Fire Leadership Council of what may be significant design modifications to FPA—ones that may not fulfill key project goals of (1) optimizing how resources are allocated, (2) linking fuel reduction to future preparedness and suppression costs, (3) ensuring comparability among different agencies’ analyses and resulting decisions, and (4) enabling aggregation of local costs to identify national options and related budgets. Agencies plan to have a prototype of phase II, reflecting this design modification, completed by June 2007. According to a program official, the prototype will enable project managers to assess and report to the leadership council on the planned scope, schedule, and cost of FPA, including whether or not they will meet the scheduled completion date of June 2008. Further, gaps in the data collected for FPA may also reduce its usefulness in allocating resources. Although the agencies had made progress on these three primary tasks at the time of our 2006 update, they had not developed either a cohesive strategy identifying options for reducing fuels or a joint tactical plan outlining the critical steps, together with related time frames, the agencies would take to complete a cohesive strategy, as we recommended in our 2005 report. In February 2006, the agencies issued an interagency document titled Protecting People and Natural Resources: A Cohesive Fuels Treatment Strategy, but we found that the document did not identify long-term options or associated funding for reducing fuels and responding to wildland fires. During our update, officials from the Office of Management and Budget stated that it would not allow the agencies to publish long-term funding estimates until the agencies had sufficiently reliable data on which to base the estimates. The agencies commented that having such data would not be possible until LANDFIRE and FPA were more fully operational. We continue to believe that until a cohesive strategy can be developed, it is essential that the agencies create a tactical plan for developing this strategy, so the Congress understands the steps and time frames involved in completing the strategy. Federal agencies need to take steps to improve the framework for sharing wildland fire suppression costs between federal and nonfederal entities. Effective sharing of suppression costs among responsible entities can play a role in helping to contain federal expenditures, especially with the growing number of homes in areas at risk from wildland fire that may require protection. We recommended in our 2006 report that federal agencies work with relevant state entities to clarify the financial responsibilities for suppressing fires that burn, or threaten to burn, across multiple jurisdictions and provide more specific guidance as to when particular cost-sharing methods should be used. As of January 2007, the agencies were updating guidance on options for sharing costs and under what circumstances each would typically be used, but it is unclear how the agencies will ensure that such guidance is followed. We found that federal and nonfederal entities used a variety of methods to share the costs of fighting wildland fires affecting both federal and nonfederal lands and resources. Agreements between federal and nonfederal entities—known as master agreements—provide the framework for those entities to share suppression costs for wildland fires that burn or threaten both federal and nonfederal lands and resources. These agreements typically list several available cost-sharing methods. The agreements we reviewed, however, often lacked clear guidance for officials to use in deciding which method to apply for a specific fire. Clear guidance is important because local representatives of federal and nonfederal firefighting entities responsible for protecting lands and resources affected by the fire use this guidance in deciding which costs will be shared and for what period. We found, however, that cost-sharing methods were applied inconsistently within and among states, even for fires with similar characteristics. For example, in one state we reviewed, the costs for suppressing a large fire that threatened homes were shared solely according to the proportion of acres burned within each entity’s area of fire protection responsibility, a method that has traditionally been used. Yet costs for a similar fire within the same state were shared differently. For this fire, the state agreed to pay for certain aircraft and fire engines used to protect the wildland-urban interface, while the remaining costs were shared on the basis of acres burned. In contrast to the two methods applied in this state, officials in another state used yet a different cost-sharing method for two similar large fires that threatened homes, apportioning costs each day for personnel, aircraft, and equipment deployed on particular lands, such as the wildland-urban interface. The type of cost-sharing method ultimately used can have significant financial consequences for the entities involved, potentially amounting to millions of dollars. Moreover, as we reported, federal officials expressed concern that the existing cost-sharing framework insulated state and local governments from the cost of providing wildland fire protection in the wildland-urban interface, thus reducing the incentive for state and local governments to adopt laws—such as building codes that require fire- resistant materials in areas at high risk of wildland fires—that in the long run could help reduce the cost of suppressing wildland fires. We recommended in our 2006 report that the federal agencies work with relevant state entities to clarify the financial responsibility for fires that burn, or threaten to burn, across multiple jurisdictions and develop more specific guidance as to when particular cost-sharing methods should be used. The federal agencies generally agreed with our findings and recommendations and agreed to improve the guidance on sharing suppression costs. As of January 2007, the agencies were updating guidance that can be used when developing master agreements between cooperating federal and nonfederal entities, as well as agreements on how to share costs for a specific fire. Agency officials said that this guidance provides additional information about potential methods for sharing costs and about the circumstances under which each cost-sharing method would typically be used. It is unclear, however, how the agencies will ensure that the guidance is followed. Further, because master agreements are updated only every 5 years, it may take a number of years before the new guidance is fully incorporated into master agreements between cooperating entities. Preliminary findings from our ongoing work for the committee show that, despite dozens of federal and nonfederal studies issued since 2000 that consistently identified similar areas needing improvement to help contain wildland fire costs, the agencies have made little progress in addressing these areas. Areas identified as needing improvement to help contain costs—in addition to reducing fuels and cost sharing discussed previously—include acquiring and using firefighting personnel and equipment, selecting appropriate strategies for responding to wildland fires, and effectively managing cost-containment efforts. Although the agencies have begun taking steps to address some of the areas previous studies have identified as needing improvement, much work remains to be done. For example: Acquiring and using personnel and equipment. The agencies have taken steps to improve their ability to track and deploy personnel and equipment, but they have made little progress in completing the more fundamental step of determining the quantity and type of firefighting assets needed based on an analysis of values at risk and appropriate suppression strategies. Further, although the Forest Service has identified a series of improvements it plans to make in the acquisition process, it has so far made little progress. Selecting appropriate suppression strategies. The agencies have also begun to improve analytic tools that assist land and fire managers identify the appropriate suppression strategy for a given fire, but shortcomings remain. Federal policies encourage the use of less intensive suppression strategies when possible, strategies that may also be less costly. Land and fire managers, however, may be reluctant to employ anything less than full suppression because of concerns that a fire will escape control. Currently, much of the information managers use to estimate potential fire size, risks, and costs are based on their individual experiences, which can vary widely. Researchers are developing a new suite of tools that will analyze fuel conditions and predicted weather conditions to model expected fire growth and behavior and provide better information for managers making fire response decisions, but as of January 2007, these new tools were still being developed and tested. Managing cost-containment efforts. The steps the agencies have taken to date to contain wildland fire costs lack several key elements fundamental to sound program management, such as clearly defining cost- containment goals, developing a strategy for achieving those goals, and measuring progress toward achieving them. First, the agencies have not clearly articulated the goals of their cost-containment efforts. For cost- containment efforts to be effective, the agencies need to integrate cost- containment goals with the other goals of the wildland fire program—such as protecting life, property, and resources. For example, the agencies have established the goal of suppressing wildland fires at minimum cost, considering firefighter and public safety and values being protected, but they have not defined criteria by which these often-competing objectives are to be weighed. Second, although the agencies are undertaking a variety of steps designed to help contain wildland fire costs, the agencies have not developed, and agency officials to this point have been unable to articulate, a clear plan for how these efforts fit together or the extent to which they will assist in containing costs. Finally, the agencies are developing a statistical model of fire suppression costs that they plan to use to identify when the cost for an individual fire may have been excessive. The model compares a fire’s cost to the costs of suppressing previous fires with similar characteristics. However, such comparisons with previous fires’ costs may not fully consider the potential for managers to select less aggressive—and potentially less costly—suppression strategies. In addition, the model is still under development and may take a number of years to fully refine. Without clear program goals and objectives, and corresponding performance measures to evaluate progress, the agencies lack the tools to be able to determine the effectiveness of their cost-containment efforts. The federal government is expending substantial effort and billions of dollars in attempting to address our nation’s wildland fire problems. Yet despite promises to do so, the agencies still cannot articulate how the steps they are taking fit together to form a comprehensive and cohesive strategy to contain costs or to address the many wildland fire management problems we and others have reported over the last 7 years. Given the interrelated nature of wildland fire issues, they cannot be addressed in isolation but must be viewed from and addressed within a broader perspective. Agencies need to understand how each issue affects the others and determine the trade-offs required to effectively meet program goals while containing program costs. Therefore, if the agencies and the Congress are to make informed decisions about an effective and affordable long-term approach to responding to these issues, agencies need to first develop clearly defined program goals and objectives and a strategy to achieve them, including identifying associated funding. Because it will likely be at least 2009 before the agencies develop a strategy for fuel reduction efforts that would meet standards required by the Office of Management and Budget, we continue to believe that in the interim, it is essential that the agencies create a tactical plan for developing this strategy, so that the Congress understands the steps and time frames involved with its completion. In doing so, the agencies need to make very clear how the final design of FPA will meet the key program goals enumerated here, how and when the agencies will complete all fire management plans, and what schedule they envision for periodically updating LANDFIRE data. At the same time, to help address the rising cost of protecting the growing number of homes built in the wildland urban interface—a cost that may be disproportionately borne by the federal government—federal agencies also need to work with relevant state entities to ensure that appropriate methods are used for sharing the costs of suppressing fires that burn, or threaten to burn, across multiple jurisdictions. Mr. Chairman, this concludes my prepared statement. I would be pleased to answer any questions that you or other Members of the Committee may have at this time. For further information about this testimony, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. David P. Bixler, Assistant Director; Ellen W. Chu; Jonathan Dent; Janet Frisch; Chester Joy; and Richard Johnson made key contributions to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Over the past two decades, the number of acres burned by wildland fires has increased, often threatening human lives, property, and ecosystems. The cost of responding to wildland fires has also grown, especially as more homes are built in or near wildlands, an area called the wildland-urban interface. Past management practices, including a concerted federal policy in the 20th century of suppressing fires to protect communities and ecosystems, unintentionally resulted in steady accumulation of dense vegetation that can fuel large, intense, and often costly wildland fires. GAO was asked to identify actions that federal wildland fire agencies need to take to help contain federal wildland fire expenditures. GAO has identified these actions in three of its reports addressing fuel reduction and cost-sharing efforts and as part of an ongoing review of federal agencies' efforts to contain wildland fire preparedness and suppression costs for this committee. Specifically, GAO focused on examining agencies' efforts to (1) reduce accumulated fuels and address wildland fire problems, (2) share with nonfederal entities the costs of responding to multijurisdictional fires, and (3) contain the costs of preparing for and responding to wildland fires. Over the past 7 years, GAO has recommended a number of actions federal wildland fire agencies should take to improve their management of wildland fire activities, actions that could also help contain the rising federal expenditures for responding to wildland fires. These agencies--the Forest Service within the Department of Agriculture and land management agencies within the Department of the Interior--concurred with GAO's recommendations but have not completed, or in some cases have not yet begun, needed actions. GAO's ongoing review of federal agencies' efforts to contain wildland fire preparedness and suppression costs has also identified other actions that may be needed. Specifically, the agencies need to: (1) Develop a cohesive strategy that identifies the options and associated funding to reduce fuels and address wildland fire problems. In 1999, to address the problem of excess fuels and their potential to increase the severity of wildland fires and the cost of suppression efforts, GAO recommended that a cohesive strategy be developed that identified the available long-term options and associated funding for reducing these fuels. In 2005 and 2006, because the agencies had not yet developed one, GAO reiterated the need for such a strategy but broadened its focus to better address the interrelated nature of fuel reduction efforts and wildland fire response. GAO also recommended that, as an interim step, the agencies develop a tactical plan outlining the steps and time frames needed for completing a cohesive strategy. As of January 2007, the agencies had not developed either a cohesive strategy or a tactical plan. (2) Clarify their guidance for sharing wildland fire suppression costs with nonfederal entities. In 2006, to address the rising costs of responding to fires that threaten both federal and nonfederal lands and resources, GAO recommended that the federal agencies provide more specific guidance as to when particular cost-sharing methods should be used. The cost-sharing method used can have significant financial consequences for the entities involved--potentially amounting to millions of dollars. As of January 2007, the agencies were updating their guidance on possible cost-sharing methods and when each typically would be used, but it is unclear how the agencies will ensure that the guidance is followed. (3) Establish clear goals, strategies, and performance measures to help contain wildland fire costs. Preliminary findings from GAO's ongoing work indicate that the effectiveness of agencies' efforts to contain costs may be limited because the agencies have not clearly defined their cost-containment goals, developed a strategy for achieving those goals, or developed related performance measures. For these efforts to be effective, the agencies need to integrate cost-containment goals with the other goals of the wildland fire program--such as protecting life and property--and to recognize that trade-offs will be needed to meet desired goals within the context of fiscal constraints. |
The growth in information technology, networking, and electronic storage has made it ever easier to collect and maintain information about individuals. An accompanying growth in incidents of loss and unauthorized use of such information has led to increased concerns about protecting this information on federal systems. As a result, the basic law governing privacy protections, the Privacy Act of 1974, has been supplemented by more recent laws and guidance that are particularly concerned with the protection of personally identifiable information maintained in automated information systems. Protecting personally identifiable information in federal systems is critical because its loss or unauthorized disclosure can lead to serious consequences for individuals. These consequences include identity theft or other fraudulent activity, which can result in substantial harm, embarrassment, and inconvenience. In 2006, the estimated losses associated with identity theft to U.S. organizations were $49.3 billion. Like other sectors, the federal government has seen significant exposures of personally identifiable information. According to a 2006 congressional staff report, since January 2003, 19 departments and agencies reported at least one loss of personally identifiable information that could expose individuals to identity theft. (App. II provides selected examples of these and other incidents.) A series of data breaches at federal agencies have involved system intrusion, phishing scams, and the physical loss or theft of portable computers, hard drives, and disks. During fiscal year 2006, federal agencies reported a record number of incidents to the U.S. Computer Emergency Readiness Team (US-CERT). For example, in 2006 there were 5,146 incident reports—a substantial increase over the 3,569 incidents reported in 2005. During this period, US-CERT recorded a dramatic rise in incidents where either physical loss or theft or system compromise resulted in the loss of personally identifiable information. As illustrated by recent security incidents and as we have previously reported, significant weaknesses continued to threaten the confidentiality, integrity, and availability of critical information and information systems used to support the operations, assets, and personnel of federal agencies. In their fiscal year 2006 financial statement audit reports, 21 of 24 major agencies indicated that deficient information security controls were either a reportable condition or a material weakness. Our audits continue to identify similar weaknesses in nonfinancial systems. Similarly, in their annual reporting under 31 U.S.C. § 3512 (commonly referred to as the Federal Managers’ Financial Integrity Act of 1982), 17 of 24 agencies reported shortcomings in information security, including 7 that considered it a material weakness. Agency inspectors general have also noted the seriousness of information security, with 21 of 24 including it as a “major management challenge” for their agencies. According to our reports and those of inspectors general, persistent weaknesses appear in the five major categories of information system controls: (1) access controls, which ensure that only authorized individuals can read, alter, or delete data; (2) configuration management controls, which provide assurance that only authorized software programs are implemented; (3) segregation of duties, which reduces the risk that one individual can independently perform inappropriate actions without detection; (4) continuity of operations planning, which provides for the prevention of significant disruptions of computer-dependent operations; and (5) an agencywide information security program, which provides the framework for ensuring that risks are understood and that effective controls are selected and properly implemented. Most agencies had weaknesses in each of these categories. Accordingly, we have designated information security as a governmentwide high-risk issue in reports to Congress since 1997—a designation that remains in force today. The primary laws that provide privacy protections to personal information are the Privacy Act of 1974 and the E-Government Act of 2002; these laws describe, among other things, agency responsibilities with regard to personally identifiable information, which include providing security. The security of information held by the federal government is specifically addressed by FISMA, which requires agencies to develop, document, and implement agencywide programs to provide security for their information and information systems, including personally identifiable information. Along with technical guidance from NIST, FISMA establishes a risk-based approach to security management, which requires an agency, among other things, to categorize its information and systems according to the potential impact to the agency should the information be jeopardized. In the wake of recent incidents of security breaches involving personal data, OMB has issued guidance reiterating the requirements of these laws and guidance, drawing particular attention to those associated with personally identifiable information. In addition, OMB updated and added to requirements for reporting security breaches and the loss or unauthorized access of personally identifiable information. The major requirements for the protection of personal privacy by federal agencies come from two laws, the Privacy Act of 1974 and the privacy provisions of the E-Government Act of 2002. In addition, FISMA, which is included in the E-Government Act of 2002, addresses the protection of personal information in the context of securing federal agency information and information systems. To protect personal privacy, the Privacy Act places limitations on agencies’ collection, disclosure, and use of personal information maintained in systems of records. The act describes a “record” as any item, collection, or grouping of information about an individual that is maintained by an agency and contains his or her name or another personal identifier. It also defines “system of records” as a group of records under the control of any agency from which information is retrieved by the name of the individual or by an individual identifier. The Privacy Act requires that when agencies establish or make changes to a system of records, they must notify the public by a notice in the Federal Register identifying, among other things, the type of data collected, the types of individuals about whom information is collected, the intended “routine” uses of the data, and procedures that individuals can use to review and correct personal information. The act’s requirements also apply to government contractors when agencies contract for the development and maintenance of a system of records to accomplish an agency function. The provisions of the Privacy Act are consistent with and based primarily on a set of principles for protecting the privacy and security of personal information—the Fair Information Practices. These principles have been widely adopted as the standard benchmark for evaluating the adequacy of privacy protections; one of the principles is security safeguards. In this regard, the Privacy Act requires agencies to “establish appropriate administrative, technical, and physical safeguards to insure the security and confidentiality of records and to protect against any anticipated threats or hazards to their security or integrity which could result in substantial harm, embarrassment, inconvenience, or unfairness to any individual on whom information is maintained.” The E-Government Act of 2002 strives to enhance protection for personal information in government information systems by requiring that agencies conduct privacy impact assessments (PIA). A PIA is an analysis of how personal information is collected, stored, shared, and managed in a federal system. More specifically, according to OMB guidance, a PIA is an analysis of how information is handled (1) to ensure handling conforms to applicable legal, regulatory, and policy requirements regarding privacy; (2) to determine the risks and effects of collecting, maintaining, and disseminating information in identifiable form in an electronic information system; and (3) to examine and evaluate protections and alternative processes for handling information to mitigate potential privacy risks. Agencies must conduct PIAs (1) before developing or procuring information technology that collects, maintains, or disseminates information that is in a personally identifiable form or (2) before initiating any new data collections involving personal information that will be collected, maintained, or disseminated using information technology if the same questions are asked of 10 or more people. OMB guidance also requires agencies to conduct PIAs when a system change creates new privacy risks, for example, changing the way in which personal information is being used. The PIA requirement does not apply to all systems. For example, no assessment is required when the information collected relates to internal government operations, the information has been previously assessed under an evaluation similar to a PIA, or when privacy issues are unchanged. Besides these primary laws, Congress has passed laws requiring protection of personally identifiable information that are agency-specific or that target a specific type of information. For example, the Veterans Benefits, Health Care, and Information Technology Act, enacted in December 2006, establishes information technology security requirements for personally identifiable information that apply specifically to the Department of Veterans Affairs (VA). The act mandates, among other things, that VA develop procedures for detecting, immediately reporting, and responding to security incidents; notify Congress of any significant data breaches involving personally identifiable information; and, if necessary, provide credit protection services to those individuals whose personally identifiable information has been compromised. Another example is the Health Insurance Portability and Accountability Act of 1996 (HIPAA), which requires the Secretary of Health and Human Services to adopt standards for the electronic exchange, privacy, and security of health information. These standards apply to agencies, such as the Department of Defense and VA, to the extent they are covered by HIPAA. FISMA is the primary law governing information security in the federal government; it also addresses the protection of personal information in the context of securing federal agency information and information systems. FISMA, which establishes a risk-based approach to security management, defines federal requirements for securing information and information systems that support federal agency operations and assets. Under the act, agencies are required to provide sufficient safeguards to cost-effectively protect their information and information systems from unauthorized access, use, disclosure, disruption, modification, or destruction, including controls necessary to preserve authorized restrictions on access and disclosure (and thus to protect personal privacy, among other things). The act also requires each agency to develop, document, and implement an agencywide information security program 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). Specifically, the act requires that these information security programs include, among other things, periodic assessments of the risk and magnitude of harm that could result from the unauthorized access, use, disclosure, disruption, modification, or destruction of information or information systems; risk-based policies and procedures that cost-effectively reduce information security risks to an acceptable level and ensure that information security is addressed throughout the life cycle of each information system; subordinate plans for providing adequate information security for networks, facilities, and systems or groups of information systems, as appropriate; security awareness training for agency personnel, including contractors and other users of information systems that support the operations and assets of the agency; periodic testing and evaluation of the effectiveness of information security policies, procedures, and practices, performed with a frequency depending on risk, but no less than annually, and that includes testing of management, operational, and technical controls for every system identified in the agency’s required inventory of major information systems; a process for planning, implementing, evaluating, and documenting remedial action to address any deficiencies in the information security policies, procedures, and practices of the agency; procedures for detecting, reporting, and responding to security incidents; plans and procedures to ensure continuity of operations for information systems that support the operations and assets of the agency. In addition, FISMA requires agencies to produce an annually updated inventory of major information systems (including major national security systems) operated by the agency or that are under its control, which includes an identification of the interfaces between each system and all other systems or networks, including those not operated by or under the control of the agency. Like protecting other information and systems, protecting personally identifiable information is dependent on agencies’ having established security programs that include the elements described above. Among other things, agencies must identify the personally identifiable information in their information systems, determine the appropriate risk level associated with it, develop appropriate controls to secure it, and ensure that these controls are applied and maintained. FISMA also establishes evaluation and reporting requirements. Under the act, each agency must have an annual independent evaluation of its information security program and practices, including control testing and compliance assessment. Evaluations of non-national security systems are to be performed by the agency inspectors general or by an independent external auditor, while evaluations related to national security systems are to be performed only by an entity designated by the agency head. FISMA also requires each agency to report annually to OMB, selected congressional committees, and the Comptroller General on the adequacy of information security policies, procedures, and practices, and compliance with the act’s requirements. In addition, agency heads are required to annually report the results of their independent evaluations to OMB. OMB is required to submit a report to Congress each year on agency compliance with the act’s requirements, including a summary of findings of agencies’ independent evaluations. Other major FISMA provisions require NIST to develop, for systems other than national security systems, standards for categorizing information and information systems according to risk levels, guidelines on the types of information and information systems that should be included in each category, and standards for minimum information security requirements for information and information systems in each category. Accordingly, NIST developed the following guidance: Federal Information Processing Standards (FIPS) 199, Standards for Security Categorization of Federal Information and Information Systems. This standard is to be used by all agencies to categorize all their information and information systems based on the objectives of providing appropriate levels of information security according to a range of risk levels. In addition, NIST has published Special Publication 800-60, to provide guidance on how to implement FIPS 199 and how to determine whether a system or information should be categorized as having a high-, moderate-, or low-risk impact level. FIPS 200, Minimum Security Requirements for Federal Information and Information Systems. This standard provides minimum information security requirements for information and information systems in each risk category. NIST Special Publication 800-53, Recommended Security Controls for Federal Information Systems. The publication provides guidelines for selecting and specifying security controls for information systems supporting the federal government. OMB is responsible for establishing governmentwide policies and for providing guidance to agencies on how to implement the provisions of FISMA, the Privacy Act, and other federal information security and privacy laws. It has issued both recommended steps and required actions to protect federally owned information and information systems. For example, OMB memorandum M-05-08 directs agencies to designate a senior official with overall responsibility for information privacy issues, including taking appropriate steps to protect personally identifiable information from unauthorized use, access, disclosure, or sharing, and to protect related information systems from unauthorized access, modification, disruption, or destruction. Following the May 2006 VA data breach, OMB issued guidance reiterating agency responsibilities under the laws and technical guidance, drawing particular attention to the requirements associated with personally identifiable information. OMB memorandum M-06-15, Safeguarding Personally Identifiable Information, re-emphasizes agency responsibilities to safeguard personally identifiable information and to appropriately train employees in this regard. It also requires agencies to perform a review of their policies and procedures for the protection of personally identifiable information, including an examination of physical security, and to take corrective action. OMB memorandum M-06-16, Protection of Sensitive Agency Information, asks agencies to verify that existing organizational policy adequately addresses the information protection needs associated with personally identifiable information that is accessed remotely or physically removed. It recommends, among other things, that all information on mobile computers and devices be encrypted unless a written waiver is issued certifying that the computer does not contain any sensitive information. In addition, M-06-16 recommends that agencies use a NIST checklist included in the memorandum. The NIST checklist states that agencies should verify that information requiring protection as personally identifiable information is appropriately categorized as such and that it is assigned an appropriate risk impact category. OMB also updated and added to requirements for reporting security breaches and the loss or unauthorized access of personally identifiable information. OMB memorandum M-06-19 directs agencies to report all incidents involving personally identifiable information to US-CERT within 1 hour of discovery of the incident. Further, OMB recommends that agencies establish a core management group responsible for responding to the loss of personal information in a memorandum issued September 20, 2006. In OMB memorandum M-06-20, FY 2006 Reporting Instructions for the Federal Information Security Management Act and Agency Privacy Management, OMB asks agencies to identify in their yearly FISMA reports any physical or electronic incidents involving the loss of or unauthorized access to personally identifiable information. In these annual reports, agencies also are required to report numbers of incidents for the reporting period, the number of incidents the agency reported to US-CERT, and the number reported to law enforcement. Most recently, OMB memorandum M-07-16, Safeguarding Against and Responding to the Breach of Personally Identifiable Information, requires agencies to develop and implement breach notification policies— that is, policies governing how and under what circumstances affected parties are notified in case of a security breach. Agencies were to develop and implement such policies and associated plans within 120 days from the issuance of the memorandum (May 22, 2007). The memorandum also reiterates four particularly important existing security requirements that agencies should already have been implementing: (1) assigning an impact level to all information and information systems, (2) implementing the minimum security requirements and controls in FIPS 200 and NIST Special Publication 800- 53 respectively, (3) certifying and accrediting information systems, and (4) training employees. With regard to the first of these, OMB stressed that agencies should generally consider categorizing sensitive personally identifiable information (and information systems within which such information resides) as moderate or high impact. In addition, this memorandum reiterates the guidance provided in memorandum M-06-16 on protection of personally identifiable information and changes earlier recommendations to requirements. These and other OMB memorandums significant to the protection of personally identifiable information are briefly described in table 1. Ensuring that agency policies and procedures appropriately emphasize the protection of personally identifiable information in accordance with applicable laws and guidance is an important aspect of protecting personal privacy. In recent guidance, OMB directed agencies to encrypt and otherwise protect personally identifiable information that is either accessed remotely or physically transported outside an agency’s secured physical perimeter. Specifically, agencies were required to encrypt all data on mobile computers or devices that carry agency data, unless the data are determined to be nonsensitive; allow remote access only with two-factor authentication, where one of the factors is provided by a device separate from the computer gaining access; use a “time-out” function for remote access and mobile devices that requires that users re-authenticate after 30 minutes of inactivity; and log all instances in which computer-readable data are extracted from databases holding sensitive information, and verify that each extract including sensitive data has been erased within 90 days or that its use is still required. OMB also recommended the use of a NIST-provided checklist for the protection of remote information, which was included in memorandum M- 06-16. The checklist provides specific actions to be taken by federal agencies for the protection of personally identifiable information that is categorized as moderate or high impact and that is either accessed remotely or physically transported outside an agency’s secured, physical perimeter, including information transported on removable media and on portable or mobile devices such as laptop computers and personal digital assistants. The controls and assessment methods and procedures in the checklist are a subset of what is currently required under NIST Special Publications 800-53 and 800-53A for moderate- and high-impact information systems. In addition, NIST standard (FIPS 140-2, Security Requirements for Cryptographic Modules) is to be used by federal organizations when it is specified that cryptographic-based security systems are to be used to provide protection for sensitive or valuable data. All encryption modules that protect sensitive data must follow this standard. However, not all agencies had developed policies and procedures reflecting OMB guidance for protecting personally identifiable information that is accessed remotely or physically transported outside an agency’s secured perimeter. Of the 24 major agencies, 22 had developed policies requiring personally identifiable information to be encrypted on mobile computers and devices. A smaller number of agencies had policies to provide other protections recommended by OMB, 14 of the agencies had two-factor authentication policies for remote access. Fifteen of the agencies had policies to use a “time-out” function for remote access and mobile devices requiring user reauthentication after 30 minutes of inactivity. One agency used a reauthentication time shorter than 30 minutes (15 minutes). Fewer agencies (11) had established policies to log computer-readable data extracts from databases holding sensitive information and erase the data within 90 days after extraction. However, several of the agencies that had not established such policies indicated that they were researching technical solutions to address these issues. Four agencies had policies requiring the use of the NIST checklist recommended by OMB. In addition, 20 agencies had written policies that require encryption software to be NIST FIPS 140-2 compliant. Gaps in their policies and procedures reduce agencies’ ability to protect personally identifiable information from improper disclosure. The loss of personally identifiable information can result in substantial harm, embarrassment, and inconvenience to individuals and may lead to identity theft or other fraudulent use of the information. Because agencies maintain significant amounts of information concerning individuals, agencies should be more vigilant to protect that information from loss and misuse. At the conclusion of our review and with the recent release of OMB’s President’s Management Agenda Scorecard for the fourth quarter of fiscal year 2007, OMB announced that agencies that did not complete all the privacy and security requirements identified in OMB memorandum M-07- 16, which included the requirements just described, received a downgrade in their scores for E-Government progress. According to OMB, it will continue working with agencies to help them strengthen their information security and privacy programs, especially as they relate to the protection of personally identifiable information. In view of OMB’s recent actions in this area, we are making no recommendations at this time. We reiterate, however, as we have in the past, that although having specific policies and procedures in place is an important factor in helping agencies to secure their information systems and to protect personally identifiable information, proper implementation of these policies and procedures remains crucial. Agencies’ implementation of OMB’s guidance on personally identifiable information, as well as our previous recommendations on improving agency information security and implementation of FISMA requirements, will be essential in improving the protection of personally identifiable information. In providing oral comments on a draft of this report, OMB representatives stated that they generally agreed with the report’s contents. In addition, they provided technical comments that we incorporated into the report. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to interested 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 www.gao.gov. If you have questions about this report, please contact me at (202) 512- 6244. I can also be reached by e-mail at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. Our objectives were to (1) identify the federal laws and guidance issued to protect personally identifiable information from unauthorized use or disclosure and (2) describe agencies’ policies and documented procedures that respond to recent Office of Management and Budget (OMB) guidance to protect personally identifiable information that is either accessed remotely or physically transported outside an agency’s secured physical perimeter. To address our first objective, we identified and reviewed legislative requirements for the protection of personally identifiable information by federal agencies. Specifically, we reviewed the Privacy Act of 1974; the E-Government Act of 2002; the Federal Information Security Management Act of 2002; the Veterans Benefits, Health Care, and Information Technology Act of 2006; and the Health Insurance Portability and Accountability Act of 1996. We also reviewed policy and guidance issued by OMB and National Institute of Standards and Technology (NIST) relevant to agencies’ policies and procedures to safeguard personally identifiable information. To address our second objective, we selected 24 major agencies and assessed the status of their policies and procedures addressing recent OMB guidance addressing personally identifiable information. At our request, each agency completed a survey of personally identifiable information practices and provided related policies and procedures. The survey and document request were based on requirements and recommendations in the OMB guidance. We examined survey responses and compared agency-documented policies and procedures to OMB’s requirements and guidance for consistency and sufficiency. We did not evaluate the effectiveness of agencies’ implementation of the practices. However, we reviewed applicable prior GAO and agency inspector general reports and discussed whether agency policies had been fully implemented with applicable agency information technology officials. We conducted this performance audit from September 2006 to January 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The incidents noted here were reported by government agencies between November 2004 and January 2007. Many of these incidents included the loss of personally identifiable information. These incidents were selected to provide illustrative examples of the types of incidents that occurred during this period. November 3, 2004, Department of Education: information of 8,290 individuals lost in the mail A contractor to the Federal Student Aid program sent the personal information of 8,290 individuals via a commercial shipping company. After determining that the package had been lost in transit, the department decided not to notify the affected individuals. It discontinued using that carrier for that facility as a result. November 24, 2004, Department of Veterans Affairs (VA): personal information accidentally disclosed on public drive of VA e-mail system A public drive on a VA e-mail system permitted entry by all users to folders and files containing personally identifiable information (name, Social Security number, date of birth, and in some cases personal health information such as surgery schedules, diagnosis, status, etc.) of veterans after computer system changes were made. All folders were then restricted and the individual services were contacted to limit user access. December 6, 2004, Department of Veterans Affairs: two personal computers stolen, exposing data of 2,000 research subjects Two desktop personal computers were stolen from a locked office in the research office of a medical center. One of the computers had files containing names, Social Security numbers, next of kin, addresses, and phone numbers of approximately 2,000 research subjects. The computers were password protected by the standard VA password system. The medical center immediately contacted the agency privacy officer for guidance. Letters were mailed to all research subjects informing them of the computer theft and potential for identity theft. VA enclosed letters addressed to three major credit agencies and postage paid envelopes. This incident was reported to VA and federal incident offices. December 17, 2004, Department of Agriculture: e-mail sent out to 1,537 individuals whose personally identifiable information was potentially exposed An e-mail was sent to 1,537 people that included an attachment with the Social Security numbers and other personal information of all 1,537 individuals. In response to the event, a letter of apology was sent and training on appropriate security measures was developed. February 24, 2005, Department of Agriculture: hacker obtains access A system containing research data was breached when someone cracking a password or a user account installed hacking software. The agency reports that no data were compromised but that the hacker had read and write access to the server and opened access points. March 4, 2005, Department of Veterans Affairs: list of Social Security numbers of 897 providers inadvertently sent via e-mail An employee reported e-mailing a list of the names and Social Security numbers of 897 providers to a new transcription company. This was immediately reported and a supervisor called the transcription company and spoke with the owner and requested that the company destroy the file immediately. Notification letters were sent out to all 897 providers. Disciplinary action was taken against the employee. June 17, 2005, Department of Defense: potential unauthorized access A systems administrator discovered potential unauthorized access to the Air Force Personnel Center Assignment Management System with personally identifiable information on 33,000 military members. Notifications were sent out to system users and an investigation was begun. Mid 2005, Department of Energy: a hacker accessed more than 1,500 In June 2006, it was announced a hacker had gained access to a file containing the names and Social Security numbers of 1,502 individuals. This event, which was detected in mid 2005, was not reported to senior Department officials until June 2006. October 14, 2005, Department of Veterans Affairs: personal computer stolen, exposing data on 421 patients A personal computer was stolen from a medical center that contained information on 421 patients and included patient names, last four digits of their Social Security number, height, weight, allergies, medications, recent lab results, and diagnoses. The agency’s privacy officer and medical center information security officer were notified. The use of credit monitoring was investigated and it was determined that, because the entire Social Security number was not listed, it would not be necessary to use these services at the time. November 5, 2005, Department of Education: personally identifiable information of 11,329 student borrowers lost The unencrypted magnetic tape was lost from the Federal Student Aid’s Virtual Data Center. After an investigation, no criminal activity was found and the case was closed. November 18, 2005, Department of Health and Human Services: contractor employees steal records of approximately 1,574 Two employees of the Centers for Medicare & Medicaid Services contractor stole records for the purpose of identity theft. The approximately 1,574 individuals were notified. February 15, 2006, Department of Health and Human Services: 22 laptops stolen from contractor site, exposing information on 1,382 The Centers for Disease Control and Prevention reported 22 laptops stolen from a contractor’s facility; 3 of them contained Department of Defense service member information affecting 1,382 personnel. All of the potentially impacted individuals were notified. March 17, 2006, Department of Defense: thumb drive with personally identifiable information of approximately 207,570 Marines lost The information on approximately 207,570 enlisted Marines from 2001 to 2005 was lost. A notification letter was sent to the affected individuals and the Marine Corps. March 28, 2006, Department of Health and Human Services: eight laptops stolen from contractor, exposing information on 10,855 Eight laptops containing beneficiary and supplier information were stolen from the contractor’s office. The beneficiary list on the laptops included 10,855 names, addresses, and dates of birth. April 5, 2006, Department of Defense: hackers access Tricare Management Activity, exposing personal data Hackers accessed a system containing personally identifiable information on military employees. Approximately 14,000 active duty and retired service members and dependents were affected and notified. New security measures were implemented. April 11, 2006, Department of Veterans Affairs: hacker and employee compromise systems, exposing information on 79,000 veterans A former VA employee was suspected of hacking into a medical center computer system with the assistance of a current employee who provided rotating administrator passwords. All systems in the medical center serving 79,000 veterans were compromised. May 3, 2006, Department of Veterans Affairs: computer equipment containing personally identifiable information of approximately 26.5 million veterans and active duty members of the military was stolen Computer equipment containing personally identifiable information on approximately 26.5 million veterans and active duty members of the military was stolen from the home of a VA employee. June 3, 2006, Department of Agriculture: systems compromised and potentially exposed information on 26,000 Three Department of Agriculture computers system were compromised, potentially exposing the personally identifiable information of 26,000 individuals, including photographs. The department notified the individuals. June 19, 2006, Department of Education: package with personally identifiable information of 13,700 study respondents lost The shipping contractor to the department’s National Center for Education Statistics lost a package containing the personally identifiable information of 13,700 study respondents. June 22, 2006, Department of Health and Human Services: laptop stolen from contractor employee, exposing information on 49,572 The theft of a contractor employee’s laptop containing a variety of personally identifiable information including medical information was reported. A total of 49,572 Medicare beneficiaries may have been affected. All were notified. July 1, 2006, Department of Commerce: documents and database copied by a former employee, exposing 934 employees A former employee copied sensitive letters and a database of employee information. The database included information on 883 cases and the letters had medical information on 51 employees. July 27, 2006, Department of Transportation: laptop stolen from car of DOT Inspector General, exposing information on approximately 133,000 A laptop containing personally identifiable information of approximately 133,000 Florida pilots, commercial drivers, and other Florida residents was stolen from a government-owned vehicle. August 1, 2006, Department of Defense: laptop falls off motorcycle, losing personally identifiable information of 30,000 A laptop containing personally identifiable information on 30,000 applicants, recruiters, and prospects fell off a motorcycle belonging to a Navy recruiter. August 3, 2006, Department of Veterans Affairs: desktop computer stolen, exposing financial records of approximately 18,000 patients A desktop computer was stolen from a secured area at a contractor’s facility in Virginia that processes financial accounts for VA. The desktop computer was not encrypted. Notification letters were mailed and credit monitoring services offered. September 6, 2006, Department of Veterans Affairs: laptop stolen, exposing patient information on an unknown number of individuals A laptop attached to a medical device was stolen. The information on an unknown number of individuals was exposed. Notification letters and credit protection services were offered to 1,575 patients. January 22, 2007, Department of Veterans Affairs: external hard drive missing or stolen, exposing records on 535,000 veterans and 1.3 million non-VA physician provider records An external hard drive was discovered missing or stolen, exposing records on 535,000 veterans and 1.3 million non-VA physician provider records from a research facility in Birmingham, Alabama. Notification letters were sent to veterans and providers, and credit monitoring services were offered to those individuals whose records contained personally identifiable information. In addition to the individual named above, Shaun Byrnes, Barbara Collier, Susan Czachor, Kristi Dorsey, Nancy Glover, Joshua Hammerstein, Anthony Molet, David Plocher, Charles Vrabel (Assistant Director), and Jeffrey Woodward were key contributors to this report. | The loss of personally identifiable information can result in substantial harm, embarrassment, and inconvenience to individuals and may lead to identity theft or other fraudulent use of the information. As shown in prior GAO reports, compromises to such information and long-standing weaknesses in federal information security raise important questions about what steps federal agencies should take to prevent them. As the federal government obtains and processes information about individuals in increasingly diverse ways, properly protecting this information and respecting the privacy rights of individuals will remain critically important. GAO was requested to (1) identify the federal laws and guidance issued to protect personally identifiable information from unauthorized use or disclosure and (2) describe agencies' progress in developing policies and documented procedures that respond to recent guidance from the Office of Management and Budget (OMB) to protect personally identifiable information that is either accessed remotely or physically transported outside an agency's secured physical perimeter. To do so, GAO reviewed relevant laws and guidance, surveyed officials at 24 major federal agencies, and examined and analyzed agency documents, including policies, procedures, and plans. In commenting on a draft of this report, OMB stated that it generally agreed with the report's contents. Two primary laws (the Privacy Act of 1974 and the E-Government Act of 2002) give federal agencies responsibilities for protecting personal information, including ensuring its security. Additionally, the Federal Information Security Management Act of 2002 (FISMA) requires agencies to develop, document, and implement agencywide programs to provide security for their information and information systems (which include personally identifiable information and the systems on which it resides). The act also requires the National Institute of Standards and Technology (NIST) to develop technical guidance in specific areas, including minimum information security requirements for information and information systems. In the wake of recent incidents of security breaches involving personal data, OMB issued guidance in 2006 and 2007 reiterating agency responsibilities under these laws and technical guidance, drawing particular attention to the requirements associated with personally identifiable information. In this guidance, OMB directed, among other things, that agencies encrypt data on mobile computers or devices and follow NIST security guidelines regarding personally identifiable information that is accessed outside an agency's physical perimeter. Not all agencies had developed the range of policies and procedures reflecting OMB guidance on protection of personally identifiable information that is either accessed remotely or physically transported outside an agency's secured physical perimeter. Of 24 major agencies, 22 had developed policies requiring personally identifiable information to be encrypted on mobile computers and devices. Fifteen of the 24 agencies had policies to use a "time-out" function for remote access and mobile devices requiring user reauthentication after 30 minutes of inactivity. Fewer agencies (11) had established policies to log computer-readable data extracts from databases holding sensitive information and erase the data within 90 days after extraction. Several agencies indicated that they were researching technical solutions to address these issues. Gaps in their policies and procedures reduced agencies' ability to protect personally identifiable information from improper disclosure. At the conclusion of GAO's review, OMB announced in November 2007 that agencies that did not complete certain privacy and security requirements, including those just described, received a downgrade in their scores for progress in electronic government initiatives. According to OMB, it will continue working with agencies to help them strengthen their information security and privacy programs, especially as they relate to the protection of personally identifiable information. In view of OMB's recent actions in this area and GAO's previous recommendations on improving agency information security and implementation of FISMA requirements, GAO is making no further recommendations at this time. |
The major changes resulting from the 1998 Act that related to the UPU included (1) transferring primary responsibility for U.S. policy regarding the UPU from USPS to the Department of State and (2) requiring the Department of State and USPS to consult with private providers and users of international postal services, the general public, and such federal agencies and other persons that each considers appropriate in carrying out its respective international postal responsibilities. These requirements for consultation are new in that USPS was not subject to similar requirements prior to enactment of the law. Under the new law, the Department of State may, with the consent of the president, negotiate and conclude postal treaties, conventions, and amendments within the framework of UPU agreements that are binding on the United States and other UPU member countries. USPS can also, with the consent of the president, negotiate and conclude certain postal treaties and conventions, subject to the requirements of the new law, which specifies that USPS actions shall be consistent with the policies of the Department of State. Further, under the new law, USPS continues to have authority to set international postal rates with the consent of the President. In addition, the new law specified that, starting in fiscal year 1999, USPS would allocate to State such sums as may be reasonable, documented, and auditable for State to carry out its UPU-related responsibilities under 39 U.S.C. 407. To fulfill this requirement, the Department of State and USPS signed an interagency agreement that specified that USPS would provide $160,000 to the Department of State as reimbursement for its UPU-related activities in fiscal year 1999. The congressional intent behind the new law was to ensure that the development of U.S. policies for UPU-related matters was fair, evenhanded, and open to all interested parties. A “Sense of Congress” resolution included in the legislation stated that: “It is the sense of Congress that any treaty, convention, or amendment entered into under the authority of section 407 of title 39 of the United States Code, as amended by this section, should not grant any undue or unreasonable preference to the Postal Service, a private provider of postal services, or any other person.” In 1998, we reported that private delivery companies had made allegations that USPS had gained unfair competitive advantages through its past role as the U.S. representative in the UPU. These concerns involved USPS’ dual role as the U.S. negotiator in international agreements that set the rules for the exchange of international mail and parcels by national postal administrations as well as competitor for the delivery of outbound international items, including documents and parcels. Shortly after enactment of the new law, the Chairman of the House Subcommittee on the Postal Service called on the Department of State to develop a U.S. policy position toward the 1999 UPU Congress that would “…serve the interests of all American participants in the postal and delivery sector, whether public or private.” To accomplish our objective, we reviewed applicable laws and the legislative history and obtained documentation from the Department of State regarding its activities concerning the UPU. We also obtained correspondence and documentation from USPS and other federal agencies and stakeholders involved in State consultations regarding U.S. policy on UPU matters. Further, we attended public meetings held by State to brief interested persons on UPU issues and U.S. participation in the UPU, as well as a 1-day conference convened by State to discuss UPU issues and developments in the international postal sector. In addition, we interviewed officials from organizations in the U.S. delegation to the 1999 UPU Congress to obtain their views on the strengths of State’s performance to date and opportunities for improvement. Specifically, we interviewed officials of the Department of State, USPS, the Department of Commerce, and the Postal Rate Commission (PRC), who represented their agencies at meetings on UPU matters, as well as representatives of the Air Courier Conference of America (ACCA) and the Direct Marketing Association (DMA). We also interviewed the officials who represented the Office of the U.S. Trade Representative (USTR) and the Department of Justice at meetings on UPU matters. We conducted our review from November 1998 through January 2000 in accordance with generally accepted government auditing standards. The Department of State made progress in implementing its UPU responsibilities by taking steps to consult with private providers of international postal services, postal users, other federal agencies, and the general public. In addition, State clearly signaled changes in U.S. policy on issues related to UPU reform. However, State has the opportunity to improve its implementation in several respects, as described in the next section of this report. The Department of State took steps to consult with interested parties and to coordinate with USPS, other federal agencies, and nongovernmental stakeholders that were involved in UPU matters through their inclusion in the U.S. delegation to the UPU Congress. Specifically, State held public meetings where interested parties could offer input, interagency meetings to discuss U.S. policy on UPU issues, and meetings and communications with individual stakeholders that included coordination meetings with USPS and other stakeholders in the U.S. delegation to the UPU Congress. The Department of State also took steps to increase access to UPU documents and to UPU meetings by making U.S. proposals to the UPU Congress accessible on a new Internet home page devoted to UPU matters and by giving access to UPU documents upon request. Further, State included representatives of the Department of Commerce and PRC and private sector organizations in the U.S. delegation to the 1999 UPU Congress. This was reportedly the first time that representatives of private-sector organizations had been included in the U.S. delegation to a UPU Congress. These actions represented progress in providing stakeholders and the public with relevant information and giving them an opportunity to offer input. Several stakeholders recognized the Department of State’s progress in this area. For example, USPS officials said that they considered State’s consultations with stakeholders and the public were handled in an evenhanded way and gave all participants an opportunity to become informed and to have their interests considered. A Federal Express Corporation (FedEx) representative said that the State official who headed the U.S. delegation to the UPU Congress tried to be fair and open in obtaining input. A USTR official said that State used an evenhanded approach in dealing with the conflicting interests of USPS and its competitors on UPU matters. Further, PRC officials said that State was open and receptive to all views. The Department of State gave interested parties an opportunity to offer input at three public meetings and held several interagency meetings to discuss U.S. policy on UPU matters (see table 1). State reported that it was “committed to a fair and open process” and that “as an initial step in this open, transparent process, State held its first formal public meeting on U.S. policies in the UPU” on January 26, 1999. State held two subsequent public meetings on April 15 and July 9, 1999. Each public meeting was advertised in the Federal Register and featured briefings on UPU matters and State’s UPU-related actions. Attendees were given an opportunity to ask questions and offer input. State officials said after the UPU Congress that they were satisfied with the outcome of their efforts to reach out to stakeholders, raise and discuss issues, and develop policies. In addition to the public and interagency meetings, the Department of State held several meetings with stakeholders relating to the UPU. State also sponsored a 1-day conference to discuss the future of the UPU and of the international mail system. Invited participants included representatives of federal agencies, private providers and users of international mail services, consultants, and academics, as well as representatives of the World Bank and two European postal administrations. Conferences on UPU-related topics may be a useful option for focusing on particular topics and promoting dialogue among stakeholders. The Department of State made efforts to increase access to UPU documents by making U.S. proposals to the UPU available on a new Internet home page devoted to international postal policy and the UPU, and by making access to documents on the UPU’s Internet site available upon request. Inaugurated in April 1999, this home page contained links to U.S. proposals to the UPU Congress; to State’s February 11, 1999, statement on its UPU responsibilities; and to the UPU Internet site. A State official informed interested parties in a March 1999 memo and announced at the April 15 public meeting that, based on an agreement with the UPU Secretariat, State would make the password to UPU documents on the UPU Internet site available upon request. These actions made U.S. proposals to the UPU available to the general public for the first time and also gave interested parties access to UPU documents on the UPU’s Internet site for the first time. A State official said that these actions were taken to address concerns about access to UPU-related documents that had predated State’s role as the lead agency responsible for U.S. policy relating to the UPU. The Department of State included representatives of USPS, USTR, PRC, ACCA, and DMA in the U.S. delegation to the UPU Congress. These representatives obtained access to some UPU-related information, such as U.S. position papers on the more than 500 proposals before the UPU Congress. State held daily meetings of the U.S. delegation to coordinate activities and discuss issues and plans. State officials reportedly also obtained input from representatives of other organizations. “Worldwide, the postal sector is opening up to competition. In many countries, including the United States, it can no longer be said that the universal service operator fully represents the interest of all stakeholders in setting postal policy. To assure that all views are taken into account, the United States Congress recently asked the Department of State – our ministry of foreign affairs – to take primary responsibility for the formulation, coordination, and oversight of policy with respect to the Universal Postal Union. The United States Postal Service remains as a close collaborator in this process, and we are assisted by other U.S. Government agencies and other interested parties. The United States welcomes signs that the UPU is adjusting to change in the international postal world. Symbolic of this change is the fact that at this Congress there are observers from the private sector. We believe strongly that the UPU, to fulfill its mission, must be more inclusive. Similarly, we have found it useful to include private-sector representatives on the U.S. delegation to this meeting. As a result, we come to this Congress with broad support of major United States stakeholders.” The Department of State clearly signaled a new direction for U.S. policy on UPU reform issues by submitting U.S. proposals to the UPU Congress related to UPU reform, by its actions in developing support for the U.S. proposals before the UPU Congress, and by its actions at the UPU Congress. State officials said that the United States presented a different view and approach to the UPU with respect to raising issues of UPU reform that gave impetus to the UPU’s decision to establish a process to consider reform issues. Representatives of other organizations in the U.S. delegation to the UPU Congress said that State’s positions and emphasis on UPU reform represented a new direction for U.S. policy. The United States made proposals to the UPU Congress that signaled changes in U.S. policies and were intended to promote UPU reform, open the UPU policy formulation process to be more inclusive of interested parties, and change some UPU rules governing international postal operations. One U.S. proposal called for the UPU to hold an Extraordinary UPU Congress in 2001 to consider the implementation of reforms relating to the UPU’s mission, role, and policies. This proposal signaled that the United States supported changes in several UPU policy areas. This proposal called for the UPU to review after the 1999 UPU Congress the UPU’s mission, the governmental and operational roles and responsibilities of UPU bodies, and UPU policies (This review was to be conducted in a transparent manner. Proposals for reform were to be formulated in a process open to the public and private sectors.); how to ensure that the UPU could continue to support global universal postal service and the needs of developing countries while not giving undue or unreasonable preference to any group of providers of international postal services; and how to expand the UPU’s role with respect to the activities of all public and private providers of international postal services. A second U.S. proposal called for revising Article 40 (see table 1, footnote c). This U.S. proposal signaled change in U.S. policy concerning this UPU rule. The Department of State signaled support for UPU reform before the UPU Congress in meetings with U.S. stakeholders and with officials from foreign countries. After the United States submitted its proposal for a 2001 UPU Congress to consider reform issues, a State official said at the April 1999 public meeting that the “far reaching proposal” would “give the UPU the opportunity to take into account changes in this sector worldwide.” At the April and July 1999 public meetings, State officials discussed their consultations with British, Dutch, and German representatives to develop support for this proposal. State also consulted with other UPU representatives. Before the UPU Congress, State sent a cable asking its diplomatic posts to “…inform host governments at the senior political and policy levels that the is seeking international support for UPU reform, in light of the rapid and extensive international and structural changes taking place in the international mail system.” The United States had not previously raised UPU reform issues through these diplomatic channels. Department of State officials also made a change in U.S. policy in UPU meetings before the UPU Congress. For example, the State official heading the U.S. delegation at UPU meetings in February 1999 said that the United States would support further consideration of a proposal to grant “consultative status” to selected nongovernmental international organizations at the UPU Congress. This statement, which indicated support for having the 1999 UPU Congress consider the proposal concerning consultative status, was reportedly the first time that the head of the U.S. delegation said that this proposal merited such consideration. The 1999 UPU Congress considered but did not approve the proposal concerning consultative status. The 1999 UPU Congress decided to approve an alternative proposal authorizing the establishment of a new Advisory Group to the UPU that would meet twice each year. Membership in the Advisory Group would be open to members of UPU governing bodies and regional UPU bodies and to international nongovernmental organizations, such as consumers’ organizations, organizations of private delivery companies, consumers, labor unions, and postal users. The Advisory Group was authorized to submit suggestions to UPU governing bodies and provide written statements on agenda items of interest that the UPU governing bodies are to consider. The Department of State also signaled support for UPU reform at the UPU Congress. For example, the State official who headed the U.S. delegation said in his August 24, 1999, statement that “…the United States delegation comes to this Congress to stimulate more interest in reform of the UPU, and to work with other delegations to chart a course to make reform happen.” He said that the U.S. proposal for a 2001 UPU Congress was “…our way of stimulating discussion so that the members of this organization, if they so choose, can collectively respond to the widely recognized need to carry on reform in the UPU.” The 1999 UPU Congress considered but did not approve the U.S. proposal for a 2001 UPU Congress. However, the 1999 UPU Congress established a High Level Group of UPU member countries on the future development of the UPU. The High Level Group was given a mandate to “…consider the future mission, structure, constituency, financing, and decisionmaking of the UPU…” and was invited to develop proposals for consideration by the UPU Council of Administration (CA). The CA, in turn, was authorized to convene, if necessary, a meeting of all UPU member countries in 2002 to consider the recommendations of the High Level Group. At its first meeting in December 1999, the 24-member High Level Group established a timetable and workplan to review proposals for UPU reform and come to conclusions before the group’s deadline of October 2001. The Department of State has the opportunity to improve its handling of its UPU responsibilities in three key areas. A number of options are available to State for making improvements in these areas. First, State gave 9 to 17 days of advance notice of the public meetings and conducted limited outreach shortly in advance of some meetings to notify interested parties. In addition, State did not distribute some materials discussed at the public meetings in advance, and distributed two important proposals at the public meetings after they had been submitted to the UPU. Further, the first two public meetings were timed to occur shortly before UPU deadlines for submitting proposals for consideration by the UPU Congress. For these reasons, stakeholders may have had limited opportunities to provide meaningful input. Second, the Department of State developed policy on UPU matters in a manner that resulted in little public record of agency or stakeholder positions that related to the formulation of U.S. policy. For example, State did not maintain minutes of the public meetings and did not solicit written comments from agencies and stakeholders that would have become part of the public record. Third, turnover among involved Department of State staff in the period leading up to the UPU Congress made it more difficult for State to develop the institutional continuity and expertise needed to fulfill its leadership responsibilities. Several stakeholders said that such continuity and expertise are important to understanding complex UPU issues and to work effectively with UPU stakeholders. We recognize that the Department of State faced a challenging time frame because it did not assume its responsibilities until October 1998, about 4 months before the first UPU deadline for submitting proposals to the 1999 UPU Congress and less than 1 year before the UPU Congress. To further complicate this situation, State did not assign its UPU responsibilities to its Bureau of International Organization Affairs until January 1999, or more than 2 months after the law was enacted and less than 2 months before the first UPU deadline for the submission of proposals. As a result, State officials had a compressed time frame within which to consult with stakeholders, consider proposals and views, and develop policies. The limited public record of agency or stakeholder positions on U.S. policy concerning UPU issues may make it difficult for Congress and other interested parties to fully understand the basis for U.S. policy positions. Several options exist for the Department of State to develop a more structured and open process for obtaining stakeholder input, including ensuring better and more advance notification of public meetings and more advance distribution of materials prior to these meetings. As we reported last year, State uses the FACA process in the international telecommunications sector to coordinate with other federal agencies and private-sector advisory groups. FACA was enacted to ensure that (1) valid needs exist for establishing and continuing advisory committees, (2) the committees are properly managed and their proceedings are as open as possible to the public, and (3) Congress is kept informed of the committees’ activities. FACA and its implementing regulations generally require that (1) agendas and meeting information, such as time, date, place, and purpose, be published in the Federal Register; (2) detailed minutes of each advisory committee meeting be kept; (3) an annual report be sent to the General Services Administration (GSA), which then is to report to Congress on the activities, status, and any changes in the advisory committees; and (4) the membership of the advisory committees be fairly balanced in terms of the points of view represented. Concerning notification issues, the Department of State gave limited advance notice of public meetings in the Federal Register and conducted limited outreach to notify stakeholders of these meetings. As table 2 indicates, State gave from 9 to 17 days of advance notice in the Federal Register for the three public meetings held before the 1999 UPU Congress. In comparison, GSA regulations generally require agencies to give 15 days’ advance notice in the Federal Register for advisory committee meetings. In addition, the Department of State conducted limited outreach shortly in advance of some meetings to notify interested parties. For example, State sent faxes to federal agencies on July 7, 1999, to notify them of the July 9 public meeting. A State official acknowledged at the July public meeting that some attendees might have learned about the meeting by word of mouth as well as in the Federal Register. A USPS official said that some postal users do not read the Federal Register. At the third public meeting, the State official said that State might consider changes to improve the notification process in the future. Further, some materials discussed at the public meetings were not distributed to stakeholders either in advance of the meetings or after the meetings. Concerning issues involving the distribution of materials and the timing of meetings, the first public meeting was held on January 26, 1999. The Department of State did not distribute materials in advance of this meeting. At the meeting, a number of materials were distributed and discussed, such as proposals drafted by USPS and FedEx, briefing slides, and UPU documents. The timing of the January 26 meeting left about 2 weeks for interested parties to discuss the issues, policy options, and specific proposals before UPU council meetings started on February 8 and less than 1 month before the UPU deadline of February 22 for the submission of proposals sponsored by individual countries. A FedEx representative who attended the January public meeting expressed concern about the limited time available to provide input on UPU matters. The representative said that stakeholders should be given a meaningful opportunity to provide draft proposals on UPU matters for the Department of State to consider for submission to the UPU Congress. The Department of State held one interagency meeting on January 29, 1999, before cabling instructions to the U.S. delegation at the UPU council meetings to submit proposals to the UPU. By the February 22, 1999, deadline, the United States submitted the U.S. proposal that called for the UPU to convene an Extraordinary Congress in 2001 to consider the implementation of reforms relating to the UPU’s mission, role, and policies. This was the main U.S. proposal relating to UPU reform. However, this proposal was not made publicly available before it was submitted or discussed at the first public meeting that we attended. By submitting the proposal by February 22, 1999, the United States ensured that it would be presented to the UPU Congress. The Department of State held its second public meeting on UPU matters on April 15, 1999. Materials distributed before the meeting to representatives of other agencies and selected stakeholders included U.S. proposals that had been submitted to the UPU in February 1999 for consideration by the UPU Congress. At the April public meeting, materials publicly distributed for the first time included additional U.S. proposals that were to be submitted to the UPU, briefing slides, and USPS comments on FedEx proposals that included an analysis that was discussed at the public meeting. Specifically, USPS officials discussed the potential financial impact on USPS if Article 40 were to be eliminated. Following the April 15, 1999, public meeting, the Department of State held a meeting about 1 week later, on April 21, the day before the April 22 UPU deadline for the submission of proposals sponsored by three countries, to follow-up on issues relating to Article 40. The April 21 meeting was open to those who indicated interest at the second public meeting but was not advertised in the Federal Register. State officials subsequently circulated draft and final proposals for amending Article 40 to representatives of several agencies and selected stakeholders. State then held a meeting on May 21, 1999, when Article 40 was discussed. This meeting was attended by representatives of federal agencies, FedEx, and UPS, and was also not advertised in the Federal Register. Department of State and USPS officials subsequently contacted UPU representatives from other countries to obtain the sponsorship of at least eight additional countries for this proposal, which was required for this proposal to be submitted to the UPU Congress by the June 22, 1999, deadline. The proposal was posted to State’s Internet site on July 15, 1999, after its submission to the UPU. The manner in which the Department of State consulted with stakeholders and the public may have afforded limited opportunities for interested parties to consider complex UPU issues and draft proposals and then provide meaningful input that could be considered in a more timely manner. Several options exist for the Department of State to develop a more structured process for obtaining stakeholder input, including ensuring better and more advance notification of public meetings and more advance distribution of materials prior to these meetings. Options, which are not all mutually exclusive, include the following: Implementing a formal process under FACA with regularly scheduled and documented meetings: We reported last year that the Department of State used a formal process under FACA to develop international telecommunications policy with respect to the International Telecommunications Union. The process for involving government and private-sector stakeholders in U.S. policy formulation in this area involved a formalized advisory committee structure headed by State, with regularly scheduled meetings that required public notification in the Federal Register. Required documentation included detailed minutes of the proceedings as well as annual status reports to Congress through a formal reporting process. Holding more timely meetings, with more advance notice and outreach to stakeholders, as well as more advance distribution of materials: Public meetings and interagency meetings to obtain input on U.S. policy on UPU matters could be scheduled more in advance of UPU meetings and UPU deadlines. The Department of State could notify stakeholders by telephone, fax, e-mail, and the Internet, as well as in the Federal Register. State officials said that State has the opportunity to use its Internet site on UPU issues to give notice of public meetings and make relevant documents available to the public. In one example of such use, USTR posted extensive material pertaining to the 1999 World Trade Organization (WTO) Ministerial Meetings to its Internet site, such as U.S. proposals, negotiating objectives, statements, and other material relating to the meetings. The Department of State’s consultations resulted in a limited public record of agency and stakeholder positions relating to the formulation of U.S. policy. State did not create minutes that documented the proceedings of public meetings on UPU matters. The limited public record of agency or stakeholder positions on U.S. policy concerning UPU issues may make it difficult for Congress and other interested parties to fully understand the basis for U.S. policy positions. The Deputy Assistant Secretary of the Department of State’s Bureau of International Organizational Affairs said at State’s first public meeting on UPU matters that the “objective above all is transparency” as State establishes U.S. policy with respect to the UPU. The Department of State reported in the Federal Register that written comments on subjects covered by the public meetings on UPU matters would be accepted at any time before or after the meetings and would be made available to interested parties unless it was requested in writing that they not be made available. According to documents provided to us by State, USPS, federal agencies, and other stakeholders, State received most of the written input before the 1999 UPU Congress from USPS and FedEx. With the exception of USPS and FedEx representatives we observed, representatives of federal agencies and most private-sector stakeholders who attended the public meetings generally did not offer input. Representatives of federal agencies discussed UPU matters at interagency meetings more fully than at public meetings. Most of the public meetings were devoted to briefings by State and USPS officials on UPU issues, U.S. proposals, and related developments. The Department of State inaugurated a new home page on UPU matters in April 1999 but updated the UPU-related material on only two occasions prior to the 1999 UPU Congress. For example, although the first section of the home page on UPU matters contains a section entitled “Meetings and Conferences,” the Federal Register notice of the July 9, 1999, public meeting was not posted to the Internet. The home page also contains a section entitled “U.S. Proposals to Universal Postal Union Congress.” Although State updated the material on its Internet site to include the U.S. proposal on Article 40, it did not update the material to include several other proposals that were submitted in spring 1999, such as three proposals on matters that State described as operational/technical in nature. State also did not update one proposal that it had previously circulated and posted to the Internet but subsequently revised before submitting it to the UPU. In addition, State did not post written input concerning UPU policy matters, from stakeholders such as USPS and ACCA, to its Internet site. Further, the Antitrust Division of the Department of Justice provided written input on UPU issues in April 1999, which was made available to interested parties who attended a meeting on April 21, 1999, but State did not post it to the Internet. At least one stakeholder asked the Department of State to use an open process for developing policy on UPU matters that could have led to the creation of an extensive public record of stakeholder positions. In November 1998, shortly after the Department of State assumed the lead role for the UPU, the Chairman of ACCA’s International Committee wrote State to petition it “…to develop, by means of a public rulemaking, an open and progressive Statement of Position towards the 1999 Beijing Congress of the UPU.” The letter proposed that, given the February deadline for submission of proposed amendments to certain UPU acts, State issue a notice of proposed rulemaking, setting out the basic issues, not later than December 1, 1998; that the notice should indicate that all comments would be posted on the Internet as soon as they were received; that the notice should encourage the public to file specific legislative proposals with comments; and that the notice should indicate that draft portions of the U.S. Statement of Position would be posted on the Internet and amenable to immediate public comment as they became available. Further, the ACCA letter proposed that State should set out specific written procedures for the distribution of UPU policy documents to all interested parties, preferably on the Internet. State did not implement these suggestions. In November 1999, the Chairman of ACCA’s International Committee again wrote the Department of State to request that State initiate a “…broad review of U.S. policy towards the international exchange of documents and parcels” and to urge it “to adopt, as soon as possible, open and transparent procedures for developing U.S. policy toward the international exchange of documents and parcels.” ACCA stated that, to the maximum extent possible, a full record of all proposals, comments, and proceedings should be publicly available on the Internet. Other related stakeholder comments included those from a DMA official who told us that, in his opinion, DMA should not make comments on UPU matters unless it was willing to make them part of the public record, which could include posting them to the Internet. A more complete and readily accessible public record would inform interested parties of matters under consideration as U.S. policy is developed. A more readily accessible public record of stakeholder positions on U.S. policy relating to the UPU could also help interested parties understand the basis for U.S. policy as well as facilitating input as the Department of State continues to develop policies and positions on UPU matters. Options, which are not all mutually exclusive, for State to develop a more complete and accessible public record include the following: Implementing the FACA process: As we previously noted, FACA requires notification of advisory committee meetings in the Federal Register and documentation, including detailed minutes of the proceedings of committee meetings, as well as annual status reports to Congress through a formal reporting process. Using a notice and comment process to provide a structured process for obtaining public input: Federal agencies have used the Federal Register and the Internet to solicit comments that were to become part of the public record. For example, USTR, a small agency that takes the lead in representing the United States in international trade negotiations in the WTO, solicited comments before the 1999 WTO Ministerial Meetings in the Federal Register and posted this solicitation on its Internet site. The Department of Commerce has also solicited comments in the Federal Register and on the Internet, and posted comments it received on the Internet. Making input, minutes, and/or proceedings of public meetings available in reading rooms, upon request, or on the Internet: For example, USTR made comments it received before the 1999 WTO Ministerial Meetings available to the public in a reading room. The Department of Commerce made a transcript of some advisory committee meetings available on the Internet. Also, among other things, the Department of Commerce has used the Internet to broadcast a voice transmission of a meeting to obtain stakeholder input. As we noted earlier in this report, FACA was enacted to ensure that the proceedings of advisory committees to federal agencies are as open as possible to the public and that Congress is kept informed of the committees’ activities. However, several officials of agencies other than the Department of State as well as a DMA official have expressed concern that a formal process for stakeholder consultations on UPU matters, such as FACA, could be counterproductive and burdensome to the Department of State. One official from another agency said that mandating an advisory committee under FACA could detract from the cooperation that would be desirable and that more timely meetings and more notice of meetings were needed. Another official said that agency officials and others would be reluctant to comment at open meetings and that agency officials would be more forthcoming at closed interagency meetings. Further, a postal official said that a more formal process would require more resources, which would be diverted from other Department of State activities. A DMA official expressed strong concern that if State used a formal process such as FACA to build a public record, it would be bureaucratic and would generate a great deal of paper. He said that it would be important not to make the consultation process overburdensome. In this regard, we reported last year that 10 of 19 agencies we surveyed that accounted for about 90 percent of federal advisory committees considered FACA requirements to be more useful than burdensome and that 13 considered the requirement to keep detailed minutes of advisory committee meetings to be useful to a great or very great extent. Advisory committee members responding to our survey conveyed a generally shared perception that the committees were providing balanced and independent advice and recommendations. Although the percentage differed by question, 85 to 93 percent said that their committees were balanced in membership, had access to the information necessary to make informed decisions, and were never asked by agency officials to give advice or make recommendations based on inadequate data or analysis or contrary to the general consensus among committee members. Turnover among the Department of State staff in the period leading up to the UPU Congress made it more difficult for State to develop the institutional continuity and expertise needed to fulfill its leadership responsibilities. Representatives of federal and nonfederal organizations in the U.S. delegation to the UPU Congress said that staff turnover, combined with the limited time available before the UPU Congress, affected State’s ability to fully understand the implications associated with various UPU policy issues, as well as to fully understand how to build support for U.S. policies in the UPU. They said that institutional continuity and expertise would be important to State’s effectiveness on UPU matters in the future. State officials said that they recognize that, if State intends to play a leadership role in the UPU, it will need to provide sufficient institutional continuity and expertise on UPU matters. After assuming its new UPU responsibilities, the Department of State assigned officials from its Bureau of International Organization Affairs to work on UPU matters. Since October 21, 1998, at one time or another, 11 State officers and 4 clerical staff members were involved with UPU affairs, although none of them devoted all of their time to UPU matters, according to State. However, staff turnover occurred repeatedly: Two Department of State staff members working on UPU matters transferred to new assignments shortly before the UPU Congress, including the staff member who worked on UPU matters before 1999. The Department of State assigned several staff members who had not previously worked on UPU or postal matters to work on UPU matters shortly before the UPU Congress. The Director of the Department of State’s Office of Technical and Specialized Agencies, Bureau of International Organization Affairs, who was the second-ranking official that handled UPU matters on a day-to-day basis before the UPU Congress, retired shortly afterward. As a result of limited continuity and expertise, the Department of State relied on USPS for continuity and expertise on UPU matters, according to federal and nonfederal representatives in the U.S. delegation to the UPU Congress. For example, USPS officials said that State finalized nearly all of the position papers that USPS drafted on proposals before the UPU Congress, without change. USPS officials said that continuity at the staff level would enable the Department of State to take on more of the policy support role relating to the UPU. According to USPS officials, it takes more than a year to come up to speed on UPU issues. Turnover is a continuing challenge for the Department of State because while the UPU operates on a 5-year cycle, State’s Foreign Service Officers usually rotate to new responsibilities every 2 or 3 years. State reported in October 1999 that 9 of the 11 officers who had been involved with UPU affairs were career Foreign Service Officers subject to normal rotational assignments within the Foreign Service system. State reported that rotation and reassignment of Foreign Service Officers is a common practice and ordinarily is required under long-standing departmental regulations. Representatives of USPS, federal agencies, DMA, and ACCA who were in the U.S. delegation to the UPU Congress said that providing sufficient institutional continuity and expertise on UPU matters should be a top priority for the Department of State. They said that such continuity and expertise is important to understanding complex UPU issues and to work effectively with UPU stakeholders. Specifically, they said that policy development for the UPU Congress typically takes place over a multiyear period. Many UPU issues are complex and long-standing; staff with sufficient continuity and expertise can understand and synthesize conflicting stakeholder input, handle day-to-day oversight tasks, and develop an understanding of how to deal with developed and developing countries in the UPU; and advocacy of U.S. policy in the UPU is aided by development of personal relationships with representatives of other countries, which develop over an extended period through interaction at UPU meetings. Continuity and expertise in these interrelated areas would be helpful in developing U.S. policies concerning complex UPU matters and in building support for those policies among diverse stakeholders. The UPU is continuing to discuss (1) whether to make fundamental reforms to its mission, role, and policies; (2) the structure of payments that postal administrations make to each other for the delivery of inbound international mail; and (3) the degree to which the UPU will allow interested parties to observe its deliberations and participate in discussions of UPU matters. Further, issues of maintaining and promoting worldwide universal postal service—a key purpose of the UPU—are also being discussed. Private delivery companies continue to raise the issue of unfair competition. UPU issues have implications for USPS and the international postal and delivery services sector, which is a critical part of this nation’s infrastructure for international communications and trade and is expected to become even more vital over the next decade with the continued growth of trade and electronic commerce and the globalization of postal and delivery service providers. Continuity and expertise will be important not only for the next UPU Congress in 2004, but also in order to ensure that the Department of State is able to participate in activities leading up to the UPU Congress. For example, the United States is a member of the UPU’s High-Level Group on the future development of the UPU, which is scheduled to produce an interim report in 2000 and a final report in 2001, when it is scheduled to recommend whether the UPU should hold a plenipotentiary meeting of all member countries in 2002. Options, which are not all mutually exclusive, for the Department of State to provide institutional continuity and expertise on UPU matters include the following: Assessing staffing needs and taking action: The Department of State has the opportunity to continue to assess its staffing resources and to take steps to provide the necessary staff continuity and expertise to handle its UPU responsibilities. Department of State officials responsible for UPU matters have recognized the opportunity to conduct this assessment, with a view toward providing some staff resources from among career staff who are not Foreign Service Officers. State officials have said that they may also consider other staffing options that involve working with Department of State units outside the Bureau of International Organization Affairs that possess relevant skills and experience, such as the Bureau of Economic and Business Affairs. Assigning career staff to handle UPU matters: These staff could be assigned to handle UPU-related activities for a longer time period than Foreign Service Officers, and thus develop more continuity and expertise. One agency official said that one option would be to assign a staff member to track matters relating to the postal and distribution sectors, which may surface in the UPU, the WTO, and other international organizations. Committing high-level staff to UPU matters: A high-level staff member assigned to UPU matters over a long period could develop experience and expertise, as well as personal relationships with foreign and postal officials. USPS officials said such involvement would be important if the United States intended to play a leadership role in the UPU. The Department of State faced difficult challenges in its first year of implementing its new responsibilities for U.S. policy concerning UPU- related matters—challenges that were posed by the compressed timeframe, the need to learn about many complex international postal issues, and the need to work with diverse stakeholders. State’s performance in implementing its new responsibilities was uneven in that we found strengths in some areas and opportunities for improvement in others. The Department of State made progress in providing stakeholders and the public with relevant information and giving them an opportunity to offer input. State took steps to consult with interested parties and the public and to coordinate with USPS, other federal agencies, and other nongovernmental stakeholders involved in UPU matters through their inclusion in the U.S. delegation to the UPU Congress. Stakeholders said that State was receptive to input and evenhanded in its consideration of views. State also took steps to increase stakeholder access to UPU documents and UPU meetings. State also clearly signaled key changes in U.S. policy concerning UPU reform. However, the Department of State has opportunities for improvement in several areas. State gave 9 to 17 days of advance notice of the public meetings on UPU matters, did not distribute some materials discussed at the public meetings in advance, and distributed two important proposals at the public meetings after they had been submitted to the UPU. Further, the first two public meetings were timed to occur shortly before UPU deadlines for submitting proposals for consideration by the UPU Congress. For these reasons, stakeholders may have had limited opportunities to give meaningful input. In addition, the limited public record of agency or stakeholder positions on U.S. policy concerning UPU issues may make it difficult for Congress and other interested parties to fully understand the basis for U.S. policy positions. Several options exist for the Department of State to develop a more structured and open process for obtaining stakeholder input, including ensuring better and more advance notification of public meetings and more advance distribution of materials prior to these meetings. Some stakeholders raised concerns about the potential burden of a formalized process, such as FACA, as well as whether such a process would be beneficial. In this regard, we have reported that 10 of 19 agencies we surveyed considered FACA requirements to be more useful than burdensome, and that 13 agencies considered the requirement to keep detailed minutes of advisory committee meetings to be useful to a great or very great extent. Further, staff turnover made it more difficult for the Department of State to provide institutional continuity and expertise on UPU matters. In our view, providing sufficient institutional continuity and expertise will be essential if State intends to play a leadership role in handling complex UPU issues and dealing with domestic and international stakeholders. Continuity and expertise will also be critical to evaluating conflicting positions by various stakeholders, developing U.S. policies on UPU issues, and effectively advocating them in the UPU. State has several options to improve in this area. We recommend that the Secretary of State take appropriate steps to (1) establish a process for developing U.S. policy on UPU matters that would be more structured, timely, open, and conducive to meaningful stakeholder input as well as develop a readily accessible public record and (2) provide sufficient staff continuity and expertise to handle its UPU responsibilities. The Department of State provided comments on a draft of this report in a letter dated January 10, 2000. These comments are summarized below and included as appendix I. We also incorporated technical comments provided by State officials into the report where appropriate. Generally, State said that it was pleased with our report and, with respect to our conclusions, agreed that there were some procedural shortcomings in the Department’s implementation of its new responsibility. State also commented that, concerning substantive UPU issues, it was very pleased with the progress that had been made in a very short time. In response to our first recommendation that State establish a more structured and open process for developing U.S. policy on UPU matters, State acknowledged that it had not given sufficient advance notice of public meetings on UPU-related matters and that minutes should have been kept at those meetings to build a concrete record. State said it can achieve the intended results of FACA without establishing a formal advisory committee through open meetings, adequate public notice, and preservation of meeting minutes. In addition, State reported that it intends to publish more UPU-related material on State’s Internet site and to periodically notify stakeholders of important documents that appear on UPU’s Internet site. We agree that these steps would be useful. However, it is not clear to us what process State intends to use to formulate and coordinate U.S. policy on UPU matters. For example, State did not address whether it would distribute materials in advance of public meetings, make key U.S. proposals available before they are submitted to the UPU, and schedule meetings in a manner conducive to meaningful stakeholder input. In addition, it is not clear what UPU-related documents will be made publicly available so that Congress and other interested parties can understand the basis for U.S. policy positions. For these reasons, it is not clear to us whether State will fully implement our recommendation concerning its process for developing policy on UPU matters. In regard to our second recommendation that State provide sufficient staff continuity and expertise to handle its UPU responsibilities, it is not clear how State will respond. State commented that its standard practice is for the vast majority of policy officer positions to be held by career Foreign Service Officers whose positions are rotated every 2 or 3 years. State said that staff rotation will automatically generate a certain lack of continuity in the handling of UPU matters, especially in contrast with USPS, which is staffed by career officers of long tenure. However, State noted that its career Foreign Service Officers are accustomed to short lead times in the development of new expertise, and that at least one career civil service staff member not subject to frequent rotation will be involved in UPU activities. We do not know whether the Department of State’s staffing for UPU- related matters will be sufficient to provide institutional continuity and expertise for it to play a leadership role in handling complex UPU issues and dealing with domestic and international stakeholders. For example, State’s UPU-related responsibilities include (1) formulating U.S. policy on UPU issues, (2) participating in UPU groups that include both UPU councils and the High Level Group that is to prepare recommendations concerning UPU reform, (3) coordinating with other federal agencies and domestic stakeholders, and (4) reaching out to other UPU member countries to develop support for U.S. positions. We recognize that State must balance its UPU-related responsibilities with other departmental priorities, such as its responsibilities for numerous United Nations organizations. State’s comments did not indicate whether the department has conducted or plans to conduct a needs assessment to determine the number and type of staff it will need in the UPU area. Nor did State say what its current staffing plans are for fulfilling its UPU responsibilities or how it plans to reduce the frequency of staff turnover in the future given the turnover that occurred within the first year. For these reasons, it is not clear whether State’s staffing will result in the institutional continuity and expertise needed for it to effectively handle its multiple responsibilities in this area. Although State has generally indicated that it intends to address its procedural shortcomings, State’s comments on our draft report were not very specific as to the steps it planned to take concerning our recommendations. We are asking the Secretary to provide greater detail on the Department’s planned actions in its response to Congress within 60 days of the date of this report as required under 31 U.S.C. 720. 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 Representative Dan Burton, Chairman, and Represenative Henry Waxman, Ranking Minority Member, House Committee on Government Reform; Representative Chaka Fattah, Ranking Minority Member, House Subcommittee on the Postal Service; Representative Sam Gejdenson, Ranking Minority Member, House Committee on International Relations; Representative Steny H. Hoyer, Ranking Minority Member, House Appropriations Subcommittee on Treasury, Postal Service, and General Government; the Honorable Madeleine K. Albright, Secretary of State; William J. Henderson, Postmaster General, Chief Executive Officer; and other interested congressional members. We will also make copies available to others on request. Major contributors to this report were Teresa Anderson, Kenneth E. John, and Jill P. Sayre. If you have any questions about this report, please contact me on (202) 512-8387 or at [email protected]. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touch- tone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed how the Department of State has implemented its new responsibilities for U.S. policy regarding U.S. participation in the Universal Postal Union (UPU). GAO noted that: (1) State faced difficult challenges in assuming its new UPU-related responsibilities less than a year before the UPU Congress met in August and September 1999 to update binding agreements governing international postal service; (2) State's performance in implementing these new responsibilities was uneven in that GAO found strengths in some areas and opportunities for improvement in other areas; (3) State made progress in its first year in providing stakeholders and the general public with relevant information on UPU matters and giving them an opportunity to offer input into U.S. policy concerning the UPU; (4) State coordinated with the United States Postal Service, other federal agencies, and other nongovernmental stakeholders that were involved in UPU matters and included some of these stakeholders in the U.S. delegation to the UPU Congress; (5) stakeholders said that State was receptive to input and evenhanded in its consideration of views; (6) in addition, State clearly signaled changes to U.S. policy on issues related to UPU reform; (7) State officials said that the United States presented a different view and approach to the UPU with respect to raising issues of UPU reform that gave impetus to the UPU's decision to establish a process to consider reform issues; (8) several options exist for State to develop a more structured and open process for obtaining stakeholder input including ensuring better and more advance notification of public meetings and more advance distribution of materials prior to these meetings; (9) some stakeholders have raised concerns about the potential burden on State of using a formalized process to handle UPU-related responsibilities as well as whether such a process would be beneficial; (10) in this regard, 10 of 19 federal agencies that accounted for 90 percent of the Federal Advisory Committee Act (FACA) committees have reported that FACA requirements are more useful than burdensome; (11) representatives of federal and nonfederal organizations in the U.S. delegation to the UPU Congress said that staff turnover, combined with the limited time available before the UPU Congress, affected State's ability to fully understand the implications associated with various complex UPU policy issues; and (12) providing sufficient institutional continuity and expertise will be essential if State intends to play a leadership role in handling complex UPU issues and dealing with domestic and international stakeholders. |
Section 1423 of the Services Acquisition Reform Act of 2003 directed the Administrator for Federal Procurement Policy to establish an acquisition advisory panel to (1) review all federal acquisition laws and regulations and, to the extent practicable, governmentwide acquisition policies, with a view toward ensuring effective and appropriate use of commercial practices, performance-based contracting, the performance of acquisition functions across agency lines of responsibility, and the use of governmentwide contracts and (2) make any recommendations for the modification of laws, regulations, or policies that are considered necessary to protect the best interests of the federal government; ensure the continuing financial and ethical integrity of acquisitions by the federal government; and enhance effective, efficient, and fair award and administration of contracts for the acquisition of goods and services. The Administrator for Federal Procurement Policy appointed the panel members in February 2005. The panel held 31 public meetings and heard the testimony of 108 witnesses, representing 86 entities from industry, government, and public interest organizations. Witnesses included representatives from GAO. The panel’s public deliberations produced about 7,500 pages of transcript. In addition, the panel received written public statements from over 50 sources, including associations, individual companies, and members of the public. The documents and transcripts associated with the panel’s deliberations were available to the public via a Web site established specifically for the panel’s work. The panel’s final report, which was dated January 2007, was released in its final form in July 2007. The report contains seven chapters that cover the following areas: commercial practices, performance-based acquisition, interagency contracting, the federal acquisition workforce, the appropriate role of contractors supporting government, the federal procurement data, and small business. In all, the panel made 89 recommendations for the modification of laws, regulations, or policies that it considered necessary as the result of its review. The 89 recommendations in the panel report are largely consistent with our past work and recommendations. Presented below is a discussion of the seven areas the panel reviewed, the general thrust of the panel’s recommendations, and our views on them. According to the panel, the bedrock principle of commercial acquisition is competition. The panel found that defining requirements is key to achieving the benefits of competition because procurements with clear requirements are far more likely to produce competitive, fixed price offers that meet customer needs. Further, the panel found that commercial organizations invest the time and resources necessary to understand and define their requirements. They use multidisciplinary teams to plan their procurements, conduct competitions for award, and monitor contract performance. Commercial organizations rely on well-defined requirements and competitive awards to reduce prices and obtain innovative, high- quality goods and services. Hence, practices that enhance and encourage competition were the basis of the panel recommendations. Among other things, the panel recommended that the requirements process be improved, competitive procedures be strengthened, and the definition of commercial services be amended. Our work is generally consistent with the panel recommendations, and we have issued numerous products that address the importance of a robust requirements definition process and the need for competition. For example, in January 2007, we testified that poorly defined or broadly described requirements have contributed to undesired service acquisition outcomes. To produce desired outcomes within available funding and required time frames, our work has shown that DOD and its contractors need to clearly understand acquisition objectives and how they translate into the contract’s terms and conditions. The absence of well-defined requirements and clearly understood objectives complicates efforts to hold DOD and contractors accountable for poor acquisition outcomes. This has been a long-standing issue. Previously, in 2000, we reported that DOD was not clearly defining requirements for most information technology services. Requirements were not clearly defined because the orders for information technology services covered several years of effort, and officials were uncertain what support they would need in future years. The 22 orders we reviewed—with an awarded value of $553 million— typically provided for reimbursing the contractors’ costs, leaving the government bearing most of the risk of cost growth. Further, a majority of these orders were awarded without competition. More recently, we testified, in July 2007, that agencies, among other things, need to translate their true needs into executable programs by setting realistic and stable requirements. However, agencies too often promise capabilities they cannot deliver and proceed to development without adequate knowledge. As a result, programs take significantly longer, cost more than planned, and deliver different capabilities than promised. Regarding competition, we have stated that competition is a fundamental principle underlying the federal acquisition process. Nevertheless, we have reported numerous times on the lack of competition in DOD’s acquisition of goods and services. For example, we noted in April 2006 that DOD awarded contracts for security guard services supporting 57 domestic bases, 46 of which were done on an authorized sole-source basis. The sole-source contracts were awarded by DOD despite recognizing it was paying about 25 percent more than previously paid for the contracts awarded competitively. We also reported in July 2004 that guidance was needed to promote competition for defense task orders placed against indefinite delivery, indefinite quantity contracts. We found that competition requirements were waived for nearly half (34 of 74) of the multiple-award contract and federal supply schedule orders we reviewed. Often, contracting officers waived competition based on requests from the DOD program offices to retain the services of contractors currently performing the work. In addressing these requests, safeguards to ensure that waivers were granted only under appropriate circumstances were lacking. In addition, the requirements for documenting the basis for waivers were not specific, and there was no requirement that waivers be approved above the level of the contracting officer. We made recommendations to the Secretary of Defense to (1) develop guidance on the conditions under which a waiver of competition may be used, (2) require detailed documentation to support waivers, and (3) establish approval authority above the contracting officer level based on the value of the order. Although these recommendations were directed at DOD, they are relevant across all federal agencies and consistent with the panel recommendations to strengthen competitive procedures across the federal government with respect to policy, procedures, and training. As the panel noted, there have also been concerns about the federal government’s definition of a commercial service. The panel finding was that the current regulatory treatment of commercial items and services allows for goods and services not sold in substantial quantities in the commercial market to be classified as “commercial” and purchased using streamlined procedures under Part 12 of the FAR, which deals with commercial items. The panel noted that the most critical element of the definition of commercial services is that the service must be offered and sold competitively, in substantial quantities, in the commercial marketplace. If the definition is overly broad, misclassification can result and the government might lack assurances that the prices of those items and services are reasonable. When commercial market forces that meet the critical elements do not exist, the panel noted that more traditional methods, such as negotiated procurements described under FAR Part 15, should be used. FAR Part 15 describes the procedures to be used when an item or service is purchased under negotiated procurements. While we addressed issues related to commercial items in the past, we have not specifically made recommendations on the definition of commercial items or services. However, in July 2006, we reported that DOD sometimes uses commercial item procedures to procure items that are misclassified as commercial items and therefore not subject to the forces of a competitive marketplace. When an item is designated as commercial, the government should be able to determine if the price is reasonable based on prices found in the commercial marketplace. However, if the government designates a service (or an item) as commercial merely because the service is “of a type” that is sold commercially, but the offered service is not readily available in the commercial market, the government reduces its ability to assess the reasonableness of the contractor’s price because it does not have prices derived through the benefit of competition in the commercial market place. Another panel recommendation dealt with pricing of commercial services. The panel reasoned that if the service meets the definition of a commercial service—in other words, it is sold in the commercial marketplace in substantial quantities—then an agency should be able to obtain a reasonable price based on the effects of existing competition, market research, and analysis of prices for similar commercial sales. The panel reasoned that even if the agency purchased a commercial service with no or limited competition, the prices that would be obtained would reflect market forces. The panel recommended, therefore, that when an agency buys a commercial service that meets the definition of a commercial service, a contracting officer may not require certification of detailed cost breakdowns, nor may contractor costs be the subject of a postaward audit. While we recognize the panel’s position with regard to limiting the use of postaward audits with respect to procuring commercial services, our past work has been supportive of postaward audits as a tool that should be available to the acquisition workforce in certain other cases to ensure that the government receives fair and reasonable prices. Specifically, we reported that the General Services Administration (GSA) Inspector General found that the postaward audits of acquisitions using Multiple Award Schedules contracts were a deterrent to vendor pricing abuse. Additionally, they can result in recovery of money from contractors that have overpriced their products after the contract was awarded. Both GSA and the Department of Veterans Affairs have recovered millions of dollars through the use of postaward audits for their schedule contracts. For example, we found the Department of Veterans Affairs recovered $90 million from postaward audits during fiscal years 1999 to 2004. The panel reported that performance-based acquisition (PBA) has not been fully implemented in the federal government even though OMB has encouraged greater use of it—setting a general goal in 2001 of making performance-based contracts 40 percent or more of all eligible service acquisitions for fiscal year 2006. The panel reported that agencies were not clearly defining requirements, not preparing adequate statements of work, not identifying meaningful quality measures and effective incentives, and not effectively managing the contract. The panel noted that a cultural emphasis on “getting to award” still exists within the government, which precludes taking the time to clarify agency needs and adequately define requirements. The panel recommended that OFPP issue more explicit implementation guidance and create a PBA “Opportunity Assessment” tool to help agencies identify when they should consider using PBA contracts. Like the panel, we have found that agencies have faced a number of issues when using PBA contracts. For example, we reported in April 2003 that there was inadequate guidance and training, a weak internal control environment, and limited performance measures and data that agencies could use to make informed decisions on when to use PBA. We have made recommendations similar to the panel’s. For example, we have recommended that the Administrator of OFPP work with agencies to periodically evaluate how well agencies understand PBA and how they can apply it to services that are widely available in the commercial sector, particularly with more unique and complex services. The panel’s concern that agencies are not properly managing PBA contracts is also consistent with our work on surveillance of service contracts. In a March 2005 report, we found that proper surveillance of service contracts, including PBAs, was not being conducted, leaving DOD at risk of being unable to identify and correct poor contractor performance. Accordingly, we recommended that the Secretary of Defense ensure the proper surveillance training of personnel and their assignment to contracts occur no later than the date of contract award. We further recommended the development of practices to help ensure accountability for personnel carrying out surveillance responsibilities. We have also found that some agencies have attempted to apply PBA to complex and risky acquisitions, a fact that underscores the need to maintain strong government surveillance to mitigate risks. Interagency contracts are designed to leverage the government’s aggregate buying power and provide a simplified method to procure commonly used goods and services. For example, the General Services Administration provides a wide range of contracts that are available to all government agencies for purchasing a wide range of commercially available supplies and services at competitive prices. The panel found that reliance on interagency contracts is significant. According to the panel report, 40 percent of the total 2004 obligations, or $142 billion, was obligated through the use of interagency contracts. The panel also found that a significant reason for the increased use of these contracts has been reductions in the acquisition workforce accompanied by increased workloads and pressures to reduce procurement lead times. Accordingly, the panel made numerous recommendations to improve the use of interagency contracts with the intent of enhancing competition, lowering prices, improving the expertise of the acquisition workforce, and improving guidance for choosing the most appropriate interagency contract for procurements. Our work is generally consistent with the panel’s recommendations on interagency contracting. In fact, 15 of our products on interagency contracting were cited in the panel report. These reports included numerous recommendations that are consistent with the panel’s recommendations. Our reports recognize that interagency contracts can provide the advantages of timeliness and efficiency by leveraging the government’s buying power and providing a simplified and expedited method of procurement. However, a number of factors make these types of contracts high risk; these factors include their rapid growth in popularity, their use by some agencies that have limited expertise with this contracting method, and the number of parties that might be involved. Taken collectively, these factors contribute to a much more complex procurement environment—one in which accountability is not always clearly established. In 2005, because we found that interagency contracts can pose risks if they are not properly managed, we designated the management of interagency contracting a governmentwide high-risk area. Specifically, our prior work has found that agencies involved in the interagency contracting process have not always obtained required competition, evaluated contracting alternatives, or conducted adequate oversight. For example, our 2006 review at the Department of Homeland Security (DHS), found that DHS did not have comprehensive guidance for the use of all types contracts, including interagency contracts. DHS relied on this contracting method for speed and convenience, but did not assess alternatives to ensure good value when selecting among these contracting options and did not evaluate the outcomes of this contracting method. Additionally, our 2005 review of DOD’s use of two franchise funds had similar findings. For example, DOD did not have clear guidance on the proper use of interagency contracting services and selected them based on convenience without analyzing whether this was the best method meeting its purchasing needs. The franchise fund organizations providing these services did not always obtain the full benefits of competitive procedures, did not otherwise ensure fair and reasonable procedures, and may have missed opportunities to achieve savings on millions of dollars in purchases. In another review, we found task orders placed by DOD on a GSA schedule contract did not always satisfy legal requirements for competition because the work was not within the scope of the underlying contract. The panel stated that small businesses are recognized as one of the nation’s most valuable economic resources. The report noted that studies commissioned by the U.S. Small Business Administration Office of Advocacy reveal that small businesses represent 99.7 percent of employers and employ about half of all private-sector employees. The panel reported that recognizing the vital role of small businesses in the U.S. economy, Congress has emphasized small business contracting as a fundamental socioeconomic goal underlying federal procurement policy. For example, Congress established a governmentwide small business contracting goal of awarding not less than 23 percent of the total value of all federal prime contracts to small businesses each fiscal year. The panel made recommendations to change the guidance to contracting officers in awarding contracts to small businesses. These recommendations are intended to improve the policies and, hence, address the socioeconomic benefits derived from acquiring services from small businesses. All but one of the recommendations requires legislation for implementation. While our work on small business has addressed a number of these policy issues, including how they are implemented, we have not made recommendations that could change the guidance to contracting officers that would affect the socioeconomic benefits between achieving contract performance and ensuring opportunities for various categories of small businesses to participate in federal contracts. We do not usually make recommendations for statutory and regulatory changes when arguments for such changes are based on value judgments, such as those related to setting small business contracting goals. The federal acquisition workforce was not one of the topics Congress directed the panel to address. The panel reported, however, that it could not provide the insight and assistance Congress sought without addressing the problems presented by the federal acquisition workforce. Specifically, panel members recognized a significant mismatch between the demands placed on the acquisition workforce and the personnel and skills available within the workforce to meet those demands. The panel found, for example, that demands on the federal acquisition workforce have grown substantially while at the same time, the complexity of the federal acquisition system as a whole has increased. Accordingly, the panel made a number of recommendations designed to define, assess, train, and collect data on the acquisition workforce and to recruit talented entry- level personnel and retain its senior workforce. Our work is generally consistent with the panel findings and recommendations on the acquisition workforce. On the basis of observations made by acquisition experts from the federal government, private sector, and academia, we reported in October 2006 that agency leaders have not recognized or elevated the importance of the acquisition profession within their organizations. The officials further noted that a strategic approach had not been taken across government or within agencies to focus on workforce challenges, such as creating a positive image essential to successfully recruit and retain a new generation of talented acquisition professionals. In September 2006, we testified that while the amount, nature, and complexity of contract activity has increased, DOD’s acquisition workforce, the largest component of the government’s acquisition workforce, has remained relatively unchanged in size and faces certain skill gaps and serious succession planning challenges. Further, we testified that DOD’s acquisition workforce must have the right skills and capabilities if it is to effectively implement best practices and properly manage the goods and services it buys. In July 2006 we reported that in the ever-changing DOD contracting environment, the acquisition workforce must be able to rapidly adapt to increasing workloads while continuing to improve its knowledge of market conditions, industry trends, and the technical details of the goods and services it procures. Moreover, we noted that effective workforce skills were essential for ensuring that DOD receives fair and reasonable prices for the goods and services it buys and identified a number of conditions that increased DOD’s vulnerabilities to contracting waste and abuse. We had previously stated in a report issued in 2002 that procurement reforms, changes in staffing levels and workload, and the need for new skill sets have placed unprecedented demands on the acquisition workforce. For example, DOD’s civilian acquisition workforce level was downsized in the 1990s. However, we noted that DOD’s approach to acquisition workforce reduction was not oriented toward shaping the makeup of the workforce; rather, DOD relied primarily on voluntary turnover and retirements, freezes on hiring authority, and its authority to offer early retirements and buyouts to achieve reductions. The panel reported that, in some cases, contractors are solely or predominantly responsible for the performance of mission-critical functions that were traditionally performed by government employees, such as acquisition program management and procurement, policy analysis, and quality assurance. Further, the panel noted that this development has created issues with respect to the proper roles of, and relationships between, federal employees and contractor employees in the “blended” workforce. The panel stated that although federal law prohibits contracting for activities and functions that are inherently governmental, uncertainty about the proper scope and application of this term has led to confusion, particularly with respect to service contracting outside the scope of OMB’s Circular A-76, which provides guidance on competing work for commercial activities via public-private competition. Moreover, according to the panel, as the federal workforce shrinks, there is a need to ensure that agencies have sufficient in-house expertise and experience to perform inherently governmental functions by being in a position to make critical decisions regarding policy and program management issues and to manage the performance of their contractors. The panel recommended that the FAR Council consider developing a standard organizational conflict-of-interest clause for solicitations and contracts that set forth a contractor’s responsibility concerning its employees and those of its subcontractors, partners, and any other affiliated organization or individual; that OFPP update the principles for agencies to apply in determining which functions government employees must perform; and that OFPP ensure that the functions identified as those that must be performed by government employees are adequately staffed. On the basis of our work, we have similar concerns to those expressed by the panel, and our work is generally consistent with the panel’s recommendations on the appropriate role of contractors supporting the federal acquisition workforce. We have testified and reported on the issues associated with an unclear definition of what constitutes inherently governmental functions, inadequate government experience and expertise for overseeing contractor performance, and organizational conflicts of interest related to contractor responsibilities. We found that there is a need for placing greater attention on the type of functions and activities that could be contracted out and those that should not, reviewing the current independence and conflict-of-interest rules relating to contractors, and identifying the factors that prompt the government to use contractors in circumstances where the proper choice might be the use of government employees or military personnel. In our recent work at DHS, we found that more than half of the 117 statements of work we reviewed provided for services that closely support the performance of inherently governmental functions. We made recommendations to DHS to improve control and accountability for decisions resulting in buying services that closely support inherently governmental functions. Accordingly, our work is consistent with panel recommendations to update the principles for agencies to apply in determining which functions government employees must perform, and ensure that the functions identified as those that must be performed by government employees are adequately staffed. The Federal Procurement Data System-Next Generation (FPDS-NG) is the federal government’s primary central database for capturing information on federal procurement actions. Congress, executive branch agencies, and the public rely on FPDS-NG for a wide range of information including agency contracting actions, governmentwide procurement trends, and how procurement actions support socioeconomic goals and affect specific geographical areas and markets. The panel reported that FPDS-NG data, while insightful when aggregated at the highest level, continue to be inaccurate and incomplete at the detailed level and cannot be relied on to conduct procurement analyses. In its report, the panel noted its frustration with trying to use FPDS-NG data for selected detailed analyses. The panel believes the processes for capturing and reporting FPDS-NG data need to be improved if it is to meet user requirements. As a result, the panel made 15 recommendations aimed at increasing the accuracy and the timeliness of the FPDS-NG data. For example, the panel recommended that an independent verification and validation should be undertaken to ensure all other validation rules are working properly in FPDS-NG. The panel also recommended that Congress revise the OFPP Act —an act that required a federal system for collecting and disseminating procurement statistics—to assign responsibility for timely and accurate data reporting to FPDS-NG or successor system to the head of executive agency. The panel recommended that OFPP ensure that FPDS-NG reports data on orders under interagency and enterprisewide contracts and make these data publicly available. For example, the panel recommended that the OFPP Interagency Contracting Working Group address data entry responsibility as part of the creation and continuation process for interagency and enterprisewide contracts. The panel expects its recommendations, if properly implemented, to increase the accuracy and usefulness of federal procurement data. Our work has identified similar concerns as those expressed by the panel and made similar recommendations. The panel cited our work numerous times in its report. Like the panel, we have pointed out that FPDS-NG data accuracy has been a long-standing problem and have made numerous recommendations to address this problem. As early as 1994, we reported that the usefulness of federal procurement data for conducting procurement policy analysis was limited. We have also had concerns about the accountability for data accuracy and reported in fiscal year 2002 that the Federal Procurement Data Center (FPDC) does not have the knowledge to correct inaccurate data or the authority to require agencies to do so. More recently, in 2005, we again raised concerns about the accuracy and timeliness of the data available in FPDS-NG. We have also reported that the use of independent verification and validation function is recognized as a best business practice and can help provide reasonable assurance that the system satisfies its intended use and user needs. We also reported in 2005 that the need for collecting and tracking data on interagency contracting transactions has become increasingly important. One panel recommendation called for us to conduct an audit that addresses the quality of FPDS-NG data and agency compliance in providing accurate and timely data. As our work has shown, we have already addressed these issues and we believe such an audit would not be necessary if OFPP implements the other recommendations related to FPDS-NG data. OFPP representatives told us the office agrees with almost all of the 89 panel recommendations and has already acted on some SARA recommendations, while potential actions are pending on others. OFPP identified legislative actions and FAR cases that could address over one- third of the recommendations. OFPP expects to address at least 51 of the remaining recommendations and plans to work with the chief acquisition officer or senior procurement official within each agency to do so. In some cases, OFPP has established milestones and reporting requirements to help provide it with visibility over the progress and results of implementing the recommendations. Although OFPP has taken some steps to track the progress of selected recommendations, it does not have an overall strategy or plan to gauge the successes and shortcomings in how the panel recommendations are implemented and how they improve federal acquisitions. Table 1 shows how OFPP expected the 89 recommendations to be implemented. This information is presented in detail in appendix II. OFPP noted that while the panel directed 17 recommendations to Congress, legislative actions could address as many as 23 panel recommendations. Panel recommendations directed to Congress include such potential legislative changes as authorizing the General Services Administration to establish a new information technology schedule for professional services and enacting legislation to strengthen the preference for awarding contracts to small businesses. An example of the latter is amending the Small Business Act to remove any statutory provisions that appear to provide for a hierarchy of small business programs. According to the panel, this is necessary because an agency will have difficulty meeting its small business goal if any one small business program takes a priority over the others. According to OFPP, the House or Senate versions of the National Defense Authorization Act (NDAA) for 2008 include provisions that, if passed, will address six of the panel recommendations. For example, a panel recommendation to expand the requirements under Section 803 of the NDAA for 2002 to all federal agencies, which addresses competition for task and delivery orders, is included in a version of the NDAA for 2008. However, if Congress does not act on all or some of the recommendations included in the legislative proposals, responsibility for implementing more of the recommendations could shift to OFPP. For those that do not pass, OFPP representatives told us the office could take administrative actions, such as issuing a policy memorandum or initiating a FAR case, to implement most of them. OFPP identified nine recommendations that it expects to address by proposing revisions to the FAR, which involve opening FAR cases. FAR cases follow a process that allows the public, as well as federal agencies, to comment on proposed changes to the FAR. Five cases have been opened thus far. For example, one case is addressing a panel recommendation to improve competition by making the requirements of Section 803 of the Fiscal Year 2002 National Defense Authorization Act applicable not just to DOD, but to all agencies. Currently, Section 803 requires DOD to give fair notice to all multiple award contract holders to ensure that competition is likely to occur when agencies buy from multiple award contracts. OFPP has identified 51 recommendations that it plans to address. According to OFPP, it will do this by using administrative mechanisms such as issuing policy memorandums and completing ongoing initiatives. According to OFPP, 34 recommendations have been addressed in some manner while 17 are still under review, as described below: According to OFPP, seven recommendations, and a portion of three others, have been addressed by issuing seven policy memorandums, as shown in appendix III. The memorandums cover a variety of issues including enhancing competition, improving the use of PBAs, addressing workforce shortfalls and capability gaps, and addressing FPDS-NG data problems. Some of the policy memorandums have reporting requirements that can provide OFPP some degree of oversight to determine whether agencies are implementing the policy requirements while some do not. For those that do, the chief acquisition officer within each federal agency is accountable for implementing the policy and reporting results to OFPP. OFPP expects to address 22 recommendations by completing implementation of existing initiatives. For example, several of the panel acquisition workforce recommendations are directed at getting federal agencies to accurately define its workforce. OFPP believes this initiative is being implemented through its existing policy and reporting requirements, in combination with agencies continuing to migrate workforce data into the Acquisition Career Management Information System. This system maintains data on acquisition workforce personnel such as employment history, education, training, certifications, grades, series, and retirement eligibility. According to OFPP, five recommendations are addressed because existing policy and regulations already exist. It is a matter of federal agencies properly adhering to the policy and regulations. For example, one of the panel recommendations addresses the use of time-and- material contracts. Specifically, the panel recommended that current policies limiting the use of time-and-material contracts and providing for the competitive awards of such contracts should be enforced. OFPP concurs and believes that, if current time-and-material policies are enforced by agencies, this panel recommendation will be implemented. Agencies’ not adhering to existing policies and regulations, however, led to the panel’s recommendation. OFPP has not established milestones and reporting requirements that would provide help it exercise oversight on agency actions and ensure that all existing policies and regulations are followed. The 17 panel recommendations that are still under OFPP review involve a wide variety of issues. Examples include updating the principles for agencies to apply in determining which functions must be performed by government employees and potentially modifying the FAR by (1) providing regulatory guidance to improve competition by establishing weights to be given to evaluation factors, and (2) creating a contract-specific “Performance Improvement Plan” tailored to specific acquisitions to improve postaward contract performance management. We have included two recommendations in this category that OFPP representatives told us they do not agree with. First, OFPP disagrees with the panel recommendation to rename Contracting Officer Technical Representatives as Contracting Officer Performance Representatives. The panel believed that this recommendation highlights the distinctive nature of the position while affording those filling it with sufficient education and training to meet demanding oversight requirements. Together, the name change and more training could help bring about a culture change in the way PBAs are dealt with by the acquisition workforce. OFPP does not believe that the benefit of changing the name from COTR to COPR would add significant value, given the expense of amending all documents and training materials, governmentwide that address COTRs. Second, OFPP disagrees with the panel recommendation dealing with the protest of task and delivery orders because the recommendation would permit protests of awards over $5 million under multiple award contracts. The panel’s position was that task and delivery orders over $5 million were most likely not routine or repetitive purchases; rather, they were in effect contracts that should be subject to bid protests. The current bill for the National Defense Authorization Act for Fiscal Year 2008 includes a section that provides for bid protests of task and delivery orders over $10 million. The six recommendations that OFPP expects agencies to address include (1) ethics training for contractor employees, regarding which the SARA Acquisition Advisory Panel report states agencies should consider whether and how to provide such training; (2) human capital planning for the acquisition workforce, for which the panel declined to recommend that OFPP mandate a governmentwide solution; (3) the Federal Procurement Data System–Next Generation to ensure sufficient and appropriate personnel are available to test changes to the system and that sufficient funds are available for its operation. As noted above, ensuring that the panel’s agency-specific recommendations are implemented requires OFPP oversight through the use of milestones and reporting requirements, but they have not been put in place for these agency-specific recommendations. The SARA Panel, like GAO, has made numerous recommendations to improve federal government acquisition—from encouraging competition and adopting commercial practices to improving the accuracy and usefulness of procurement data. Our work is largely consistent with the panel’s recommendations, and when they are taken as a whole, we believe the recommendations, if implemented effectively, can bring needed improvements in the way the federal government buys goods and services. OFPP, as the lead office for responding to the report, is now in a key position to sustain the panel’s work by ensuring that panel recommendations are implemented across the federal government in an effective and timely manner regardless of whether Congress takes action through legislation initiatives or responsibility for implementation eventually shifts to OFPP. To do this, OFPP will need to work with the chief acquisition officers and senior procurement officials across all the federal agencies to lay out a strategy or plan that includes milestones and reporting requirements that OFPP could use to establish accountability, exercise oversight, and gauge the progress and results of implementing the recommendations. To help ensure timely and effective implementation of SARA Panel recommendations, we recommend that the Administrator of OFPP develop an oversight strategy or plan, in conjunction with agency chief acquisition officers and senior procurement officials, that would include milestones and reporting requirements OFPP could use to gauge the status and results of implementing the panel recommendations. OFPP officials provided oral comments on a draft of this report. They stated that OFPP generally agreed with our findings and observations and agreed in principle with our recommendation. They also noted that they would rely on Chief Acquisition Officers and senior procurement executives within federal agencies to help implement the recommendations. OFPP provided technical comments, which we incorporated into the report as appropriate. As agreed, unless you publicly announce its contents, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies of this report to the Director of the Office of Management and Budget and interested congressional committees. We will also make copies available at no charge on the GAO Web site at http://www.gao.gov. If you have questions about this report or need additional information, please contact me at (202) 512-4841 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 were James Fuquay, Assistant Director; Julie Hadley; Daniel Hauser; John Krump; Jean Lee; Robert Miller; and Robert Swierczek. To determine how the Service Acquisition Reform Act (SARA) Acquisition Advisory Panel recommendations compare to GAO’s past work and recommendations, we reviewed and analyzed the panel report and related GAO products. We compared the panel recommendations to relevant GAO products and determined whether each of the panel’s recommendations is consistent with our work or whether we have no basis to take a position, based on the following criteria: The SARA Panel recommendation is consistent with our work and broad institutional knowledge obtained through long-term involvement with the subject, The SARA Panel recommendation is not consistent with our work and broad institutional knowledge obtained through long-term involvement with the subject, Our work provided no basis to take a position on the SARA Panel recommendation. In some cases, we considered the panel recommendations consistent with our past work if we thought their implementation would help address broader acquisition issues covered by our work, even though the panel recommendations were not identical or similar to our specific recommendations. As part of our analysis, we also interviewed the chair of the panel to obtain additional information on the scope of work associated with some of the report issues and to discuss the rationale behind some of the panel recommendations. The number of panel recommendations is dependent upon whether each actionable item is counted as a separate stand-alone recommendation or whether several actionable items are consolidated and counted as one recommendation. For example, the panel report contains 15 separate actionable items in its chapter on commercial practices. However, they are consolidated into 10 numbered recommendations. For the purposes of our review, we counted the actionable items as separate recommendations when we deemed it appropriate to do so. As a result, we show a total of 89 actionable items or recommendations. To determine how the panel recommendations will likely be addressed, we obtained the Office of Federal Procurement Policy’s (OFPP) comments on each recommendation and how OFPP plans or expects them to be implemented. In addition, we reviewed OFPP policy memorandums issued to senior procurement executives and recent Federal Acquisition Regulatory Council initiatives for those recommendations identified by OFPP as its planned action. We also reviewed pending legislative proposals in the U.S. Senate and House of Representatives as of October 31, 2007, to identify legislative initiatives that could address some of the panel recommendations. As a result, we present the recommendations in the following categories: (1) legislative action, (2) changes to the FAR, (3) OFPP actions, and (4) agency actions. We conducted our review from March 2007 to November 2007 in accordance with generally accepted government auditing standards. Appendix II lists the SARA Acquisition Advisory Panel recommendations and shows the recommendations that are generally consistent or not consistent with our past work, or for which we have no basis to take a position. The number of panel recommendations is dependent upon whether each actionable item is counted as a separate stand-alone recommendation or whether several actionable items are consolidated and counted as one recommendation. For example, the panel report contains 15 separate actionable items in its chapter on commercial practices. However, they are consolidated into 10 numbered recommendations. For the purposes of our review, we counted the actionable items as 15 separate recommendations, as shown below. As a result, we show a total of 89 actionable items or recommendations for all chapters in the report. We obtained the Office of Federal Procurement Policy’s comments on how each panel recommendation is being addressed and categorized as shown below. Establishes a structured training program for Contracting Officer Technical Representatives and other individuals performing these functions, that standardize competencies and training across civilian agencies and improves collective stewardship of taxpayer dollars. The Chief Acquisition Officer of each agency is responsible for the policies and programs necessary to implement this certification program. There is no requirement for a encies to report their actions to OFPP. Highlights the ke survey that CAOs developing strategies competency gaps in t workforce. Allow the hiring of retired annuitants to fill critical vacancies in the acquisition field. OFPP, to implement the General Services Administration Modernization Act (P.L. 109-313). 2. Annual reports on the use of this law are to be provided to the Office of Person November 1, each fi 2008. nel Management and OFPP by uest help and leadership i forcing the use of compe Req rein and related practices a competitive environm port, submit an a promoting competition. T 20, 2007, and ann ally ther annual report is to be provid showing how the agency is he report is d ue December eafter. A copy of the first ent. ed to OFPP. 2. The General Services Administration is to develop new competition m trics to Procurement Data System. Recommend appropriate PBA performance goals PBA learning assets useful guides and training opportunities, to ensure this acquisition strategy is used effectively. In fiscal year 2006 agencies wer methods to 40 percent or more o actions over $25,000. In Dece the goal to 50 percent for fisc ensure that their PAB plans re information. Improve the partnership between program/project managers and contracting professionals for a common understanding of how to best meet acquisition needs. 1. The Federal Acquisition Certification for Program and Project Managers shall be accepted by, at minimum, all civilian agencies as evidence that an employee meets the core training and experience requirements. 2. The F deral Acquisition Ins ute will conduct periodic tite reviews to ensure the Feder for Program and Project managed consistently. Agencies must provide OFPP with responsibility assignments and data validation ensure that 2007 Federal Pro reflect accurate and timely co report was due May 16, 2007. curement Data System data ntract information. The initial tion. Federal Acquisitions and Contracting: Systemic Challenges Need Attention. GAO-07-1098T. Washington, D.C.: July 17, 2007. Defense Contracting: Improved Insight and Controls Needed over DOD’s Time-and- Materials Contracts. GAO-07-273. Washington, D.C.: June 29, 2007. Defense A Better Contro January 17, 2007 cquisitions: DOD Needs to Exert Management and Oversight to l Acquisition of Services. GAO-07-359T. Washington, D.C.: . acting: Efforts Needed to Address Air Force Commercial Risk. GAO-06-995. Washington, D.C.: September 29, 2006. Management: DOD Vulnerabilities to Contracting Fraud, buse. GAO-06-838R. Washington, D.C.: July 7, 2006. Contract M Multiple Aw February 11, 2005. Interagen Suppo 2005. cy Contracting: Problems with DOD’s an d Interior’s Order rt Military Operations. GAO-05-201. Washington, D.C.: April 29, t Management: Guidance Needed to Promote Competition for Orders. GAO-04-874. Washington, D.C.: July 30, 2004. Contr in Purchas D.C.: June act Management: Further Efforts Needed to Sustain VA’s Progress ington, ing Medic Products and Services. GAO-04-718. Washal 22, 2004. Competitive Effic February 27, rcing: Greater Emphasis Needed on Increasing mproving Performan ce. GAO-04-367. Washington, D.C.: 2004. Contract Management: Restructuring GSA’s Federal Supply Service and Federal Technology Service. GAO-04-132T. Washington, D.C.: October 2, 2003. Contract Management: Civilian Agency Compliance with Revised Task and Delivery Order Regulations. GAO-03-983. Washington, D.C.: August 29, 2003. Military Transformation: Progress and Challenges for DOD’s Advanced Distributed Learning Programs. GAO-03-393. Washington, D.C.: February 28, 2003. Contract Management: Improving Services Acquisitions. GAO-02-179T. Washington, D.C.: November 1, 2001. Contract Management: Service Contracting Trends and Challenges. GAO- 01-1074R. Washington, D.C.: August 22, 2001. Contract Management: Few Competing Proposals for Large DOD Information Technology Orders. GAO/NSIAD-00-56. Washington, D.C.: March 20, 2000. Acquisition Reform: Multiple-award Contracting at Six Federal Organizations. GAO/NSIAD-98-215. Washington, D.C.: September 30, 1998. Homeland Security: Observations on the Department of Homeland Security’s Acquisition Organization and on the Coast Guard’s Deepwater Program, GAO-07-453T. Washington, D.C.: February 8, 2007. Implementation of OMB Circular No. A-76 at Science Agencies. GAO-07- 434R. Washington, D.C.: March 16, 2007. Defense Contracting: Improved Insight and Controls Needed over DOD’s Time-and-Materials Contracts. GAO-07-273. Washington, D.C.: June 29, 2007. NASA Procurement: Use of Award Fees for Achieving Program Outcomes Should Be Improved. GAO-07-58. Washington, D.C.: January 17, 2007. Defense Acquisitions: Tailored Approach Needed to Improve Service Acquisition Outcomes. GAO-07-20. Washington, D.C.: November 9, 2006. DOD Systems Modernization: Uncertain Joint Use and Marginal Expected Value of Military Asset Deployment System Warrant Rea Investment. GAO-06-171. Washington, D.C.: ssessment of Planned December 15, 2005. Defense Acquisitions Fees Regardless of Acqu December 19, 2005. OD Needs to Demonstrate That Performance- ber 9, 2005. Contract Management: O artment of Defense S Dep March 17, 2005. Federal Acquisition: Pro Reform Act of 2 gress in Implementing the Services Acquisit 5-233. Washington, D.C.: February 28 , 2005. Department Contract Management for March 18, 2005. Department of Energ Reforms. GAO-03-570T y: Statu . Wash s of Contract and Project Management ington, D.C.: March 20, 2003. Trends. GAO-03-443. 0, 003. Contract Management: Guidance Needed for Using Performance-Based O-02-1049. Washington, D.C.: September 23, 2002. GA Service Contracting . Contract Reform: DO Initiatives Have I September 13, 2002. as Made Progress, but Actions Needed to Ensure ed Results. GAO-02-798. Washington, D.C.: Contract Management: Taking a Strategic Approach to Improving Service Acquisitions. GAO-02-499T. Washington, D.C.: March 7, 2002. Contract Management: Trends and Challenges in Acquiring Services. GAO-01-753T. Washington, D.C.: May 22, 2001. National Laboratories: DOE Needs to Assess the Impact of Using Performance-Based Contracts. GAO-RCED-99-141. Washington, D.C.: May 7, 1999. Department of Energy Based Incentive Contr 1998. : Less ac GAO-R ts. IMD-98-185. Washington, D.C.: July 31, 1 998. High-Risk Se 2007. Transportation-Disadvantage Responsibilities and Increase Preparedness for Evacuations. GAO-07-44. Washington, D.C.: December 22, 2006. d Populations: Actions Needed to Clarify Interagency Contracting: Improved Guidance, Planning, and Oversight Would Enable the Department of Homeland Security to Address Risks. GAO-06-996. Washington, D.C.: September 27, 2006. Hurricane Katrina: Planning for and Management of Federal Disaster Recovery Contracts. GAO-06-622T. Washington, D.C.: April 10, 2006. Interagency Contracting: Franchise Funds Provide Convenience, but Value to DOD Is Not Demonstrated. GAO-05-456. Washington, D.C.: July 29, 2005. GAO’s 2005 High-Risk Update. GAO-05-350T. Washington, D.C.: February 17, 2005. Contract Management: Opportunities to Improve Surveillance on Department of Defense Service Contracts. GAO-05-274. Washington, D.C.: March 17, 2005. Contract Management: Opportunities to Improve Pricing of GSA Multiple Award Schedules Contracts. GAO-05-229. Washington, D.C.: February 11, 2005. High-Risk Series: An Update. GAO-05-207. Washington, D.C.: January 2005. Rebuilding Iraq: Fiscal Year 2003 Contract Award Procedures and Management Challenges. GAO-04-605. Washington, D.C.: Ju ne 1, 2004. Contract Management: Restructuring GSA’s Federal Supply Service and Federal Technology Service. GAO-04-132T. Washington, D.C.: October 2, 2003. Budget Issues: Franchise Fund Pilot Review. GAO-03-1069. Washington, D.C.: August 22, 2003. Management Reform: Continuing Progress in Implementing Initiatives in the President’s Management Agenda. GAO-03-556T. Washington, D .C.: March 26, 2003. Contract Management: Interagency Contract Program Fees Need Mo Oversight. GAO-02-734. Washington, D.C.: July 25, 2002. Contract Management: Taking a Strategic Approach to Improving Service Acquisitions. GAO-02-499T. Washington, D.C.: March 7, 2002. Contract Management: Improving Services Acquisitions. GAO-02-179T. Washington, D.C.: November 1, 2001. Hurricane Katrina: Agency Contracting Data Should Be More Complete Regarding Subcontracting Opportunities for Small Businesses. GAO-07- 205. Washington, D.C.: March 1, 2007. Contract Management: Impact of Strategy to Mitigate Effects of Contract Bundling on Small Business Is Uncertain. GAO-04-454. Washington, D .C.: May 27, 2004. Contract Management: Reporting of Small Business Contract Awards Does Not Reflect Current Business Size. GAO-03-704T. Washington, D.C.: May 7, 2003. Small Business Contracting: Concerns about the Administration’s Plan to Address Contract Bundling Issues. GAO-03-559T. Washington, D.C.: March 18, 2003. Small Business: HUBZone Program Suffers from Reporting and Implementation Difficulties. GAO-02-57. Washington, D.C.: October 26, 2001. Small Business: Trends in Federal Procurement in the 1990s. GAO-01- 119 . Washington, D.C.: January 18, 2001. Acquisition Reform: Multiple-award Contracting at Six Federal Organizations. GAO/NSIAD-98-215. Washington, D.C.: September 30, 1998. Human Capital: Federal Workforce Challenges in the 21st Century. GAO- 07-556T. Washington, D.C.: March 6, 2007. Human Capital: Retirements and Anticipated New Reactor Applications Will Challenge NRC’s Workforce. GAO-07-105. Washington, D.C.: January 17, 2007. Highlights of a GAO Forum: Federal Acquisition Challenges and Opportunities in the 21st Century. GAO-07-45SP. Washington, D.C.: October 6, 2006. Contract Management: DOD Vulnerabilities to Contracting Fraud, Waste, and Abuse. GAO-06-838R. Washington, D.C.: July 7, 2006. DOD Acquisitions: Contracting for Better Outcomes. GAO-06-800T Washington, D.C.: September 7, 2006. . Hurricane Katrina: Planning for and Management of Federal Disaster Recovery Contracts. GAO-06-622T. Washington, D.C.: April 10, 2006. Defense Acquisitions: Assessments of Selected Major Weapon Pr GAO-06-391. Washington, D.C.: March 31, 2006. ogram. Securities and Exchange Commission: Some Progress Made on Strategic Human Capital Management. GAO-06-86. Washington, D.C.: January 10, 2006. Interagency Contracting: Problems with DOD’s and Interior’s Orders to Support Military Operations. GAO-05-201. Washington, D.C.: April 29, 2005. DOD Civilian Personnel: Comprehensive Strategic Workforce Plans Needed. GAO-04-753. Washington, D.C.: June 30, 2004. Human Capital: Key Principles for Effective Strategic Workforce Planning. GAO-04-39. Washington, D.C.: December 11, 2003. Acquisition Workforce: Status of Agency Efforts to Address Future Needs. GAO-03-55. Washington, D.C.: December 18, 2002. Acquisition Workforce: Department of Defense’s Plans to Address Workforce Size and S April 30, 2002. tructure Challenges. GAO-02-630. Washington, D.C.: Contract Management: Improving Services Acquisitions. GAO-02-179T. Washington, D.C.: November 1, 2001. Contract Management: Service Contracting Trends and Challenges 01-1074R. Washington, D.C.: August 22, 2001. Federal Acquisition: Trends, Reforms, and Challenges. GAO/T-OCG-00-7. Washington, D.C.: March 16, 2000. Government Contractors: Are Service Contractors Performing Inherently Governmental Functions?. GAO/GGD-92-11. Washington, D.C.: November 18, 1991. Department of Homeland Security: Improved Assessment and Overs Needed to Manage Risk of Contracting for Selected Services Washington, D.C.: September 17, 2007. ight . GAO-07-990. Homeland Security: Observation Security’s Acquisition Organization and on the Coast Guard’s Deepwater Program, GAO-07-453T. Washington, D.C.: February 8, 2007. s on the Department of Homeland Implementation of OMB Circular No. A-76 at Science Agencies. GAO-07- 434R. Washington, D.C.: March 16, 2007. Suggested Areas for O Washington, D.C.: November 17, 2006. versight for the 110th Congress. GAO-07-235R. Defense Acquisitions: Future Combat Systems Challenges and Prospe for Success. GAO-05-442T. Washington, D.C.: March 16, 2005. Government Contractors: Are Service Contractors Performing Inh Governmental Functions? 18, 1991. GAO/GGD-92-11. Washington, D.C.: November Federal Housing Administration: Monitoring of Single Family Mortgages Needs Improvement. GAO/RCED-91-11. Washington, D.C.: February 7, 1991. Federal Contracting: Use of Contractor Performance Information. GA 07-111T. Washington, D.C.: July 18, 2007. Interagency Contracting: Improved Guidance, Planning, and Oversig Would Enable the Department of Homeland Security to Address Risks. GAO-06-996. Washington, D.C.: September 27, 2006. Improvements Needed to the Federal Procurement Data System-Next Generation. GAO-05-960R. Washington, D.C.: September 27, 2005. DOD Business Systems Modernization: Navy ERP Adherence to Best Business Practices Critical to Avoid Past Failures. GAO-05-858. Washington, D.C.: September 29, 2005. Interagency Contracting: Franchise Funds Provide Convenience, but Value to DOD is Not Demonstrated. GAO-05-456. Washington, D.C.: J 29, 2005. Reliability of Federal Procurement Data. GAO-04-295R. Washington, D.C December 30, 2003. Contract Management: Restructuring GSA’s Federal Supply Service and Federal Technology Service. GAO-04-132T. Washington, D.C.: October 2, 2003. Contract Management: No Reliable Data to Measure Benefits of the Simplified Acquisition Test Program. GAO-03-1068. Washington, D.C.: September 30, 2003. Contract Management: Civilian Agency Compliance with Revised Ta and Delivery Order Regulations. GAO-03-983. Washington, D.C.: August 29, 2003. Small Business: HUBZone Program Suffers from Reporting and Implementation Difficulties. GAO-02-57. Washington, D.C.: October 26 2001. Human Capital: A Self-Assessment Checklist for Agency Leaders. GAO/OCG-00-14G. Washington, D.C.: September 2000. OMB and GSA: FPDS Improvements. GAO/AIMD-94-178R. Washington, D.C.: August 19, 1994. The Federal Procurement Data System—Making It Work Better. PSAD-80-33. Washington, D.C.: April 18, 1980. | A growing portion of federal spending is related to buying services such as administrative, management, and information technology support. Services accounted for about 60 percent of total fiscal year 2006 procurement dollars. The Services Acquisition Reform Act (SARA) of 2003 established a Services Acquisition Advisory Panel to make recommendations for improving acquisition practices. In January 2007, the panel proposed 89 recommendations to improve federal acquisition practices. GAO was asked to determine how the panel recommendations compare to GAO's past work and identify how the Office of Federal Procurement Policy (OFPP) expects the recommendations to be addressed. To do this, GAO analyzed the panel report and compared its findings and recommendations to GAO's past work and recommendations, obtained OFPP's views on how it expected the recommendations to be implemented, and reviewed proposed legislation in Congress to determine if legislative provisions had the potential to address some recommendations. The SARA Panel, like GAO, has made numerous recommendations to improve federal government acquisition--from encouraging competition and adopting commercial practices to improving the accuracy and usefulness of procurement data. The recommendations in the SARA Panel report are largely consistent with GAO's past work and recommendations. The panel and GAO have both pointed out: the importance of a robust requirements definition process and the need for competition; the need to establish clear performance requirements, measurable performance standards, and a quality assurance plan to improve the use of performance-based contracting; the risks inherent in the use of interagency contracts due to their rapid growth and their improper management; stresses on the federal acquisition workforce and the need for a strategy to assess these workforce needs; concerns about the role of contractors engaged in acquisition program management and procurement traditionally performed by government employees and the proper roles of federal employees and contractor employees in a "blended" workforce; and the adverse effects of inaccurate and incomplete federal procurement data, such as not providing a sound basis for conducting procurement analyses. The panel also made recommendations that would change the guidance for awarding contracts to small businesses. While GAO's work has addressed some small business policy issues, GAO has not made recommendations that would change the guidance to be used for awarding contracts to small businesses. OFPP representatives told GAO that OFPP agrees with almost all of the panel recommendations and expected that most of the 89 panel recommendations would be implemented through one of the following means: congressional actions; changes to the Federal Acquisition Regulation; OFPP actions, such as issuing new or revised policy; and federal agency actions. OFPP has already acted on some SARA recommendations, while other actions are pending or under consideration. Milestones and reporting requirements are in place to help OFPP gauge the implementation status of some recommendations but not for others. Moreover, OFPP does not have a strategy or plan to allow it to exercise oversight and establish accountability for implementing all of the panel recommendations and to gauge their effect on federal acquisitions. |
VA’s mission is to promote the health, welfare, and dignity of all veterans in recognition of their service to the nation by ensuring that they receive medical care, benefits, social support, and lasting memorials. It is the second largest federal department and, in addition to its central office located in Washington, D.C., has field offices throughout the United States, as well as the U.S. territories and the Philippines. The department’s three major components—the Veterans Benefits Administration (VBA), the Veterans Health Administration (VHA), and the National Cemetery Administration (NCA)—are primarily responsible for carrying out its mission. More specifically, VBA provides a variety of benefits to veterans and their families including disability compensation, educational opportunities, assistance with home ownership, and life insurance. VHA provides health care services, including primary care and specialized care, and it performs research and development to improve veterans’ needs. Lastly, NCA provides burial and memorial benefits to veterans and their families. Collectively, the three components rely on approximately 340,000 employees to provide services and benefits. These employees work in 167 VA medical centers, approximately 800 community-based outpatient clinics, 300 veterans centers, 56 regional offices, and 131 national and 90 state or tribal cemeteries situated throughout the nation. The use of IT is critically important to VA’s efforts to provide benefits and services to veterans. As such, the department operates and maintains an IT infrastructure that is intended to provide the backbone necessary to meet the day-to-day operational needs of its medical centers, veteran- facing systems, benefits delivery systems, memorial services, and all other IT systems supporting the department’s mission. The infrastructure is to provide for data storage, transmission, and communications requirements necessary to ensure the delivery of reliable, available, and responsive support to all VA staff offices and administration customers, as well as veterans. Toward this end, the department operates approximately 240 information systems, manages 314,000 desktop computers and 30,000 laptops, and administers nearly 460,000 network user accounts for employees and contractors to facilitate providing benefits and health care to veterans. These systems are used for the determination of benefits, benefits claims processing, patient admission to hospitals and clinics, and access to health records, among other services. For example, VBA relies on VBMS to collect and store information such as military service records, medical examinations, and treatment records from VA, DOD, and private medical service providers. IT also is widely used and critically important to supporting the department in delivering health care to veterans. VHA’s systems provide capabilities to establish and maintain electronic health records that health care providers and other clinical staff use to view patient information in inpatient, outpatient, and long-term care settings. Specifically, the Veterans Health Information Systems and Technology Architecture, known as VistA, consists of many computer applications and modules that collect, among other things, information about a veteran’s demographics, allergies, procedures, immunizations, and medical diagnoses. However, a number of VA’s systems are old. For example, our recent report on legacy systems used by federal agencies identified 2 of the department’s systems as being over 50 years old and among the 10 oldest investments and/or systems that were reported by 12 selected agencies. Personnel and Accounting Integrated Data (PAID)—This 53-year old system automates time and attendance for employees, timekeepers, payroll, and supervisors. It is written in Common Business Oriented Language (COBOL), a programming language developed in the late 1950s and early 1960s, and runs on IBM mainframes. VA plans to replace PAID with a project called Human Resources Information System Shared Service Center in 2017. Benefits Delivery Network (BDN)—This 51-year old system tracks claims filed by veterans for benefits, eligibility, and dates of death. It is a suite of COBOL mainframe applications. VA has general plans to roll the capabilities of BDN into another system, but there is no firm date associated with this transition. To address these obsolete systems that are in need of modernization or replacement, we recommended that the Secretary of Veterans Affairs direct the department’s Chief Information Officer (CIO) to identify and plan to modernize or replace legacy systems, as needed, and consistent with draft OMB guidance, including time frames, activities to be performed, and functions to be replaced or enhanced. VA concurred with our recommendation and stated that it is planning to retire PAID and BDN in 2017 and 2018, respectively. In 2014, VA issued its 6-year strategic plan, which emphasizes the department’s goal of increasing veterans’ access to benefits and services, eliminating the disability claims backlog, and ending veteran homelessness. According to the plan, the department intends to improve access to benefits and services through the use of improved technology to provide veterans with access to more effective care management. The plan also calls for VA to eliminate the disability claims backlog by fully implementing an electronic claims process that is intended to reduce processing time and increase accuracy. Further, the department has an initiative under way that provides services, such as health care, housing assistance, and job training, to end veteran homelessness. Toward this end, VA is working with other agencies, such as the Department of Health and Human Services, to implement more coordinated data entry systems to streamline and facilitate access to appropriate housing and services. VA reported spending about $3.9 billion to improve and maintain its IT resources in fiscal year 2015. Specifically, the department reported spending approximately $548 million on new systems development efforts, approximately $2.3 billion on maintaining existing systems, and approximately $1 billion on payroll and administration. For fiscal year 2016, the department received appropriations of about $4.1 billion for IT. Further, for fiscal year 2017, the department’s budget request included nearly $4.3 billion for IT. The department requested approximately $471 million for new systems development efforts, approximately $2.5 billion for maintaining existing systems, and approximately $1.3 billion for payroll and administration. In addition, in its 2017 budget submission, the department requested appropriations to make improvements in a number of areas, including: veterans’ access to health care, to include enhancing health care- related systems, standardizing immunization data, and expanding telehealth services ($186.7 million); veterans’ access to benefits by modernizing systems supporting benefits delivery, such as VBMS and the Veterans Services Network ($236.3 million); veterans’ experiences with VA by focusing on integrated service delivery and streamlined identification processes ($171.3 million); VA employees’ experiences by enhancing internal IT systems ($13 information security, including implementing strong authentication, ensuring repeatable processes and procedures, adopting modern technology, and enhancing the detection of cyber vulnerabilities and protection from cyber threats ($370.1 million). VA’s CIO has recently initiated an effort to transform the focus and functions of the Office of Information and Technology (OI&T), in response to the Secretary’s goal of achieving a more veteran-focused organization. The CIO’s transformation strategy, initiated in January 2016, calls for OI&T to focus on stabilizing and streamlining processes, mitigating weaknesses highlighted in GAO assessments, and improving outcomes by institutionalizing a new set of IT management capabilities. As part of this transformation, the CIO began transitioning the oversight and accountability of IT projects to a new project management process called the Veteran-focused Integration Process in January 2016, in an effort to streamline systems development and the delivery of new IT capabilities. The CIO also intends to establish five new functions within OI&T: The enterprise program management office is to serve as OI&T’s portfolio management and project tracking organization. The account management function is to be responsible for managing the IT needs of VA’s major components. The quality and compliance function is to be responsible for establishing policy governance and standards and ensuring adherence to them. The data management organization is expected to improve both service delivery and the veteran experience by engaging with data stewards to ensure the accuracy and security of the information collected by VA. The strategic sourcing function is to be responsible for establishing an approach to fulfilling the agency’s requirements with vendors that provide solutions to those requirements, managing vendor selection, tracking vendor performance and contract deliverables, and sharing insights on new technologies and capabilities to improve the workforce knowledge base. According to the CIO, the transformation strategy is expected to be completed by the first quarter of fiscal year 2017, although the vast majority of the plan, including establishing the five new functions, is to be executed by the end of fiscal year 2016. In February 2015, we designated VA health care as a high-risk area. Among the five broad areas contributing to our determination was the department’s IT challenges. Of particular concern was the failed modernization of a system, suspended development of another system, and the extent of system interoperability—the ability to exchange information—with DOD, which present risks to the timeliness, quality, and safety of VA health care. We have reported on the department’s failed attempts to modernize its outpatient appointment scheduling system, which is about 30 years old. Among the problems cited by VA staff responsible for scheduling appointments are that the system requires them to use commands requiring many keystrokes and that it does not allow them to view multiple screens at once. Schedulers must open and close multiple screens to check a provider’s or a clinic’s full availability when scheduling a medical appointment, which is time-consuming and can lead to errors. In addition, we reported in May 2010 that after spending an estimated $127 million over 9 years on its outpatient scheduling system project, VA had not implemented any of the planned system’s capabilities and was essentially starting over by beginning a new initiative to build or purchase another scheduling system. We also noted that VA had not developed a project plan or schedule for the new initiative, stating that it intended to do so after determining whether to build or purchase the new application. We recommended that the department take six actions to improve key systems development and acquisition processes essential to the second outpatient scheduling system effort. The department generally concurred with our recommendations, but as of May 2016, had not addressed four of the six recommendations. Further, in January 2014, we reported that the inability to electronically share data across facilities had led VA to suspend the development of a system that would have allowed it to electronically store and retrieve information about surgical implants (including tissue products) and the veterans who receive them nationwide. Having this capability would be particularly important in the event that a manufacturer or the Food and Drug Administration ordered a recall on a medical device or tissue product because of safety concerns. In the absence of a centralized system, at the time of our report, VA clinicians tracked information about implanted items using stand-alone systems or spreadsheets that were not shared across VA facilities, which made it difficult for the department to quickly determine which patients may have received an implant that was subject to a safety recall. Additionally, we reported in February 2014 that VA and DOD lacked electronic health record systems that permit the efficient electronic exchange of patient health information as military service members transition from DOD to VA health care systems. Since 1998, VA and DOD have undertaken a patchwork of initiatives intended to allow their health information systems to exchange information and increase interoperability. Among others, these have included initiatives to share viewable data in existing (legacy) systems, link and share computable data between the departments’ updated heath data repositories, and jointly develop a single integrated system. In March 2011, the secretaries of the two departments announced that they would develop a new, joint integrated electronic health record system (referred to as iEHR). This was intended to replace the departments’ separate systems with a single common system, thus sidestepping many of the challenges they had previously encountered in trying to achieve interoperability. However, in February 2013, about 2 years after initiating iEHR, the secretaries announced that the departments were abandoning plans to develop a joint system, due to concerns about the program’s cost, schedule, and ability to meet deadlines. The Interagency Program Office (IPO) reported spending about $564 million on iEHR between October 2011 and June 2013. In place of the iEHR initiative, VA stated that it would modernize VistA, while DOD planned to buy a commercially available system. The departments stated that they would ensure interoperability between these updated systems, as well as with other public and private health care providers. Our February 2014 report noted that the departments did not substantiate their claims that it would be less expensive and faster than developing a single, joint system. We have also noted that the departments’ plans to modernize their two separate systems were duplicative and stressed that their decisions should be justified by comparing the costs and schedules of alternate approaches. We therefore recommended that the departments should develop cost and schedule estimates that would include all elements of their approach (i.e., modernizing both departments’ health information systems and establishing interoperability between them) and compare them with estimates of the cost and schedule for the single-system approach. If the planned approach were projected to cost more or take longer, we recommended that they provide a rationale for pursuing such an approach. VA and DOD agreed with our prior recommendations and stated that initial comparison indicated that the current approach would be more cost effective. However, as of June 2016, the departments have not provided us with a comparison of the estimated costs of their current and previous approaches. Moreover, with respect to their assertions that separate systems could be achieved faster, both departments have developed schedules that indicate their separate modernizations are not expected to be completed until after the 2017 planned completion date for the previous single-system approach. To further highlight the department’s IT challenges, our most recent report in August 2015 on VA’s efforts to achieve electronic health record interoperability with DOD noted that the departments have engaged in several near-term efforts focused on expanding interoperability between their existing electronic health record systems. For example, the departments analyzed data related to 25 “domains” identified by the Interagency Clinical Informatics Board and mapped health data in their existing systems to standards identified by the IPO. The departments also expanded the functionality of their Joint Legacy Viewer—a tool that allows clinicians to view certain health care data from both departments in a single interface. In addition, VA and DOD have moved forward with plans to modernize their respective electronic health record systems. For its part, VA has developed a number of plans for its VistA modernization effort (known as VistA Evolution), including an interoperability plan and a road map describing functional capabilities to be deployed through fiscal year 2018. According to the road map, the first set of capabilities was to be delivered in September 2014, and was to include access to the Joint Legacy Viewer, among other things. VA’s CIO has asserted that the department has continued to improve VistA. However, the CIO also recently indicated that the department is taking a step back in reconsidering how best to meet VA’s future electronic health record system needs and has not determined whether to modernize VistA or to replace it with an off-the- shelf system. Nevertheless, a significant concern that we identified is that VA (and DOD) had not identified outcome-oriented goals and metrics that would more clearly define what they aim to achieve from their interoperability efforts and the value and benefits these efforts are intended to yield. As we have stressed in our prior work, assessing the performance of a program should include measuring its outcomes in terms of the results of products or services. In this case, such outcomes could include improvements in the quality of health care or clinician satisfaction. Establishing outcome-oriented goals and metrics is essential to determining whether a program is delivering value. In our August 2015 report, we stressed that using an effective outcome- based approach could provide VA with a more accurate picture of its progress toward achieving interoperability with DOD and the value and benefits generated. Accordingly, we recommended that the departments, working with the IPO, establish a time frame for identifying outcome- oriented metrics, define related goals as a basis for determining the extent to which the departments’ modernized electronic health record systems are achieving interoperability, and update IPO guidance accordingly. VA concurred with our recommendations and has told us that it has initiated actions in response to them. In September 2015, we reported that VBA had made progress in developing and implementing VBMS, its system that is to be used for processing disability benefit claims. Specifically, it had deployed the initial version of the system to all of its regional offices as of June 2013. Further, after initial deployment, VBA continued developing and implementing additional system functionality and enhancements to support the electronic processing of disability compensation claims. As a result, 95 percent of records related to veterans’ disability claims are electronic and reside in the system. Nevertheless, we found that VBMS was not able to fully support disability and pension claims, as well as appeals processing. Specifically, while the Under Secretary for Benefits stated in March 2013 that the development of the system was expected to be completed in 2015, implementation of functionality to fully support electronic claims processing was delayed beyond 2015. In addition, VBA had not produced a plan that identified when the system will be completed. Accordingly, holding VA management accountable for meeting a time frame and for demonstrating progress was difficult. As VA continues its efforts to complete the development and implementation of VBMS, we reported in September 2015 that three areas could benefit from increased management attention. Cost estimating: The program office did not have a reliable estimate of the cost for completing the system. Without such an estimate, VA management and the department’s stakeholders had a limited view of the system’s future resource needs, and the program risked not having sufficient funding to complete development and implementation of the system. System availability: Although VBA had improved its performance regarding system availability to users, it had not established system response time goals. Without such goals, users did not have an expectation of the system response times they could anticipate and management did not have an indication of how well the system performs relative to performance goals. System defects: While the program had actively managed system defects, a recent system release included unresolved defects that impacted system performance and users’ experiences. Continuing to deploy releases with large numbers of defects that reduce system functionality could adversely affect users’ ability to process disability claims in an efficient manner. We also found in our September 2015 report that VA had not conducted a customer satisfaction survey that would allow the department to compile data on how users view the system’s performance, and ultimately, to develop goals for improving the system. GAO’s 2014 survey of VBMS users found that a majority of them were satisfied with the system, but decision review officers were considerably less satisfied. Although the results of our survey provided VBA with data about users’ satisfaction with VBMS, the absence of user satisfaction goals limited the utility of survey results. Specifically, without having established goals to define user satisfaction, VBA did not have a basis for gauging the success of its efforts to promote satisfaction with the system, or for identifying areas where its efforts to complete development and implementation of the system might need attention. In our September 2015 report, we recommended that VA develop a plan with a time frame and a reliable cost estimate for completing VBMS, establish goals for system response time, minimize the incidence of high and medium severity system defects for future VBMS releases, assess user satisfaction, and establish satisfaction goals to promote improvement. As we stressed in our report, attention to these issues can improve VA’s efforts to effectively complete the development and implementation of VBMS. Fully addressing our recommendations, as VA agreed to do, should help the department give appropriate attention to these issues. As we reported in May 2016, VA’s expenditures for its care in the community programs, the number of veterans for whom VA has purchased care, and the number of claims processed by VHA have all grown considerably in recent years. The substantial increase in utilization of VA care in the community programs poses staffing and workload challenges for VHA, which has had ongoing difficulty processing claims from community providers in a timely manner. VHA officials and staff at three of the four claims processing locations we visited told us that limitations of the existing IT systems, including the Fee Basis Claims System (FBCS) that VHA uses for claims processing, have delayed processing and payment of claims for VA care in the community services. Officials at the sites we visited described the following limitations. VHA cannot accept medical documentation electronically. Authorizations for VA care in the community services are not always readily available in FBCS. FBCS cannot automatically adjudicate claims. System weaknesses have delayed claims payments. The officials we interviewed said that if the agency is to dramatically improve its claims processing timeliness, comprehensive and technologically advanced solutions must be developed and implemented, such as modernizing and upgrading VHA’s existing claims processing system or contracting out the claims processing function. In October 2015, VHA submitted a plan to address these issues as part of a broader effort to consolidate VA care in the community programs. The agency estimated that it would take at least 2 years to implement solutions that would fully address all of the challenges now faced by its claims processing staff and by providers of VA care in the community services. However, VHA has not yet provided to Congress or other external stakeholders a plan for modernizing its claims processing system. In particular, VHA has not provided (1) a detailed schedule for developing and implementing each aspect of its new claims processing system; (2) the estimated costs for developing and implementing each aspect of the system; and (3) performance goals, measures, and interim milestones that VHA will use to evaluate progress, hold staff accountable for achieving desired results, and report to stakeholders the agency’s progress in modernizing its claims processing system. That VHA has not yet provided a detailed plan but has stated that it expects to deploy a modernized claims processing system as early as fiscal year 2018 is cause for concern. Thus, to help provide reasonable assurance that VHA achieves its long-term goal of modernizing its claims processing system, we recommended in May 2016 that the Secretary of Veterans Affairs direct the Under Secretary for Health to ensure that the agency develops a sound written plan that includes: a detailed schedule for when VHA intends to complete development and implementation of each major aspect of its new claims processing system; the estimated costs for implementing each major aspect of the system; and the performance goals, measures, and interim milestones that VHA will use to evaluate progress, hold staff accountable for achieving desired results, and report to stakeholders the agency’s progress in modernizing its claims processing system. The department concurred with our recommendation and said that VHA plans to address the recommendation when the agency develops an implementation strategy for the future consolidation of its VA care in the community programs. In conclusion, effective IT management is critical to the performance of VA’s mission. The department faces challenges in key areas, including the development of new systems, modernization of existing systems, and increasing interoperability with DOD. While we recognize that the transformation of VA’s IT organization is intended, among other things, to mitigate the IT weaknesses we have identified, sustained management attention and organizational commitment will be essential to ensuring that the transformation is successful and that the weaknesses are fully addressed. Chairman Isakson, Ranking Member Blumenthal, and Members of the Committee, this completes my prepared statement. I would be pleased to respond to any questions that you may have. If you or your staff have any questions about this testimony, please contact Valerie C. Melvin at (202) 512-6304 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony statement. GAO staff who made key contributions to this statement are Mark T. Bird (Assistant Director), Jennifer Stavros-Turner (Analyst in Charge), Kara Epperson, Rebecca Eyler, and Jacqueline Mai. 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. | VA relies on IT to meet its mission and effectively serve the nation's veterans. Over the past several years, the department has expended billions of dollars to manage and modernize its information systems. However, VA has experienced challenges in managing its IT, raising questions about the effectiveness of its IT operations. GAO has previously reported on a number of the department's IT initiatives. This statement summarizes results from key GAO reports issued between 2010 and 2014 highlighting IT challenges that have contributed to GAO's designation of VA health care as a high risk area. It also describes additional challenges that GAO more recently identified in 2015 and 2016 that are related to increasing the electronic exchange of VA's health records with those of DOD, development and use of VBMS, and the department's modernization of its health care claims processing system. In February 2015, GAO designated Veterans Affairs (VA) health care as a high-risk area based on its concerns about the department's ability to ensure the quality and safety of veterans' health care in five broad areas, one of which was information technology (IT) challenges. Of particular concern at that time was the failed modernization of an outpatient appointment scheduling system, suspended development of a system that was to electronically store and retrieve information about surgical implants, and the extent of system interoperability—the ability to exchange information—with the Department of Defense (DOD), which present risks to the timeliness, quality, and safety of VA health care. Subsequent to the designation of VA health care as high risk, GAO completed evaluations that identified additional IT management challenges at VA. In August 2015, GAO reported on VA's efforts to achieve electronic health record interoperability with DOD and noted that (1) the two departments had engaged in several near-term efforts to expand interoperability and (2) VA and DOD had moved forward with plans to separately modernize their electronic health record systems. However, of significant concern was that VA (and DOD) had not identified outcome-oriented goals and metrics that would clearly define what it aims to achieve from its efforts. GAO recommended that VA develop goals and metrics, among other things. VA concurred with the recommendations and stated that it has initiated actions in response. VA had made progress in developing and implementing its Veterans Benefits Management System (VBMS), with deployment of the initial version of the system. However, in September 2015, GAO reported that the development and implementation of the system was ongoing and noted three areas that could benefit from increased management attention: cost estimating, system availability, and system defects. The report also noted that VA had neither conducted a customer satisfaction survey nor developed goals for improving the system. GAO recommended that VA develop a plan with a time frame and a reliable cost estimate for completing VBMS, establish goals for system response time, minimize the incidences of high and medium severity system defects for future VBMS releases, assess user satisfaction, and establish satisfaction goals to promote improvement. VA agreed with the recommendations and noted steps it was taking to address them. Due to recent increases in utilization of VA care in the community, the department has had difficulty processing claims in a timely manner. In May 2016, GAO reported that VA officials and claims processing staff indicated that IT limitations, manual processes, and staffing challenges had delayed claims processing. The department had implemented interim measures to address some of the system's challenges, but did not expect to deploy solutions to address all challenges, including those related to IT, until fiscal year 2018 or later. Further, VA did not have a sound plan for modernizing its claims processing system, which GAO recommended it develop. The department concurred with this recommendation and stated that it intended to address the recommendation through the planned consolidation of its care in the community programs. GAO has made numerous recommendations to VA to improve the modernization of its IT systems. Among other things, GAO has recommended that VA address challenges associated with its efforts to modernize its electronic health record system to increase interoperability with DOD, develop goals and metrics as a basis for determining the extent to which VA's and DOD's modernized electronic health records systems are achieving interoperability, address shortcomings with VBMS planning and implementation, and develop a sound written plan for deploying its modernized claims processing system. VA has concurred with these recommendations and has some actions ongoing. |
Established by the National Housing Act, FHA administers several programs that support multifamily housing for low- and moderate-income families by insuring loans made by private lenders. Specifically, these programs insure mortgage loans for the construction, purchase, substantial rehabilitation, and refinancing of multifamily apartments and health care facilities. FHA insures most of its mortgages for multifamily housing under its General Insurance Fund and Special Risk Insurance Fund. To cover lenders’ losses, FHA collects insurance premiums that borrowers pay to the lenders and deposits the premiums into the funds. In addition, because the funds were not designed to be self sustaining, Congress provides budget authority as part of FHA’s budget each fiscal year to cover anticipated costs—known as “credit subsidy costs”—for some of the multifamily insurance programs. In fiscal year 2001, Congress provided $101 million in credit subsidy budget authority to FHA. When a default occurs on an insured loan, the lender may elect to assign the mortgage to HUD—effectively making the Department the new lender for the mortgage—and file an insurance claim with HUD for the unpaid principal balance of the loan. As a result, the lender is protected from financial losses stemming from a borrower’s default. FHA’s multifamily insurance programs also benefit borrowers by providing favorable financing terms. For example, under one of the programs, nonprofit borrowers can finance up to 100 percent of a project’s replacement costs, and for-profit borrowers can finance up to 90 percent of these costs. As of September 30, 2001, FHA had about 15,000 multifamily mortgages in its insured portfolio, with a total unpaid principal balance of approximately $55 billion. To obtain an FHA-insured loan, a prospective borrower must use a lender approved by HUD’s Lender Approval and Recertification Division, and the HUD-approved lender, in turn, must submit a mortgage insurance application to HUD. HUD’s multifamily housing field offices—comprising 18 “hubs” and their associated 33 program centers—are responsible for processing the applications and approving or rejecting them. Historically, these responsibilities included the bulk of the loan underwriting duties, such as preparation of the property appraisal, mortgage credit analysis, and other loan exhibits. Because this process was often slow and inefficient, in 1994 HUD developed an expedited approach for processing loan insurance applications—known as “fast-track”—that delegated certain underwriting functions to the lenders. About 30 of HUD’s field offices eventually adopted fast-track processing, but, according to HUD, variations existed among the offices regarding the extent of the functions delegated to the lenders and the thoroughness of the offices’ review of loan documents. In order to standardize the responsibilities of both lenders and the field offices, in May 2000, HUD implemented the Multifamily Accelerated Processing (MAP) program for several of its insurance programs, including the most widely used programs. HUD’s objective for the MAP program was to provide a consistent, reliable, and expedited process that would enable FHA to insure more loans while limiting risk to the FHA insurance funds. To accomplish this objective, HUD, among other things, developed a new guidebook for lenders and HUD staff and established set time frames for the mortgage insurance application and review process. In addition, although HUD delegated significant underwriting responsibilities to the lenders, it continued to retain the final underwriting decision authority. Under MAP, a lender’s insurance application goes through a two-stage review process. The first stage, called “pre-application,” focuses on the overall eligibility and feasibility of the property to be insured (for example, whether a sufficient market exists for the property). If an application passes this stage, HUD invites the lender to submit a complete set of underwriting exhibits as part of the second stage, known as “firm commitment.” If the application passes this stage and the borrower agrees to accept the conditions of the FHA mortgage insurance agreement, the loan becomes FHA-insured. Although only about 30 percent of all multifamily loans insured by FHA in fiscal year 2001 were insured through the MAP program, HUD expects that in subsequent years the large majority of its insured multifamily loans will be MAP loans. During fiscal year 2001, HUD insured 212 loans under the MAP program, with a total value of about $1.5 billion. As shown in figure 1, this total was about equally divided between new construction and substantial rehabilitation loans and refinancing and acquisition loans. To mitigate the financial risks of the MAP program, HUD established controls and procedures covering the (1) approval of MAP lenders, (2) review and monitoring of lenders’ underwriting of loans, and (3) sanctioning of poorly performing lenders. Specifically: HUD requires HUD-approved lenders wanting to participate in the MAP program to apply to the Lender Qualifications and Monitoring Division within HUD’s Office of Multifamily Housing. The division is responsible for reviewing documentation submitted by the lender and deciding whether or not the lender meets the MAP program’s qualification standards. In addition, for every mortgage insurance application submitted by a MAP lender, the cognizant HUD multifamily field office is required to review the qualifications of the lender’s staff involved in making the loan. As of March 2002, HUD had approved about 100 lenders to participate in the MAP program. HUD’s multifamily field offices are responsible for conducting and documenting reviews of MAP mortgage insurance applications and associated loan exhibits (for example, appraisal, market study) to ensure lenders’ compliance with HUD’s underwriting requirements. At both stages of the application process, a team of technical specialists, known as a MAP team, with expertise in the areas of architecture, property appraisal, mortgage credit, and building costs reviews the application and its associated underwriting exhibits. The MAP team may require the lender to correct underwriting deficiencies uncovered by the reviews. After each stage of review, the team’s supervisor, called the MAP team leader, is required to provide a recommendation to the field office director on whether to accept or reject the application. On the basis of the team leader’s recommendation, the field office director decides whether or not to insure the loan. The field offices are to complete each stage of their reviews within 45 to 60 days, depending on the type of loan. To further monitor MAP lenders’ underwriting of loans and to oversee the work of the field offices, teams of field staff assigned to HUD’s Lender Qualifications and Monitoring Division are to conduct comprehensive reviews of samples of loans already approved for mortgage insurance. These reviews focus on the same four technical areas that the field offices analyze in reviewing an insurance application. After completing a review, the teams are to document their findings and recommendations in written reports, which are to be reviewed and approved by the division’s director. Upon approval, the reports are issued to the cognizant lender and multifamily field office. If HUD determines that a lender is not complying with program requirements, HUD’s Office of Multifamily Housing may take enforcement actions against the lender. Specifically, Multifamily Housing has the authority to suspend or terminate a lender’s participation in the MAP program. HUD’s guidance requires an FHA-approved lender wishing to participate in MAP to submit documentation demonstrating, among other things, that it is financially sound, has a satisfactory lending record, and has qualified underwriters. Our review of HUD’s approval files for 20 MAP lenders found that HUD followed its procedures in determining that these lenders met the requirements for financial soundness and satisfactory lending. However, we also found that HUD sometimes lacked a sufficient basis for determining whether the lenders’ underwriters met MAP qualification requirements. Furthermore, in approving MAP lenders, HUD did not ensure that the lenders had quality control plans in accordance with HUD’s regulations. According to HUD’s guidance, a lender must, among other things, be financially sound and have a satisfactory lending record to qualify for the MAP program. As evidence of its financial soundness, a prospective MAP lender must provide HUD with a recent audited financial statement showing a net worth in excess of $250,000. As evidence of a satisfactory lending record, a lender must submit information on the FHA-insured and conventional multifamily housing loans it made during the previous 5 years. For the lender’s FHA-insured loans, the submission must include a list of the loans that were assigned to HUD for insurance benefits and a narrative explanation of why the assignments occurred. HUD uses this information to (1) determine whether the lender has a recent history of assignments that can be attributed to poor lending practices and (2) ask cognizant multifamily field offices about their experience with the lender. To determine whether approved MAP lenders met HUD’s requirements, we examined HUD’s approval files for the 20 lenders that made the 35 new construction and substantial rehabilitation loans we reviewed during our visits to eight of HUD’s multifamily field offices. We found that all 20 lenders provided the required documentation and that the documentation adequately supported HUD’s conclusion that the lenders met the criteria for financial soundness and satisfactory lending records. Specifically, we found that 19 of the 20 lenders we reviewed submitted the required audited financial statements and that the statements showed the lenders met the net worth requirement. In accordance with HUD’s guidance, the remaining lender was exempted from the requirement because its accounts were insured by the Federal Deposit Insurance Corporation.With respect to lending performance, we used a HUD database containing assignment information to confirm that all 20 lenders submitted complete lists of their assigned loans. The lenders either had no loans assigned to HUD or had few assignments relative to their total number of FHA-insured loans—an indicator of sound lending practices, according to HUD. In addition, we reviewed the responses from HUD’s field offices about each lender’s performance and found that the overwhelming majority of the responses supported approval of the 20 lenders. Although HUD retains the authority for the final underwriting decision for MAP loans, it relies heavily on the lenders’ underwriters to ensure that the loans pose a reasonable financial risk. The underwriter is an employee of the lender, who is responsible for ensuring compliance with applicable requirements and for approving or rejecting a loan on the basis of a review and analysis of the loan exhibits. HUD’s guidance sets forth experience and training requirements for underwriters and requires a prospective MAP lender to submit the resumes of those underwriters who will have responsibility for MAP loans. According to HUD’s guidance, the resumes must demonstrate that these individuals have at least 3 years of recent experience in underwriting multifamily housing loans and have underwritten at least three loans that were funded. In evaluating a prospective MAP lender, the Lender Qualifications and Monitoring Division within HUD’s Office of Multifamily Housing is required to review the resumes and approve those underwriters who meet the requirements. In addition, HUD’s multifamily field offices may subsequently approve additional underwriters who are qualified. Lenders frequently have more than one individual who is authorized to underwrite loans. Thus, HUD approved a total of 81 underwriters for the 20 lenders we reviewed. We found, however, that HUD sometimes approved underwriters without having a sufficient basis for determining whether the underwriters met the qualification requirements of the MAP program. Specifically, the resumes for 22 of the 81 underwriters did not provide clear evidence of at least 3 years of recent underwriting experience; and the resumes for 30 did not provide evidence of 3 funded loans. Furthermore, 11 of the resumes did not provide clear evidence that either requirement had been met. (See fig. 2.) In some cases, the resumes showed some underwriting experience but less than 3 years of experience. In other cases, the resumes cited experience only in loan administration, processing, or origination— activities that can encompass a range of duties that may or may not involve significant underwriting responsibilities. Although some HUD officials told us that they knew from first-hand knowledge that the underwriters met HUD’s experience standards, others indicated that they were not aware of the standards, had applied the standards loosely, or had drawn inferences about the underwriters’ qualifications without knowing whether these inferences were accurate. By not applying the qualifications standards in a strict and consistent manner, HUD increases its chances of insuring loans underwritten by individuals who lack sufficient expertise in evaluating financial risk. HUD’s guidance states that in addition to having proper experience, an underwriter must attend a MAP training session before submitting a mortgage insurance application to HUD. The main objective of the training is to familiarize the underwriter with the MAP process and the roles and responsibilities of both the lender and HUD under this process. HUD’s multifamily field offices are responsible for ensuring that the underwriters who submit insurance applications have met the training requirement. During our visits to HUD’s multifamily field offices, we reviewed 35 loans submitted by 22 separate underwriters. Our review of HUD’s training records indicated that only 10 of the 22 underwriters attended MAP training. Without proper assurance that underwriters are trained, HUD increases the likelihood that MAP underwriters will not be familiar with the program’s requirements and will make errors that increase HUD’s review time and insurance risk. Field office officials acknowledged that they did not always verify whether underwriters had attended MAP training, citing incomplete local training records and the absence of a nationwide list of trained underwriters as factors that made this verification difficult. To help address this problem, the Lender Qualifications and Monitoring Division in January 2002 developed a nationwide list of trained underwriters. In addition, the division director told us that better attendance records would be kept at future MAP training sessions. HUD inconsistently applied its qualifications standards for the underwriters we reviewed largely because of a lack of clear guidance. For example, HUD’s guidance for approving underwriters does not clearly define the meaning of “underwriting experience.” As a result, the HUD officials responsible for approving the underwriters interpreted the guidance differently. One official, for example, said that work in “loan origination” counted as underwriting experience; another official said it did not, because loan origination focuses on the marketing of loans. Similarly, another official told us that he counted property appraising as underwriting experience; another did not. In addition, although HUD’s guidance authorizes the multifamily field offices to approve MAP underwriters, that portion of the guidance does not cite the specific requirements of 3 years of experience and three funded loans. Accordingly, staff at four of the eight field offices we visited told us they were not aware of these standards. According to HUD’s regulations, all FHA-approved lenders must implement a written quality control plan. A quality control plan is an important internal control mechanism because it sets forth a program of independent review designed, among other things, to ensure compliance with HUD’s requirements and to prompt corrective actions when deficiencies are found. For example, a quality control plan may require a lender to have a certain percentage of its loans reviewed either by external auditors or by individuals on the lender’s staff who are independent of the loan processing and underwriting functions. Although HUD has implemented specific written standards for single- family housing lenders’ quality control plans, it has not done so for lenders that make multifamily housing loans. According to the Director of HUD’s Lender Approval and Recertification Division—the office responsible for granting lenders HUD-approved status—establishing the standards had not been a high priority because, until the MAP program was implemented, HUD retained primary responsibility for underwriting the multifamily loans insured by FHA. He said that because of the lack of standards, most lenders applying for HUD approval did not submit quality control plans for their multifamily lending operations. Accordingly, in our examination of the division’s files we found a multifamily quality control plan for 1 of the 20 lenders we reviewed. Multifamily Housing officials told us that their decision not to require a quality control plan as a condition of MAP approval was influenced by several factors, including (1) the Department’s lack of standards for these plans, (2) the difficulty of developing standards that would be suitable for both large and small lenders, and (3) concerns that lenders would treat the plans as merely a paperwork requirement. In our view, however, the MAP program’s delegation of greater underwriting responsibilities to lenders heightens the need for lenders to implement quality control measures. Furthermore, these problems could be overcome through consultation with large and small lenders in developing quality control standards, and through the Department’s enforcement of these standards. HUD did not always comply with or effectively implement processes and procedures for reviewing and monitoring MAP lenders’ underwriting of loans. HUD’s procedures require field staff to conduct and document reviews of lenders’ mortgage insurance applications to ensure lenders’ compliance with HUD’s underwriting requirements before the loans are insured. However, at the field offices we visited, we found that the staff did not always properly document their reviews. Furthermore, the field offices did not consistently ensure that lenders were adhering to HUD requirements for property appraisals, a critical element of the loan underwriting process. To some extent, the offices attributed these problems to their heavy workloads. In addition to the field offices’ reviews, HUD has established a quality assurance process to review samples of loans after they have been approved for insurance. However, HUD has not fully staffed the division responsible for this function. Consequently, the division conducted significantly fewer reviews than it could have done if it had been fully staffed, according to the division director. In addition, the division has not developed written operating procedures or a systematic process for analyzing the results of its reviews. HUD’s guidance requires the multifamily field offices to perform reviews of mortgage insurance applications and associated loan exhibits at both the pre-application and firm commitment stages of the application process. In conducting these reviews, a team of technical specialists, known as a MAP team, is required to use standardized checklists that delineate the specific areas the review should cover. The checklists are designed to document the specialists’ thorough review of the application, approval or rejection of the application, and recommendations to place conditions on the approval, if necessary. After each stage of review, the team’s supervisor, called the MAP team leader, is required to prepare a memo to the field office’s director that summarizes the results of the technical reviews and provides a recommendation to accept or reject the application. The memo should also indicate whether the team leader rejected or modified the recommendation of a technical reviewer. However, we found that field staff did not always prepare these checklists and memos as required. At the eight field offices we visited, we reviewed HUD’s records for 35 new construction and substantial rehabilitation loans insured between May 2000 and August 2001 to determine the field offices’ compliance with MAP review procedures. We found that the field staff did not prepare one or more of the required review documents for 28 of the 35 loans we examined. Specifically, 12 of the cases were missing one or more of the technical specialists’ checklists, and 25 cases were missing one or more team leader memos. (See table 1.) Furthermore, even when the checklists were used, they were not always signed by the reviewer or did not clearly indicate approval or rejection of the application. Quality assurance reviews by the Office of Multifamily Housing’s Lender Qualifications and Monitoring Division have found similar problems with the field offices’ documentation of reviews. Some field office staff told us these problems were attributable in some cases to their lack of familiarity with the MAP program’s documentation requirements during the early stages of program implementation. However, other staff said they did not have time to document their reviews or did not think that use of the checklists and memos was mandatory. Without proper documentation, however, HUD lacks adequate assurance that technical staff are performing thorough reviews and that team leaders’ recommendations to approve insurance applications are properly supported. In conducting their reviews of MAP insurance applications, field staff are expected to determine whether the lender complied with specific underwriting requirements set forth in HUD’s guidance. To determine the extent to which the field offices ensured lenders’ compliance, we focused on HUD’s requirements for property appraisals, a critical component of loan underwriting. Among other things, HUD’s guidance indicates that an appraisal should (1) use rent and expense information from at least three comparable properties as a basis for estimating the expected rental income and operating expenses of the subject property; (2) update the operating expense estimate for the subject property to the date of the appraisal; (3) account for comparable properties’ occupancy rates and rent concessions—factors that affect rental income—in estimating income for the subject property; and (4) be no more than 120 days old at the time the mortgage insurance application reaches the firm commitment stage. Despite this guidance, however, for the 35 loans we reviewed, we found that the field offices did not always ensure lenders’ compliance with these requirements. The Lender Qualifications and Monitoring Division has also found problems with appraisals, as well as deficiencies in other aspects of the loan underwriting. Among other things, the appraisal estimates the income (generated primarily from rents) and operating expenses of the property being insured, or “subject” property. As a basis for these estimates, the appraiser uses rent and expense data from existing properties—known as comparable properties—that are as similar as possible to the subject property in size, location, age, and other characteristics. Because no two properties are identical, the appraiser must make adjustments to these rent and expense data to account for differences between the comparable properties and the subject property, and must use the adjusted data as a basis for making estimates regarding the subject property. These estimates are important because a property’s net income (that is, gross income minus expenses) is a major factor in determining the size of the mortgage the property can support and HUD will insure. In general, the higher a property’s net income, the larger the mortgage it can qualify for. In accordance with HUD’s guidance, we found that the appraisals for all 35 loans provided rent and expense data from at least three comparable properties as a basis for estimating the subject property’s rental income and operating expenses. In addition, we found that the rent data in the appraisal were consistent with other data sources, and that these data supported the rental income estimate for the subject property. However, the same did not always hold true for the expense data and operating expense estimates. To corroborate the appraisal’s expense data for the comparable properties, we used HUD’s Financial Assessment Subsystem—-a database containing audited financial statements for all HUD-insured and –assisted properties. The appraisals for 10 of the 35 loans we reviewed used one or more comparable properties that were HUD-insured or –assisted and for which corresponding expense information was available in HUD’s database. In 9 of the 10 cases, we found that the appraisals cited lower expenses for the comparable properties than did the corresponding information in the database. The appraisals’ understatement of expenses for the comparable properties ranged from about $28,000 to $270,000 per year. This situation is problematic because an underestimation of expenses can lead to an overestimation of net income and approval of a higher mortgage amount than the property can support. The field office staff who reviewed the appraisals told us that they had not been aware of these discrepancies for most of the properties and, in any event, felt that the operating expense estimates for the subject properties were reasonable based on their experience and knowledge as professional appraisers. However, they also acknowledged that appraisers sometimes made estimates that were not well supported by expense data from comparable properties, as required, and that this practice raised questions about the quality of the appraisals. Some field office staff said they did not try to corroborate the expense data for the comparable properties against information in HUD’s database because this was not a required part of their review and they did not have time to do it. Similarly, Office of Multifamily Housing officials told us that the field offices should not be performing this task because to do so would overstep HUD’s role in relation to the lenders under the MAP program. However, given that HUD, and not the lender, bears the financial risk of a MAP loan, HUD should take reasonable steps to protect its financial interests. Given the importance of the subject property’s estimated operating expenses in determining the mortgage amount that HUD insures, HUD would be prudent to use data in its Financial Assessment Subsystem to help ensure that the estimate is based on accurate information. According to HUD’s guidance, the operating expense estimate for the subject property should be updated by the lender to the date of the appraisal. The updating procedure involves the application of an inflation rate to account for the age of the data used to develop the expense estimate. For example, if the data are current as of January 1, 1999 (known as the data’s “effective date”), and the appraisal is conducted in January 1, 2001, the expense estimate should be adjusted upward to reflect 2 years of inflation. However, for 27 of the 35 loans we reviewed, we found that the lender did not properly update the expense estimate, and the field office did not require the lender to correct the error. As a result, the operating expense estimates for 9 of these loans were 5 to 9 percent lower than if the updating procedure had been done correctly. When a property’s actual operating expenses are higher than originally estimated, its ability to support the mortgage may be weakened, thereby increasing HUD’s insurance risk. Some field staff told us they did not see a need to correct the errors or inform the lenders of these problems because they felt the magnitude of the understatement was too small to significantly affect HUD’s risk. However, Office of Multifamily Housing officials told us that the operating expenses should always be updated. We also found that some field staff were unclear on how to perform the updating procedure because the instructions in MAP program guidance were vague. The instructions for the updating procedure are located in both a standard HUD appraisal form and in MAP program guidance. However, unlike the form’s instructions, the MAP guidance does not indicate that the effective date of the expense data is the beginning date of the fiscal year in which the expenses were accrued. When the effective date used is not the beginning date of the fiscal year, the time period for which the data are updated is shortened, resulting in an understatement of the expense estimate for the subject property. HUD’s guidance also requires that the appraisal account for the comparable properties’ occupancy rates and rent concessions in estimating income for the subject property. Specifically, if the occupancy rate for the comparable property is lower than the occupancy rate estimated for the subject property, the guidance requires that a downward adjustment be made to the comparable property’s rent to reflect this difference. Similarly, if a comparable property is offering rent concessions (for example, first month’s rent free), the rent should again be adjusted downward. When these downward adjustments are not made, the rental income for the subject property can be overestimated, which, in turn, can lead to an overestimation of the property’s net income. Despite HUD’s guidance, however, we found that the appraisals for 11 of the 35 loans did not make adjustments to account for lower occupancy rates at the comparable properties. Furthermore, in 5 cases, no adjustments were made for rent concessions at the comparable properties, even though these concessions were mentioned in the appraisal reports. Although the adjustments in these cases would have been minor and would not have affected the properties’ net income, HUD’s guidance does not make exceptions for such situations. Moreover, none of this noncompliance was documented in the field office’s reviews of the appraisals. Field office staff told us they generally did not bother documenting instances of minor noncompliance or notifying the lender of such problems because (1) doing so would make it more difficult for them to stay within the required review time frames and (2) according to HUD’s guidance, their role as reviewers is to require lenders to correct only those underwriting deficiencies that significantly affect HUD’s insurance risk. Finally, HUD guidance states that an appraisal should be no more than 120 days old at the time the lender’s insurance application reaches the firm commitment stage of HUD’s review. When an appraisal is beyond the 120- day point, the guidance permits the lender to update the appraisal in lieu of doing a new one. According to Office of Multifamily Housing officials, the purpose of this requirement is to ensure that the appraisal’s conclusions reflect current market conditions. However, for 7 of the 35 loans we reviewed, the age of the appraisals exceeded 120 days and no update was submitted. Specifically, the 7 appraisals ranged from 121 to 251 days old at the firm commitment stage. HUD field office officials told us that they accepted the appraisals without an update because, to their knowledge, market conditions had not changed since the time the appraisal was originally performed. The Lender Qualifications and Monitoring Division has found similar appraisal deficiencies that were not identified during the field office’s review. These problems included situations where operating expense estimates were not properly updated, rent concessions were not accounted for in estimating income, and the appraisal was over 120 days old. The division has also found deficiencies with other aspects of the field offices’ review, including mortgage credit and architectural problems. These problems included unauthorized financial relationships between borrowers and lenders and noncompliance with building accessibility requirements for the disabled. As previously noted, field office staff cited workload and time constraints as major reasons for some of the implementation problems we found. In addition, some field office managers told us that they needed additional staff to handle their assigned workload. HUD’s risk assessment for the MAP program concluded that a MAP team should be able to review up to four mortgage insurance applications at a time and still meet required processing timeframes. To compare the teams’ workloads against this standard, we determined the number of applications that each MAP team was reviewing at the time of our visits to the eight field offices. Because two of the field offices had two MAP teams apiece, we reviewed a total of 10 teams. As shown in figure 3, we found that 9 of the 10 teams were reviewing more than four applications. For these 9 teams, the number of applications ranged from 5 in Denver and San Francisco to 10 in Baltimore and Phoenix. Office of Multifamily Housing officials told us that they were aware that some of the field offices had heavy workloads. To address this problem, the officials said that to a limited extent, they had shifted some of this work to staff in field offices with smaller workloads. However, they also acknowledged that as the MAP program grows, they might have to take this action more frequently to balance the workload among the field offices. In its risk assessment of the MAP program, HUD emphasized the importance of establishing a quality assurance process. The risk assessment indicated, among other things, that quality assurance efforts would promote lenders’ compliance with program requirements. However, HUD has not fully implemented its quality assurance process. Specifically, although the Lender Qualifications and Monitoring Division is tasked with implementing this process, it has not (1) achieved its intended staffing level, (2) developed and implemented formal operating procedures, or (3) effectively used the results of its reviews to improve lenders’ underwriting of loans. In developing the MAP program, HUD recognized that it had not committed sufficient resources to lender monitoring in the past. Despite this recognition, the Department has not fully staffed its Lender Qualifications and Monitoring Division, which is tasked with performing quality assurance reviews of loans already approved for FHA insurance. The division’s staffing plan envisioned that the reviews would be conducted by 15 field-based staff divided into three teams. However, as of March 2002—almost 2 years after the MAP program’s inception—only 4 of the 15 positions had been filled. Although the division performed 24 quality assurance reviews in fiscal year 2001, it had to bring in volunteers from other HUD headquarters and field offices to assist in this work. The division director indicated that the volunteers were not as productive as the permanent staff because they were only temporary and lacked experience in performing reviews. Furthermore, he estimated that with 15 permanent full-time staff, the division could have conducted 75 reviews. The Department has taken steps to deal with the vacant field positions; in February 2002, the division received approval from HUD’s Office of the Deputy Assistant Secretary for Multifamily Housing to fill its staff vacancies. According to HUD officials, the Department will begin hiring for these positions in May 2002, but has not established a target date for filling all of the vacancies. The division also has a vacancy in a headquarters position slated to assist the division director with his responsibilities. However, an Office of Multifamily Housing official told us there was no plan to fill the position until other staffing needs in Multifamily Housing were addressed. According to the division director, these staffing problems have contributed to delays in the division’s development of written operating procedures addressing, among other things, how quality assurance reviews should be conducted and how loans and lenders should be targeted for review. Without such procedures, the division cannot ensure that its reviews are performed in a systematic and consistent manner and that its resources are focused on loans and lenders that pose the highest insurance risks to HUD. The division has been in the process of drafting operating procedures since October 2000, but it has relied on a series of individuals detailed from another part of Multifamily Housing to complete this task. According to the division director, turnover in these detailees, the fact that they are not directly accountable to him, competing work priorities, and his lack of an assistant have made it difficult for him to adequately supervise the development of the procedures. At the time of our review, one of the detailees was still working on the procedures but, according to the director, did not have an estimated completion date. A key objective of the quality assurance reviews is to improve the MAP lender’s underwriting of loans by conveying findings and recommendations to the lenders through written reports and by identifying serious or recurring underwriting deficiencies and program violations that may require corrective action. In addition, the reviews are also intended to evaluate the field office’s compliance with procedures for approving lenders’ mortgage insurance applications under the MAP program. However, the Lender Qualifications and Monitoring Division is not fully meeting this objective because it has been slow to communicate the results of its reviews to MAP lenders and field offices and has done limited analysis of the results. For example, during fiscal year 2001, staff completed 24 reviews and submitted draft reports for all of these reviews to the division director for approval and issuance. According to division field staff, conducting a review and drafting the associated report takes about 2 weeks. However, as of March 2002, the division had issued final reports for only 6 of the 24 reviews, even though all 18 of the remaining reviews had been conducted over 6 months earlier. In two cases, the reviews were done over a year earlier. According to the division director, the remaining draft reports have not been finalized because he has not had time to review them. However, by not issuing the reports, HUD is not providing lenders and field offices with timely feedback on problems uncovered by these reviews that may increase HUD’s insurance risk. In addition, the division has not developed a systematic process for aggregating and analyzing the results of its reviews to identify patterns of deficiencies. As a result, it has done limited analysis of the 24 completed reviews to identify recurring underwriting errors and program violations committed by MAP lenders. Even these limited efforts demonstrate the benefits of this kind of analysis. For example, the division observed that several lenders had not, as required, determined whether the properties HUD was insuring complied with accessibility requirements mandated by the Fair Housing Act. Accordingly, the division sent a notice to all MAP lenders reemphasizing the lenders’ responsibility for ensuring compliance with the accessibility requirements. However, further analysis of its reviews would be difficult—particularly as the number of completed reviews increases—without storing the results in an automated spreadsheet or database. To hold MAP lenders accountable for specific violations of program requirements or for exhibiting patterns of noncompliance, HUD’s Office of Multifamily Housing can suspend or terminate their ability to participate in the MAP program. Multifamily Housing has suspended some MAP lenders for specific violations. In contrast, it has neither terminated nor suspended any lenders for exhibiting patterns of noncompliance, because weaknesses in its quality assurance process and the newness of the MAP program have provided a limited basis for identifying such patterns. HUD’s guidance allows the Office of Multifamily Housing to suspend or terminate a lender’s participation in the MAP program for specific violations of program requirements. The type of penalty HUD imposes against a lender depends on the severity of the violation and the degree to which it affects HUD’s financial risk. According to HUD’s guidance, violations that directly and adversely affect HUD’s risk may result in termination; violations that do not pose such a risk may result in suspension. As of March 2002, HUD had not terminated any MAP lenders, but it had suspended three. Two of the three lenders were suspended because they had prohibited financial relationships with the borrowers. The third lender was suspended because it did not follow HUD’s insurance application process for health care facilities. Specifically, it submitted mortgage insurance applications without first obtaining the required HUD approval of the management agent of these facilities. The duration of the suspensions range from 6 to 12 months. During the term of their suspensions, these lenders are prohibited from submitting additional mortgage insurance applications under the MAP program. The suspensions do not affect insurance applications already being processed by HUD’s field offices. The three suspensions are a result of lender noncompliance with MAP program requirements identified by Lender Qualifications and Monitoring Division staff. Multifamily Housing officials told us that taking enforcement actions consumes considerable staff time and effort, partly because the actions must be supported well enough to withstand potential court challenges by the lenders. According to HUD officials, two of the three lenders that HUD suspended have challenged the Department’s actions in federal district court. In one case, the lender ultimately withdrew its challenge and served its suspension. In the other case, as of April 2002, the court had not made a ruling, according to Multifamily Housing officials. The officials said they would continue to pursue enforcement actions against MAP lenders that do not comply with HUD’s requirements because the success of the MAP program depends heavily on the integrity of the participating lenders. HUD’s guidance emphasizes the importance of terminating or suspending lenders that exhibit a pattern of noncompliance over several insurance applications. According to the guidance, examples of noncompliance may include failure to provide required loan exhibits, or submission of incomplete or inaccurate exhibits; lack of appropriate documentation and analysis for underwriting conclusions; evidence that a lender’s unsound underwriting resulted in the assignment of an FHA-insured mortgage loan to HUD. Reviews conducted by the Lender Qualifications and Monitoring Division have revealed instances where lenders made underwriting errors, including missing and inaccurate loan exhibits and inadequately supported underwriting conclusions. However, as previously discussed, the division has issued final reports for only a few of its quality assurance reviews and lacks a systematic process for aggregating and analyzing the results of its reviews. Consequently, HUD has had a limited basis for identifying any patterns of noncompliance and, as of March 2002, had not taken enforcement actions against lenders for exhibiting such patterns. The newness of the MAP program has also limited HUD’s ability to identify patterns of deficiencies, because patterns take time to emerge and may only become evident after HUD has performed quality assurance reviews on several of a lender’s loans. Furthermore, because no MAP loans have been assigned to HUD so far—partly a consequence of the young age of loans—-the Department has no evidence that unsound underwriting practices are resulting in failed loans. FHA insures several billion dollars in mortgages for multifamily housing properties each year. Given the size of this financial commitment and the MAP program’s delegation of significant loan underwriting responsibilities to lenders, it is important that HUD have sufficient controls to mitigate the program’s financial risks. Although HUD has established processes and procedures for this purpose, it has not always consistently or effectively implemented them. Weaknesses in HUD’s lender approval and monitoring efforts, in particular, underscore the need for improvements in its oversight of MAP lenders. HUD did not always ensure that the lenders it approved to participate in the MAP program met HUD’s qualification requirements for underwriters. Because the Department’s guidance does not provide clear standards for assessing the experience of lenders’ underwriters, HUD staff applied the guidance inconsistently. In addition, HUD did not ensure that approved underwriters attended required training sessions before submitting insurance applications. When qualification standards are not clear and strictly enforced, HUD increases the potential that MAP underwriters will not be familiar with program requirements and will make errors that could increase HUD’s review time and insurance risk. Although the success of the MAP program rests heavily on the quality of its participating lenders, HUD did not require these lenders to implement quality control plans and did not establish standards for these plans. We believe that implementing such a requirement would help ensure that MAP lenders have the necessary policies and procedures to prevent underwriting deficiencies that could increase HUD’s insurance risk. HUD could improve its implementation of processes for reviewing and monitoring MAP lenders’ underwriting of loans. Because field office staff did not always document their reviews of mortgage insurance applications, as required, HUD lacked full assurance that the reviews were thorough and that its decisions to insure loans were properly supported. In addition, field staff did not enforce lenders’ compliance with some requirements for property appraisals, including those designed to ensure that expense estimates for the property being insured are accurate. These problems occurred, in part, because of unclear guidance and heavy workloads. Because a property’s income and expenses are major factors in determining the size of the mortgage, inaccurate estimates can increase HUD’s risk of insuring mortgages that are higher than what the property can support. The consequence of this increased risk is higher potential program costs. Finally, HUD’s monitoring of lenders and field offices through quality assurance reviews has several weaknesses. These weaknesses—including insufficient staff, a lack of formal operating procedures, lengthy delays in issuing reports, and minimal analysis of review results—have limited HUD’s ability to oversee the MAP program. To improve HUD’s oversight of MAP lenders and to reduce the financial risks assumed by FHA, we recommend that the Secretary of HUD direct the Assistant Secretary for Housing-Federal Housing Commissioner to do the following: Strengthen the process for approving MAP lenders by (1) issuing guidance that clarifies HUD’s experience requirements for MAP underwriters and requires HUD staff to evaluate prospective MAP underwriters against these standards; and (2) issuing guidelines that establish standards for quality control plans and require MAP lenders to develop and maintain these plans as a condition of continued participation in the MAP program. Improve field offices’ implementation of procedures for reviewing mortgage insurance applications submitted by MAP lenders, by (1) holding MAP team leaders accountable for preparing required review memos, and for ensuring that HUD field office staff consistently use review checklists in accordance with MAP guidance; (2) utilizing data in HUD’s Financial Assessment Subsystem to corroborate expense data for HUD-insured or - assisted properties used as comparable properties in appraisal reports; and (3) clarifying and enforcing HUD’s requirement for updating the operating expense estimate for a subject property to the date of the appraisal. Strengthen the Lender Qualifications and Monitoring Division’s monitoring of lenders and HUD field offices, by (1) establishing a time frame for finalizing and issuing written operating procedures that include criteria for selecting loans and lenders for review that pose a high insurance risk to the Department; (2) issuing written reports on all quality assurance reviews conducted in fiscal year 2001 to the cognizant MAP lenders and HUD field offices; and (3) developing a process for aggregating and analyzing the results of quality assurance reviews to identify patterns of underwriting deficiencies and program violations by MAP lenders. We provided HUD with a draft of this report for its review and comment. HUD indicated that it agreed with each of the report’s recommendations and that it had begun taking actions to address them. In response to our recommendations to strengthen the process for approving MAP lenders, HUD said it (1) would centralize the authority for the initial approval of MAP underwriters within HUD headquarters, and would issue guidance to MAP lenders and HUD staff that clarifies HUD’s experience requirements for underwriters; and (2) was working with the Mortgage Bankers Association of America to develop requirements and standards for quality control plans for MAP lenders. HUD also indicated that MAP lenders that failed to submit, maintain, or operate in accordance with an acceptable quality control plan would be removed from the program. In response to our recommendations to improve field offices’ implementation of procedures for reviewing mortgage insurance applications submitted by MAP lenders, HUD indicated that it (1) had instructed field office directors to ensure MAP team leaders’ and technical specialists’ adherence to procedures for documenting reviews of MAP insurance applications, and would issue a notice to the field offices emphasizing the necessity of following these procedures; (2) would begin using data in HUD’s Financial Assessment Subsystem to corroborate the expense data for HUD-insured properties used as comparable properties in appraisal reports; and (3) would issue guidance to MAP lenders detailing the correct method for updating a property’s operating expenses. In response to our recommendations to strengthen the Lender Qualifications and Monitoring Division’s monitoring of lenders and HUD field offices, HUD said it (1) had established a target date of December 15, 2002, for issuing written procedures that include criteria for selecting lenders and loans that pose a high insurance risk to HUD; (2) would expedite the issuance of reports from quality assurance reviews conducted in fiscal year 2001; and (3) was developing a spreadsheet to aggregate and analyze findings from quality assurance reviews. The full text of HUD’s letter is presented in appendix I. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 15 days after the date of this letter. At that time, we will send copies to the Secretary of Housing and Urban Development. 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) 512-7631. Key contributors to this report are listed in appendix III. Our objectives were to answer the following questions: (1) How well does the Department of Housing and Urban Development (HUD) ensure that lenders participating in the Multifamily Accelerated Processing (MAP) program meet HUD’s qualification requirements? (2) How well is HUD implementing processes for reviewing and monitoring MAP lenders’ underwriting of loans? (3) Has HUD held any MAP lenders accountable for noncompliance with program requirements? To determine how HUD ensures that MAP lenders meet HUD’s qualifications requirements, we reviewed HUD’s regulations, guidance, and procedures relating to its process for approving lenders to participate in the MAP program. We interviewed officials from HUD’s Office of Lender Activities and Program Compliance, the Office of Multifamily Housing’s Lender Qualifications and Monitoring Division, and multifamily field offices in Baltimore, Chicago, Cleveland, Denver, Ft. Worth, Phoenix, San Antonio, and San Francisco. To assess how HUD implemented its process for approving MAP lenders, we focused on the 20 lenders that made the 35 new construction and substantial rehabilitation loans insured under the MAP program by the eight field offices between May 2000 and August 2001. For each of the 20 lenders, we reviewed its application and supporting documents for MAP approval; comments solicited from the field offices about it; and HUD’s records showing the approval of the lender and its underwriters for participation in the program. In addition, we used information from HUD’s F47 database—which provides current and historical information on the multifamily mortgage loans that FHA insures—to verify that the lenders reported all of their FHA-insured loans made during the previous 5 years that were assigned to HUD. We also examined HUD’s training records to determine whether the 22 underwriters who underwrote the 35 loans we reviewed had received MAP program training. Finally, to determine whether HUD had obtained quality control plans from the lenders, we reviewed files maintained by the Department’s Lender Approval and Recertification Division. To determine how well HUD implemented processes for reviewing and monitoring MAP lenders’ underwriting of loans, we reviewed HUD’s guidance and procedures for the field offices’ review and approval of mortgage insurance applications. We also interviewed officials from HUD’s Office of Multifamily Housing and each of the eight field offices we visited regarding how the reviews are conducted and documented, as well as workload and staffing issues. To assess how HUD implemented the application review process, we focused on the 35 new construction and substantial rehabilitation loans insured under the MAP program by the eight field offices between May 2000 and August 2001. For each of these cases, we reviewed the lender’s mortgage insurance application and associated underwriting exhibits and documentation of HUD’s review and approval of the applications, including review checklists and team leader memos. To assess the extent to which the field offices ensured lenders’ compliance with HUD’s underwriting requirements, we focused on four requirements for property appraisals, a critical aspect of loan underwriting. Specifically, we determined whether the appraisals: 1) used rent and expense information from at least three comparable properties as a basis for estimating the expected rental income and operating expenses of the subject property; 2) updated the expense estimate for the subject property to the date of the appraisal; 3) accounted for the comparable properties’ occupancy rates and rent concessions in estimating rental income for the subject property; and 4) were no more than 120 days old at the time the insurance application reached the firm commitment stage. In making these determinations, we corroborated the rent data used in the appraisals using information in apartment rental guides and Web sites and by contacting apartment leasing offices. Similarly, we corroborated expense data for HUD-insured or -assisted properties used in the appraisals against audited financial statements in HUD’s Financial Assessment Subsystem. We discussed our findings with the field office staff responsible for reviewing the appraisals. Also, we compared the field offices’ workloads at the time of our visits against the workload standard set forth in HUD’s risk assessment for the MAP program. In addition, we reviewed the results of reviews conducted by the Lender Qualifications and Monitoring Division to identify underwriting deficiencies uncovered by HUD’s quality assurance process. To determine how well HUD monitored lenders and field offices through its quality assurance process, we interviewed officials from the Office of Multifamily Housing and its Lender Qualifications and Monitoring Division to discuss how the division conducts its reviews. In addition, we compared the division’s planned staffing level with its actual level as of March 2002. We obtained data on the number and status of quality assurance reviews that the division planned and conducted in fiscal year 2001 and the number of these reviews for which the division issued reports to the cognizant MAP lenders and field offices. To determine whether HUD has held any MAP lenders accountable for noncompliance with program requirements, we reviewed HUD’s regulations and guidance to determine the enforcement options available to HUD. We interviewed officials from HUD’s Office of Multifamily Housing to discuss the enforcement actions that had been taken against MAP lenders as of March 2002. We also reviewed documentation regarding the specific circumstances that led to these actions. We tested the data we obtained from HUD for reasonableness and completeness and found them to be reliable for the purpose of our analyses. In addition, we reviewed existing information about the quality and controls supporting the data systems and discussed the data we analyzed with agency officials to ensure that we interpreted them correctly. We conducted this review from April 2001 through April 2002 in accordance with generally accepted government auditing standards. In addition to those named above, Mark Egger, Tiffani Green, Rick Hale, Laura Hogshead, Donna Leiss, Bill McDaniel, John McGrail, Andy O’Connell, Jerry Patton, Rose Schuville, Stewart Seman, Jim Vitarello, Wendy Wierzbicki, and Steve Westley made key contributions to this report. | Each year, the Federal Housing Administration (FHA) insures billions of dollars in multifamily housing mortgage loans to help construct, rehabilitate, purchase, and refinance apartments and health care facilities. However, the Department of Housing and Urban Development (HUD) lacks assurances that the lenders approved for the Multifamily Accelerated Processing (MAP) program always meet all of HUD's qualifications. HUD's guidance requires prospective lenders to submit documents showing that they are financially sound, have a satisfactory lending record, and have qualified underwriters. GAO found that HUD did not always comply with, or effectively implement, controls and procedures for reviewing and monitoring MAP lenders' underwriting of loans. Before issuing a loan, field staff are required to conduct and document reviews of lenders' mortgage insurance applications and associated loan exhibits to ensure compliance with HUD underwriting requirements. However, staff did not always properly document their reviews. HUD has held some lenders accountable for specific violations of program requirements but is unable to systematically identify lenders that exhibit patterns of noncompliance. To hold lenders accountable for specific violations or for patterns of noncompliance, HUD's Office of Multifamily Housing can suspend or terminate their ability to participate in the MAP program. |
The first BRAC Commission was chartered by the Secretary of Defense in 1988, and operated in accordance with processes later established by the Defense Authorization Amendments and Base Closure and Realignment Act of 1988. Since that time, the BRAC process has changed in many ways, with a variety of requirements and procedures mandated by subsequent BRAC statutes or adopted by DOD. Among these is the requirement that the Secretary of Defense develop a current force structure plan. DOD’s force structure plan is designed to identify the number and type of forces that DOD needs to combat the anticipated threats to the security of the United States. As specified in DOD’s force structure plan in support of BRAC 2005, the President’s National Security Strategy and the Secretary of Defense’s National Defense Strategy provide the focus for the military forces. DOD then analyzes current and future threats, challenges, and opportunities to develop the force structure plan. DOD’s planning framework helps determine the capabilities required to respond to a range of scenarios. The Department then analyzes the force requirements for the most likely, the most dangerous, and the most demanding circumstances. One of the objectives of the first BRAC Commission was to review the current and planned military base structure in light of force structure assumptions and, using the process and the criteria the Commission developed, to identify which bases should be realigned or closed. To accomplish this, the Commission used a two-phase approach. Phase I grouped bases into 22 overall categories, such as training bases and administrative headquarters, and then focused on determining the military value of bases within each category, each base’s capacity to absorb additional missions and forces, and the overall excess capacity within the category. The Commission then ranked the bases to identify those warranting review in phase II, which focused on assessing the cost and savings of base realignment and closure options. The Defense Base Realignment and Closure Act of 1990 substantially revised the process for DOD base closure and realignment actions within the United States, establishing an independent Defense Base Closure and Realignment Commission and providing for BRAC rounds in 1991, 1993, and 1995. One of the key elements of the 1990 BRAC statute was the requirement that DOD submit a force structure plan and that closure and realignment decisions be based on that force structure plan and on the final selection criteria established for the BRAC round. As part of the BRAC process for 1991, 1993, and 1995, an important step in the military services’ approach for identifying bases to close or realign was determining whether excess capacity existed at their bases. The starting point for this step was comparing changes in the force structure plan to the base structure of the military services. After applying military value criteria and other specific BRAC criteria, each of the services developed their recommendations for closures and realignments for submission to the BRAC Commission. In May 1997, the Secretary of Defense announced his intention to ask Congress to authorize two additional BRAC rounds. Later that year, Congress enacted section 2824 of the National Defense Authorization Act for Fiscal Year 1998, which required that the Secretary of Defense provide the congressional defense committees with a comprehensive report on a range of BRAC issues, including the need for any additional BRAC rounds and an estimate of the amount of DOD’s excess capacity. DOD submitted the required report in April 1998 and estimated that DOD had 23 percent excess capacity. In the report, DOD also stated that its method for estimating excess capacity determined the extent to which reductions in base structure had kept pace with reductions in force structure since 1989. The National Defense Authorization Act for Fiscal Year 2002 amended the 1990 BRAC statute by authorizing a BRAC round for 2005, and required DOD to report to Congress on several BRAC-related issues in 2004 in order for the 2005 round to proceed. The statute directed, among other things, that the Secretary of Defense provide Congress with a 20- year force structure plan and a worldwide inventory of military installations and facilities as part of DOD’s fiscal year 2005 budget justification documents. In addition, as part of the force structure plan and inventory submission, the Secretary was to prepare (1) a description of the infrastructure necessary to support the force structure described in the force-structure plan, (2) a discussion of categories of excess infrastructure and infrastructure capacity, and (3) an economic analysis of the effect of the closure or realignment of military installations to reduce excess infrastructure. DOD provided the required report, which estimated that the department had 24 percent excess capacity, on March 23, 2004. In that report, the Secretary of Defense also certified that an additional round of BRAC was needed and that the round would result in savings by fiscal year 2011. Subsequently, an initial part of DOD’s BRAC recommendations development process for the 2005 round involved an overall capacity analysis of specific locations or functions and subfunctions at specific locations. The analysis relied on data calls to obtain certified data to assess such factors as maximum potential capacity, current capacity, current usage, excess capacity, and capacity needed to meet surge requirements. This capacity analysis—in conjunction with the department’s 20-year force structure plan, military value analysis, and transformational options; applicable guiding principles, objectives, or policy imperatives identified by individual military services or joint cross- service groups; and military judgment—was used to identify realignment and closure scenarios for further analysis, ultimately leading to finalized recommendations for base realignments and closures. Our review of DOD’s pre-BRAC estimates of excess capacity found that the methods DOD has used and the resulting estimates have limitations. DOD used similar methods in 1998 and 2004 to calculate its pre-BRAC estimates of excess capacity. However, our current review identified a number of additional limitations with DOD’s methods. For example, DOD’s approach assigns each installation to only one mission category, even though most installations support more than one mission. In addition, to arrive at the excess capacity estimate it provided to Congress in 2012 and repeated in 2013, DOD subtracted an estimate of excess capacity that it expected would be disposed of during the 2005 BRAC round from the amount of excess capacity estimated to exist immediately before that BRAC round to arrive at the current excess capacity estimate of about 20 percent. However, because DOD’s pre-BRAC excess capacity estimate, expressed as a percentage of bases, and plant replacement value, expressed in dollars, are not measured in the same units, they are not comparable measures. DOD based its 1998 and 2004 estimates of 23 percent and 24 percent excess capacity, respectively, on a method that compared measures of force structure projected to be in place at the end of the 5-year Future Years Defense Programs that were current at the time of each estimate, to associated indicators of capacity. DOD’s 1998 and 2004 technique consisted of three major steps: (1) categorizing bases according to their primary missions and defining indicators of capacity, (2) developing ratios of capacity-to-force structure for DOD’s baseline year of 1989, and (3) aggregating these various excess capacity indicators that were calculated at the installation level to the military service level and then department- wide. To begin DOD’s analysis, each of the military services identified categories for their bases, identified bases that the services considered major installations, and categorized their bases according to their primary missions—such as depots, training, or administration—so that each installation was included in only one category. Figure 1 shows the installation categories used by each military service and the Defense Logistics Agency. Figure 1. Installation Categories for the Military Services and the Defense Logistics Agency. The services then defined various indicators of capacity—such as maneuver base acres or facility square feet—for each installation category. Next, DOD divided each services’ indicators of capacity by a measure of force structure—such as the number of military and civilian personnel authorized, authorized end strength, or the size of the acquisition workforce—to develop ratios of capacity-to-projected force structure and compared them to ratios from 1989, which was used as a baseline. For its 1998 analysis DOD projected force structure through 2003, and for its 2004 analysis DOD projected force structure through 2009 because these dates marked the end of DOD’s Future Year’s Defense Program projections that were current at the time the analyses were performed. For example, as illustrated in Figure 2, in its 1998 capacity analysis, DOD projected, that in 2003, there would be 6.575 million square feet of administrative space on Army administrative bases, and DOD projected that there would be 65,516 military and civilian personnel assigned to those bases, resulting in a capacity-to-force structure ratio of 100.4. Similarly, according to its 2004 capacity analysis, DOD projected that, in 2009, there would be 6.121 million square feet of administrative space on Army administrative bases, and DOD projected that there would be 64,598 military and civilian personnel assigned to those bases, resulting in a capacity-to-force structure ratio of 94.8. DOD then calculated the extent to which the ratio of capacity-to-force structure for each base category differed from the ratio in 1989, which was used as a baseline. To do this, DOD first calculated an estimate of capacity it would need for the year in question for each of its various indicators of capacity. For instance, to continue with the second example above, DOD calculated an estimate of administrative capacity the Army would need for 2009. As illustrated in Figure 3, DOD calculated its needed capacity indicators by multiplying the projected 2009 force structure measure (64,598 military and civilian personnel in this case) by the 1989 capacity-to-force ratio (81.3 for Army administrative bases), which in this case resulted in an estimated needed capacity of 5.25 million square feet of Army administrative space. To calculate the projected excess capacity for 2009, DOD subtracted a base category’s estimated needed capacity from its projected 2009 capacity. In our Army administrative base example, DOD subtracted its estimated needed capacity for 2009 of 5.25 million square feet from its estimated existing capacity in 2009 of 6.12 million square feet, which resulted in DOD’s estimate of 0.87 million square feet of excess Army administrative space or 14 percent of the Army’s existing administrative space in 2009. After computing these indicators of excess capacity for each category of installation for each military service and the Defense Logistics Agency, DOD then aggregated these indicators departmentwide. Specifically, DOD first multiplied the number of bases in a category by the percentage of excess for that category, which resulted in DOD’s estimate of the number of excess bases in each category. Continuing our Army administrative capacity example above, as illustrated in Figure 4, the percentage of excess capacity (in this case, the Army’s estimated 14- percent excess of projected administrative space in 2009) would be multiplied by the number bases in the category (12 in the case of Army administrative bases), resulting in an estimated number of excess administrative bases (1.7 in this case). As illustrated in Figure 5, to calculate an overall indication of excess capacity for each DOD component, DOD summed the estimated number of excess bases for each installation category within a component (22.3 in the case of the Army) and divided this by the sum of the number of all bases in all categories for that component (78 in the case of the Army), which resulted in a percentage of excess bases for the component. In our example, DOD estimated that 29 percent of the Army’s bases were in excess to its estimated needed capacity. Finally, the departmentwide excess was calculated by summing the estimated number of excess bases for each military service and the Defense Logistics Agency (65.2), summing the number of bases included in the analysis (276), then dividing the sum of the excess bases by the total number of bases in the analysis, resulting in estimated department- wide excess of 24 percent. DOD recognized some limitations within its method for estimating excess capacity, stating in both its 1998 and 2004 reports to Congress that the analysis it performed provided an indication of the type and amount of excess capacity within the department, but recognizing that the analyses lacked the precision to identify specific installations or functional configurations for realignment or closure. In addition, our current review of DOD’s method for estimating excess capacity outside of a congressionally-authorized BRAC process identified a number of limitations. First, DOD assigned each base to only one installation category, even though most bases support more than one mission. This approach effectively excluded significant portions of a base’s infrastructure from the analysis. For example, in the case of Army maneuver bases, using base acres as the indicator of capacity does not include about 204 million square feet of buildings located on the 12 Army maneuver bases in DOD’s analysis. Another limitation associated with DOD’s method is that the services measured capacity for some similar functions differently. For example, the Army and Air Force measured capacity for test and evaluation facilities in terms of physical total square feet of space, while the Navy measured its capacity for these facilities in terms of work years. These differences make it difficult for DOD to assess excess capacity across the department. A third limitation is that, in using 1989 as a baseline, DOD assumed that the bases and facilities as they existed in 1989 were appropriately sized to support missions, and DOD did not identify any excess capacity or capacity shortfall that may have existed at that time. This approach, in essence, transfers any excesses and shortfalls that existed in 1989 into DOD’s estimates of future capacity needs because, as illustrated in Figure 3 above, the capacity-to-force structure ratio from 1989 was used to calculate the needed capacity for 2009. It is therefore uncertain to what extent DOD’s estimates of excess capacity are overstated or understated. Finally, in both the 1998 and 2004 analyses, in instances where DOD’s analysis indicated that projected capacity was less than needed capacity—indicating a capacity shortage—within a specific installation category, DOD treated these cases as having zero or no excess capacity. Despite the data showing capacity shortages, DOD used this data to aggregate the results of its analysis across the department. If DOD had treated those installation categories as having capacity shortages, DOD’s estimates would have resulted in a lower number of excess bases and consequently a lower percentage of excess capacity across the department than DOD reported to Congress. DOD’s testimony in March 2012 and March 2013, that by its estimates DOD had about 20 percent excess capacity remaining after the end of BRAC 2005, relied on earlier calculations that the department made in 2004 and 2005. First, in 2004, using the method described above, the department estimated that it had 24 percent excess capacity. Then, in 2005, DOD’s report transmitting its recommendations to the BRAC Commission stated that, while it is difficult to measure the full extent of the improvements in effectiveness and efficiency of the BRAC 2005 recommendations, four statistics would illustrate the breadth and depth of the effect of its proposed actions. One of those statistics was the department’s projection that DOD’s plant-replacement value would be reduced by 5 percent. After the BRAC Commission reviewed DOD’s recommendations and made some changes, including reducing the number of closures at major installations, DOD revised its estimate of the expected percentage reduction in plant-replacement value and projected that it would likely be around 3 percent. In 2012, the Deputy Under Secretary of Defense (Installations and Environment) said that these estimates from 2004 and 2005 suggested that roughly 20 percent excess capacity remained. However, because DOD’s pre-BRAC excess capacity estimate, which is expressed as a percentage of bases, and plant replacement value, which is expressed in dollars, are not measured in the same units, they are not comparable measures. In March 2013, the Acting Deputy Under Secretary of Defense (Installations and Environment) testified that the method upon which DOD’s current estimate of 20 percent excess capacity is based is helpful in making a broad assessment in determining whether an additional BRAC round is justified, but it cannot identify specific installations or functional configurations for realignment or closure. The Acting Deputy Under Secretary further stated that the specific capacity analysis that is an integral part of the BRAC process is preferable to aggregate metrics used in DOD’s pre-BRAC estimates. He further stated that only through the BRAC process is the Department able to determine excess capacity by installation and by mission or function in a process that is thorough and fair. We provided a draft of this report to DOD for comment. In its written comments, which are reproduced in appendix I, DOD stated that we properly highlighted the limitations of its approach used to estimate excess capacity. In addition, DOD stated that our report provides proper context for its methodology by contrasting it with the extensive and detailed data collection and analysis that DOD has used to develop BRAC recommendations. DOD concluded that only through the BRAC process is it able to determine excess capacity by installation and mission or function in a fair and thorough way. DOD also provided a technical comment which we incorporated into our report. We are sending copies of this report to appropriate congressional committees and the Secretary of Defense; the Secretaries of the Army, Navy, and Air Force; the Commandant of the Marine Corps; and the Director, Office of Management and Budget. This report is also available at no charge on our Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4523 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix II. Brian J. Lepore, (202) 512-4523 or [email protected]. In addition to the contact named above, Harold Reich (Assistant Director), Ronald Bergman, Timothy Burke, Susan Ditto, Gregory Marchand, Carol Petersen, Amie Steele, Laura Talbott, John Van Schaik, and John Wren made significant contributions to the report. Military Bases: Opportunities Exist to Improve Future Base Realignment and Closure Rounds. GAO-13-149. Washington, D.C.: March 7, 2013. GAO’s 2013 High Risk Series: An Update. GAO-13-283. Washington, D.C.: February 2013. DOD Joint Bases: Management Improvements Needed to Achieve Greater Efficiencies. GAO-13-134. Washington, D.C.: November 15, 2012. Military Base Realignments and Closures: The National Geospatial- Intelligence Agency’s Technology Center Construction Project. GAO-12-770R. Washington, D.C.: June 29, 2012. Military Base Realignments and Closures: Updated Costs and Savings Estimates from BRAC 2005. GAO-12-709R. Washington, D.C.: June 29, 2012. Military Base Realignments and Closures: Key Factors Contributing to BRAC 2005 Results. GAO-12-513T. Washington, D.C.: March 8, 2012. Excess Facilities: DOD Needs More Complete Information and a Strategy to Guide Its Future Disposal Efforts. GAO-11-814. Washington, D.C.: September 19, 2011. Military Base Realignments and Closures: Review of the Iowa and Milan Army Ammunition Plants. GAO-11-488R. Washington, D.C.: April 1, 2011. GAO’s 2011 High-Risk Series: An Update. GAO-11-394T. Washington, D.C.: February 17, 2011. Defense Infrastructure: High-Level Federal Interagency Coordination Is Warranted to Address Transportation Needs beyond the Scope of the Defense Access Roads Program. GAO-11-165. Washington, D.C.: January 26, 2011. Military Base Realignments and Closures: DOD Is Taking Steps to Mitigate Challenges but Is Not Fully Reporting Some Additional Costs. GAO-10-725R. Washington, D.C.: July 21, 2010. Defense Infrastructure: Army Needs to Improve Its Facility Planning Systems to Better Support Installations Experiencing Significant Growth. GAO-10-602. Washington, D.C.: June 24, 2010. Military Base Realignments and Closures: Estimated Costs Have Increased While Savings Estimates Have Decreased Since Fiscal Year 2009. GAO-10-98R. Washington, D.C.: November 13, 2009. Military Base Realignments and Closures: Transportation Impact of Personnel Increases Will Be Significant, but Long-Term Costs Are Uncertain and Direct Federal Support Is Limited. GAO-09-750. Washington, D.C.: September 9, 2009. Military Base Realignments and Closures: DOD Needs to Update Savings Estimates and Continue to Address Challenges in Consolidating Supply- Related Functions at Depot Maintenance Locations. GAO-09-703. Washington, D.C.: July 9, 2009. Defense Infrastructure: DOD Needs to Periodically Review Support Standards and Costs at Joint Bases and Better Inform Congress of Facility Sustainment Funding Uses. GAO-09-336. Washington, D.C.: March 30, 2009. Military Base Realignments and Closures: DOD Faces Challenges in Implementing Recommendations on Time and Is Not Consistently Updating Savings Estimates. GAO-09-217. Washington, D.C.: January 30, 2009. Military Base Realignments and Closures: Army Is Developing Plans to Transfer Functions from Fort Monmouth, New Jersey, to Aberdeen Proving Ground, Maryland, but Challenges Remain. GAO-08-1010R. Washington, D.C.: August 13, 2008. Defense Infrastructure: High-Level Leadership Needed to Help Communities Address Challenges Caused by DOD-Related Growth. GAO-08-665. Washington, D.C.: June 17, 2008. Defense Infrastructure: DOD Funding for Infrastructure and Road Improvements Surrounding Growth Installations. GAO-08-602R. Washington, D.C.: April 1, 2008. Military Base Realignments and Closures: Higher Costs and Lower Savings Projected for Implementing Two Key Supply-Related BRAC Recommendations. GAO-08-315. Washington, D.C.: March 5, 2008. Defense Infrastructure: Realignment of Air Force Special Operations Command Units to Cannon Air Force Base, New Mexico. GAO-08-244R. Washington, D.C.: January 18, 2008. Military Base Realignments and Closures: Estimated Costs Have Increased and Estimated Savings Have Decreased. GAO-08-341T. Washington, D.C.: December 12, 2007. Military Base Realignments and Closures: Cost Estimates Have Increased and Are Likely to Continue to Evolve. GAO-08-159. Washington, D.C.: December 11, 2007. Military Base Realignments and Closures: Impact of Terminating, Relocating, or Outsourcing the Services of the Armed Forces Institute of Pathology. GAO-08-20. Washington, D.C.: November 9, 2007. Military Base Realignments and Closures: Transfer of Supply, Storage, and Distribution Functions from Military Services to Defense Logistics Agency. GAO-08-121R. Washington, D.C.: October 26, 2007. Defense Infrastructure: Challenges Increase Risks for Providing Timely Infrastructure Support for Army Installations Expecting Substantial Personnel Growth. GAO-07-1007. Washington, D.C.: September 13, 2007. Military Base Realignments and Closures: Plan Needed to Monitor Challenges for Completing More Than 100 Armed Forces Reserve Centers. GAO-07-1040. Washington, D.C.: September 13, 2007. Military Base Realignments and Closures: Observations Related to the 2005 Round. GAO-07-1203R. Washington, D.C.: September 6, 2007. Military Base Closures: Projected Savings from Fleet Readiness Centers Likely Overstated and Actions Needed to Track Actual Savings and Overcome Certain Challenges. GAO-07-304. Washington, D.C.: June 29, 2007. Military Base Closures: Management Strategy Needed to Mitigate Challenges and Improve Communication to Help Ensure Timely Implementation of Air National Guard Recommendations. GAO-07-641. Washington, D.C.: May 16, 2007. Military Base Closures: Opportunities Exist to Improve Environmental Cleanup Cost Reporting and to Expedite Transfer of Unneeded Property. GAO-07-166. Washington, D.C.: January 30, 2007. Military Bases: Observations on DOD’s 2005 Base Realignment and Closure Selection Process and Recommendations. GAO-05-905. Washington, D.C.: July 18, 2005. Military Bases: Analysis of DOD’s 2005 Selection Process and Recommendations for Base Closures and Realignments. GAO-05-785. Washington, D.C.: July 1, 2005. Military Base Closures: Observations on Prior and Current BRAC Rounds. GAO-05-614. Washington, D.C.: May 3, 2005. Military Base Closures: Assessment of DOD’s 2004 Report on the Need for a Base Realignment and Closure Round. GAO-04-760. Washington, D.C.: May 17, 2004. Military Bases: Review of DOD’s 1998 Report on Base Realignment and Closure. GAO/NSIAD-99-17. Washington, D.C.: November 13, 1998. | Due in part to challenges DOD faces in reducing excess infrastructure, DOD's Support Infrastructure Management is on GAO's High Risk List of program areas vulnerable to fraud, waste, abuse, and mismanagement, or are most in need of transformation. Since 1988, DOD has relied on the BRAC process as a primary means of reducing excess infrastructure or capacity and realigning bases to meet changes in the size and structure of its forces. In 1998 and 2004, Congress required DOD to submit reports that, among other things, estimated the amount of DOD's excess capacity at that time. Also, in March 2012, DOD testified that it had about 20 percent excess capacity. The methods used to develop such preliminary excess capacity estimates differ from the data-intensive process--supplemented by military judgment--that DOD has used to formulate specific base closure and realignment recommendations. A Senate Armed Services Committee report directed GAO to review how DOD identifies bases or facilities excess to needs. The objective of this report is to discuss how DOD has estimated its excess capacity, outside of the BRAC process. To do so, GAO reviewed excess capacity estimates from 1998, 2004, and 2012; analyzed DOD's data; reviewed supporting documentation; assessed assumptions and limitations of DOD's analysis; and interviewed DOD officials. In commenting on a draft of this report, DOD stated that GAO had properly highlighted the limitations of its approach to estimating excess capacity and contrasted it with the method used to develop BRAC recommendations. The Department of Defense's (DOD) methods for estimating excess capacity outside of a congressionally-authorized Base Realignment and Closure (BRAC) process have limitations. DOD used similar processes in its excess capacity analyses conducted in 1998 and 2004. This process included three major steps: (1) categorizing bases according to their primary missions and defining indicators of capacity; (2) developing ratios of capacity-to-force structure for DOD's baseline year of 1989; and (3) aggregating the analysis from the installation level across the military services and department-wide. In both its 1998 and 2004 reports, DOD recognized some limitations with its methods for estimating excess capacity and stated that its analyses lacked the precision necessary to identify specific installations or functional configurations for realignment or closure. In addition, GAO's review of DOD's methods for estimating excess capacity outside of a congressionally-authorized BRAC process identified a number of limitations. First, DOD's approach assigns each installation to only one mission category, even though most installations support more than one mission. This approach effectively excluded significant portions of some bases' infrastructure from the analysis. Second, the services measured capacity for some similar functions differently such as test and evaluation facilities, which makes it difficult for DOD to evaluate excess capacity across the department. Third, DOD did not attempt to identify any excess capacity or capacity shortfall that existed in 1989; hence it is uncertain to what extent DOD's estimates of excess capacity may be overstated or understated. Finally, in instances where DOD's analysis indicated that projected capacity was less than needed capacity--indicating a capacity shortage--within an installation category, DOD treated these cases as having zero or no excess capacity when aggregating the results of its analysis. If DOD had treated those installation categories as having a capacity shortages, DOD's method would have calculated a lower number of bases and consequently a lower percentage of excess capacity across the department than DOD reported to Congress. DOD's testimony in March 2012 and again in March 2013, that it had about 20 percent excess capacity remaining after the end of BRAC 2005, relied on earlier calculations that the department made in 2004 and 2005. Specifically, these estimates were reached by subtracting DOD's estimate of the amount of capacity that would be eliminated by the approved recommendations from BRAC 2005--3 to 5 percent of plant replacement value--from DOD's 2004 estimate that it had 24 percent excess capacity. However, pre-BRAC estimates of the percentage of bases that may be excess to needed capacity, which is expressed as a percentage of bases, and plant replacement value, which is measured in dollars, are not comparable measures. In March 2013, the Acting Deputy Under Secretary of Defense (Installations and Environment) testified that the method upon which DOD's current estimate is based is helpful in determining whether an additional BRAC round is justified, but only through the BRAC process is the Department able to determine specifically which installations or facilities are excess. |
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